1 IJARAH Islamic Lease Zubair Mughal Chief Executive
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IJARAH ( Islamic Lease ) Zubair Mughal Chief Executive Officer Al. Huda : Centre of Islamic Banking & Economics Editor in Chief. Islamic Banking and Finance News , True Banking. 2
IJARAH (LEASING) IJARAH AL ASHKAAS IJARAH AL AAyyan 3
IJARAH (LEASING) Ijarah is to offer for a consideration the usufruct of a thing of value from which benefit can be derived without consumption, while retaining the ownership of the leased assets and assuming risks pertaining thereto. 4
IJARAH (LEASING) The leased commodity remains in the ownership of the lessor and only its usufruct is transferred to the lessee. Any thing which cannot be used without consuming the same cannot be leased out like money, edibles, fuel, etc. Only such assets which are owned by the lessor can be leased out except that a sub-lease is effected by the lessee with the express permission of the lessor. Until such time that assets to be leased are delivered to the lessee, lease rentals do not become due and payable 5
IJARAH (LEASING) During the entire term of the lease, the lessor must retain title to the assets, and bear all risks and rewards pertaining to ownership. If any damage or loss is caused to the leased assets due to the fault or negligence of the lessee, the consequences thereof shall be borne by the lessee. 6
IJARAH (LEASING) The lessee is also responsible for all risks and consequences in relation to third party liability, arising from or incidental to operation or use of the leased assets. The insurance of the leased asset should be in the name of lessor and the cost of such insurance borne by him. A lease can be terminated before expiry of the term of the lease but only with the mutual consent of the parties. 7
IJARAH (LEASING) Either party can make a unilateral promise to buy/sell the assets upon expiry of the term of lease. Alternatively, the lessor may make a promise to gift the asset to the lessee upon termination of the lease. However, there shall not be any stipulation in the lease agreement purporting to transfer of ownership of the leased assets at a future date. 8
IJARAH (LEASING) The amount of rental must be agreed in advance Contract of lease will be considered terminated if the leased asset ceases to give the service for which it was rented. However, if the leased asset is damaged during the period of the contract but is capable of being repaired, the contract will remain valid. 9
IJARAH (LEASING) l. Late Payment Plenty l. The banks can also approach competent courts for award of damages. l. Also, security or collateral can be sold by the bank (purchaser) without intervention of the court. 10
MECHANISM 11
Leasing (Operating Lease) Beneficial use of asset Transfer of asset Financier (Lessor) Vendor Payment of purchase price Entrepreneur (Lessee) Lease rentals l Another popular instrument – 15% of the transactions l Right available to lessee to purchase l Asset ownership risk with owner; operational risks with lessee l Features close to a financial lease l Used for machinery, equipment, property, vehicles, aircraft etc. l Ownership usually transferred at the end 12
Ijarah Operating Lease GENERAL MECHANICS. VENDOR . ISLAMIC BANK Agreement CUSTOMER l The customer approaches the Bank with the request for financing l The Bank purchases the item required for leasing and receives title of ownership from the vendor l The Bank makes payment to the vendor 13
Ijarah Operating Lease GENERAL MECHANICS. VENDOR l The ISLAMIC BANK Agreement . CUSTOMER Bank leases the asset to the customer l The customer makes periodic payments as per the contract l The asset title transfers to the customer based on the method disclosed in the agreement 14
USAGE OF IJARAH 15
IJARAH (LEASING) Ijarah (Operating Lease) Examples: Houses Rent-A-Car Agricultural Durables Aircrafts, etc. Issues Asset Price Risk Repair and Maintenance Running Expenses (depending upon contract) Credit Risk (Default in rental payment) 16
IJARAH (LEASING) Ijarah Muntahia Bittamleek Examples: Vehicles Ijarah Financing Plant and Machinery Consumer Durables House Financing Project Finance, etc. 17
RISKS AND ISSUES 18
Risks l l l l Credit Risk Rate of Return Risk Customer may decline to enter into Ijarah. Damage to Asset Overdue Rentals Non-Compliance/Violation of contract. Early Termination Asset Price Risk 19
Risks and Practical Issues l l How to treat insurance cost paid by the Lessor? Treatment of Security deposits received from customers. Treatment of Advance rentals. Accounting rule/policy regarding repairs of Leased assets. 20
Leasing/Ijarah Contract Conventional Leasing Ijarah There are two types of contracts, Financial lease and loan for car financing. Both these contracts contain conditions that are contravenes with the Islamic Sharia'h. Financing lease contains conditions of hire purchase, which is not permissible by Sharia'h. Car financing or loan agreement contains conditions of interest. Interest is considered Riba by Sharia'h The Ijarah contract does not contain any condition that makes the contract void under Sharia'h perspective. 21
Rights & Liabilities of Lessor and Lessee Conventional Leasing Ijarah In Conventional Leasing All risks pertaining to ownership Products, the Customer is are borne by Lessor. Customer responsible for all kinds of losses only bears usage-related risks or damages to the Leased asset, irrespective of the circumstances. If the insurance company does Lessor bears the risk not compensate the entire Insurance claim settlement. outstanding amount in case of total loss, the customer is liable to pay the balance. of 22
Rentals recovery in case of theft and loss Conventional Leasing Ijarah If the Leased Asset is stolen or completely destroyed, the conventional leasing company or Bank would continue charging the lease rent till the settlement of the Insurance claim Under the Islamic Ijarah, rent is consideration for usage of the leased asset, and if the asset has been stolen, destroyed or temporarily out of order and not in use of Customer, the concept of rental becomes void. In such situations rental is not charged from the lessee. 23
Penalty for late payment Conventional Leasing In most current financial leases, an extra monetary amount is charged if rent is not paid on time. This extra amount is the considered Riba and is Haram. Car Ijarah Under Ijarah, the Lessee may be asked to undertake that if he fails to pay rent on its due date, he will pay a certain amount to a charity Fund, which will be administered through the This amount is taken by the Islamic Bank. leasing institution into their For this purpose the bank maintains a charity fund where income. such amounts may be credited and disbursed for charitable 24 purposes.
Insurance premium Conventional Leasing Car Ijarah Insurance is independent of the lease contract. The insurance expense of the asset is directly borne by the lessee Takaful / Insurance should be at the expense of the Lessor and not at the expense of the lessee. The Lessor may increase the lease rent to recover any costs incurred by him in connection with the asset. However, as a matter of principal, the cost should be paid for by the Lessor. 25
Registration Charges Conventional Leasing Car Ijarah Lessee is responsible for the The Leased Asset(vehicle) is Registration of Leased Vehicle. registered in the name of the Bank and registration charges are paid by the Bank (Lessor). The Lessor may increase the lease rent to recover any costs incurred by him in connection with the asset 26
Purchase of asset Conventional Leasing Under conventional leasing contracts, the vehicle is automatically transferred in the name of the customer upon completion of the lease period, whether or not he wants to purchase it. Car Ijarah There is not such clause in the Ijarah Agreement that Leased Asset will automatically transfer to Lessee. Separate sale agreement is required to execute sale transaction at the end of lease term. 27
Commencement of Rentals Conventional Leasing In case of Booking of Leased Asset, recovery of Lease installment commence after the payment of cost of Asset to manufacturer/dealer. Ijarah In case of Car Ijarah, the recovery of rentals is associated with delivery of Leased Asset. Rental recovery should not be commenced before the delivery of Asset. 28
Signing of Lease Contract Conventional Leasing Ijarah Lease Agreement can be signed In case of Ijarah, the Ijarah by the Lessee and Lessee any time Agreement can not be signed by even if the Leased Asset is not the Lessor and Lessee unless: owned by the Customer. §Asset has come in to existence §Assets is in the ownership of the Lessor §Lessor has taken possession of the Asset 29
Termination before delivery Conventional Leasing The customer will suffer loss of interest paid during the booking period because installment commence immediately after payment of cost of asset to the Manufacturer/Dealer. Ijarah The loss of customer is only limited to actual loss, if any, suffered by the Lessor on sale of asset in the open market. Since the customer has not paid any rental during the booking period, no other cash loss is expected under Ijarah. 30
OTHER DOCUMENTS Undertaking for Personal use of Ijarah Asset Trust Receipt Authorization to Take possession of Leased Asset Sale Deed 31
Thank You. 32
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