Introduction To Ijarah: Release Date

Introduction to Ijarah
Version 2.0
Release Date:
Jamad ul Thani 31, 1430 H
June 25, 2009
Prepared By:
Product Development and Shariah
Compliance Department
Ijarah
• Ijarah is a term of Islamic Fiqh

• Literally, it means “To give something on
rent”
• The term “Ijarah” is used in two situations:
1. It means ‘To employ the services of a
person on wages’ e.g. “A” hires a porter at
the airport to carry his luggage
2. Another type of Ijarah relates to paying
rent for use of an asset or property defined
as “LAND” in Islamic Economics
Ijarah as a mode of financing
• Ijarah is an Islamic alternative of Leasing.

• Leasing backed by an acceptable contract is an
acceptable transaction under Shariah.
• The question of whether or not the transaction
of leasing is Shariah compliant depends on the
terms and conditions of the contract.
• Several characteristics of conventional
agreements may not conform to Shariah thus
making the transaction un-Islamic and thereby
invoking a prohibition.
Ijarah-Key Difference
• Risk and rewards of ownership lies with the

owner i.e. any loss to the asset beyond the
control of the lessee should be borne by the
Lessor.
• Late payment penalty cannot be charged to the

income of the Lessor.
• Lease and Sale agreement should be separate

and non contingent.
Process of Ijarah
Ijarah
MECHANIC
S . .
VENDOR ISLAMIC BANK Agreement-1 CUSTOMER
 The customer approaches the Bank with the

request for financing and enters into a promise
to lease agreement.
 The Bank purchases the item required for
leasing and receives title of ownership from the
vendor
 The Bank makes payment to the vendor
Ijarah as a mode of financing
MECHANIC
S . .
VENDOR ISLAMIC BANK Agreement-2 CUSTOMER
 The Bank leases the asset to the customer after

execution of lease agreement.
 The customer makes periodic rental payments
as per the contract
 At the end of the tenure customer can purchase
the asset from the bank with the help of
separate Sale agreement.
Rules governing Ijarah
Ijarah
• Rules governing Ijarah are similar to the
rules governing sale.
• Because in both cases something is
transferred from one person to another
The only difference is:
• In case of sale, title of property is transferred
to Buyer
• In case of Ijarah, title remain with the Lessor
• Only the use of the property is transferred to
Lessee
Rules of Ijarah
1. Leasing is a contract where the owner of an

asset transfers its use to another person
against an agreed price.
2. However, ownership of the leased asset

remains with the Lessor
Rules of Ijarah
3. Since ownership of the leased asset remains

with the Lessor, all rights and liabilities relating
to ownership are borne by the Lessor.
All rights and liabilities relating to use are borne

by the Lessee e.g. “A” gives his house to “B”
on rent.Property taxes are to be borne by the
owner. Water tax, electricity bill etc are to be
borne by the Lessee
Rules of Ijarah
4. Subject matter of Lease should be Valuable,

Identified and Quantified.
5. The period of Lease must be determined in

clear terms.
6. The Lessee is responsible for damage to the

asset caused by fraud or negligence.
7. Any damage to the asset not caused by the

Lessee’s neglect, is to be borne by the Lessor.
Rules of Ijarah
8. Normal maintenance is Lessee’s responsibility
9. Lease rentals for the entire lease period must

be fixed at the time of Lease Agreement;
a) Different amounts of rents can be fixed for

different periods, but they must be known.
b) The rent may be tied to a known benchmark,

acceptable to both the parties.
Rules of Ijarah
10.The Lessor cannot increase the rent unilaterally
11.The Lessor may receive the rent in advance, but

such payment should be recorded as an Advance
rental. Balance Sheet should reflect this payment
as Liability, since rent can be received only for
use of an asset.
Rules of Ijarah
12.The Lease period will start when the asset has

been delivered to the Lessee
- in a usable condition
- whether or not the Lessee has started using it
13.If the leased asset is destroyed, the lease will

terminate.
14.If the Lessee is at fault, he is liable to

compensate the Lessor for the loss
Termination of Ijarah
• If the Lessee contravenes any term of the Lease

agreement the Lessor may unilaterally terminate
the agreement
• If there is no contravention, the agreement can

only be terminated by mutual consent
• Conventional Financial Lease agreements give

termination right to Lessor in all cases. This is
contrary to Shariah laws
Ijarah
Difference b/w Conventional Lease & Ijarah

1. In conventional lease the Lessor has the
unilateral right to rescind the lease contract
at his sole discretion, which is against the
laws of Shariah,
2. Expenses under Ijarah are as follows:
• Lessor- expenses relating to the corpus of
the asset i.e. insurance, accidental
repairs etc. will be borne by the lessor
• Lessee- actual operating/overhead
expenses related to running the asset will
be borne by the lessee
Ijarah
Difference b/w Conventional Lease & Ijarah

3. Two contracts into one contract is not
permissible in Shariah therefore, we cannot
have the agreement of hire and purchase
into one agreement, only we can
undertake/promise to purchase the leased
asset.
4. In conventional lease the lease starts even
before the existence of assets, which is also
not permissible in Shariah.
5. Penalty income is charged for late payments
in Conventional lease.
APPLICATION
Application of Ijarah
Car Ijarah
Unique Selling Proposition
• Pakistan’s first truly Shariah-

compliant Car Financing Scheme.
• Available in tenures of 3, 4 and 5

years.
• Available for locally assembled as

well as Imported cars.
• Also available for Used Cars
• No application Fee
Applications of Ijarah
• For long and medium term fixed asset

financing
• BMR
• Retail products (Car Ijarah)

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Introduction to Ijarah

• Ijarah is a term of Islamic Fiqh

• Ijarah is an Islamic alternative of Leasing.

• Risk and rewards of ownership lies with the

• Late payment penalty cannot be charged to the

• Lease and Sale agreement should be separate

 The customer approaches the Bank with the

 The Bank leases the asset to the customer after

1. Leasing is a contract where the owner of an

2. However, ownership of the leased asset

3. Since ownership of the leased asset remains

All rights and liabilities relating to use are borne

4. Subject matter of Lease should be Valuable,

5. The period of Lease must be determined in

6. The Lessee is responsible for damage to the

7. Any damage to the asset not caused by the

8. Normal maintenance is Lessee’s responsibility

9. Lease rentals for the entire lease period must

a) Different amounts of rents can be fixed for

b) The rent may be tied to a known benchmark,

10.The Lessor cannot increase the rent unilaterally

11.The Lessor may receive the rent in advance, but

12.The Lease period will start when the asset has

- whether or not the Lessee has started using it

13.If the leased asset is destroyed, the lease will

14.If the Lessee is at fault, he is liable to

• If the Lessee contravenes any term of the Lease

• If there is no contravention, the agreement can

• Conventional Financial Lease agreements give

Difference b/w Conventional Lease & Ijarah

Difference b/w Conventional Lease & Ijarah

• Pakistan’s first truly Shariah-

• Available in tenures of 3, 4 and 5

• Available for locally assembled as

• Also available for Used Cars

• For long and medium term fixed asset

• Retail products (Car Ijarah)

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