IJARAH – Islamic Leasing

IJARAH – Islamic Leasing

The meaning of Ijarah – Islamic Leasing is to give something on rent. This is to rent a fixed asset to a person (the lessee) by the owner (the lessor) at an agreed rent price for an agreed period.

A customer comes to bank for an Ijara agreement to receive any asset for example vehicle. Bank purchases that asset from vendor and handover to costumer on rental basis. Customer pays rent to bank in against of usage of that asset. Customer can buy that asset after some time by entering new sale agreement with bank.

Basic Rules of Ijarah

• The subject of Ijara shall be valuable, quantified and identified.
• Some consumable commodities cannot be leased out.
• Lessor bears all liabilities of ownership.
• Both parties of lease shall know the period of lease.
• Leased asset cannot be used by lessee other than purpose specified in the leased agreement.
• Third person cannot be assigned to receive Ijara payment.
• Self-imposed penalty shall go in separate charity account in case of late payment.
• Lessee is considered as Ameen of asset of lessor.
• Rent amount shall be determined at the time of agreement.
• Lessor of Ijara has right to change rent amount.
• Both parties shall know the amount of rent.
• Rent payment will not be due if asset is out of order.
• Rent amount shall be due after the delivery of asset.
• Hidden charges like insurance, tax, fee, etc. not allowed.

Application of Ijarah in Islamic Banks

Despite in practice from long period of time, Islamic banking started attraction and high popularity. At present time, Islamic banking is continues flourishing. This is an economic banking system not only for Muslims but for all human being to deal with financial affairs in accordance to Islamic ideology.

Ijara in Islamic banking is to rent or wage some asset to take benefits of utilization of that asset in against fixed rental payments. Islamic banks play the role of lessor and receive rent from lessee. Islamic banks also charge non-returnable service charges to make arrangements for Ijara.

Differentiate b/w Ijarah and Conventional Leasing

The Ijara contracts only follow Shariah perspectives and cannot contain any condition which is not allowable by Shariah. Conventional contracts have two types: Financial lease (hire / purchase) and interest based loan (Riba). Both types are not allowed in Shariah.

All risks other than usage-related maintenance, is born by lessor. Lessor can claim insurance settlement. However, in conventional leasing, lessee is responsible for all kind of losses and damages. Insurance company also does not reimburse full claim.

According to Ijara, rent is connected to usage of asset. Rent cannot be charged if asset is out of order, destroyed, or stolen. But in conventional leasing, bank will not stop charging rent whatever the situation until the settlement of insurance claim.

Separate charity account is maintained in Ijara Islamic banking system to charge against late payment. Conventional bank will charge extra income in form of interest apply of late payment.

Takaful or insurance is born by lessor not lessee in Ijara Islamic bank. In conventional leasing, all insurance expenses are born by lessee.

Registration charges are the responsibility of owner of the asset. As in Ijara, bank is the owner of asset so registration charges are also paid by Islamic bank. Costumer has to carry the burden of registration charges in conventional leasing system.

Asset will not be transferred to costumer automatically in Ijara. Costumer and bank have to make another sale agreement after completing Ijara contract if costumer wants to purchase the asset. On the other side, asset will be transferred to customer after the completing of leasing period, either costumer wants that asset or not.

Ijarah – Islamic Leasing System provides relaxation in the situation of any kind of losses to lessee. Only actual loss will be transfer to lessee. All losses are shifted to costumer in conventional leasing system.

Conclusion

To conclude, Ijara Leasing System shall be the best way to carry out if a customer has no sufficient funds to purchase asset. In other way if a costumer does not want to acquire an asset but needs to use for some certain period of time. Conventional leasing system shall be considered very costly for lessee and also against Shariah compliance.