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˜ ˜



³A contract pertaining to usufruct transfer, with compensation´

×c ˜t differs with sale and purchase of goods concept. Lease is selling and purchasing of

usufructs of the goods. However, the goods are still subjected to the ownership of the lessor.

×c Æhe right to use the usufructs of the asset is switched from the owner to the lessee. For

consideration, the lessee has to pay an amount of rental payment to the owner of the asset.

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×c At-Æahrim:6) ³And if they suckle your offspring, give them their recompense´.

×c Hadith: ³Pay the hired worker his wages before his sweat dries off´.

×c ˜t is also known that the Muslim nation during the time of the Companions of the Prophet

reached a consensus on the permissibility of leasing. ˜n this regard, the observable usufruct of

goods is clear benefit to the people, thus rendering leasing such usufruct, valid, based on the

validity of selling the objects themselves.

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Æhe majority of jurists have classified lease according to various perspectives, the following are two main


a)c r CÆ MAÆÆ OF ÆH LAr ArrÆ

×c ˜ : to lease the usufruct from the specific goods or asset.

Æhis first type of lease has invited no difference in opinion among the scholars and jurists as to its

permissibility. Æhe rental payment can be fixed and paid at the initial lease contract or on the

basis of deferred payment.

g: Mr Ahmad leases out his house to Mr Karim for the payment of M700 per month for a period of one


×c ˜  
: to lease out the works or self-skills

˜n this type of contract, the work itself will be the subject matter of the contract. Hence, for the

consideration of the work and the skills in performing the job, the workers, such as consultants, lawyers,

company¶s staffs, etc., will be paid a certain amount of wages

×c ˜     or ˜  

Æhis is a form of ˜  where the asset needs to be described in detail in advance but it is not available at

the time of contract. Æhe asset must be delivered on a future agreed date.

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g: Mr Ahmad leases out his double storey terrace house in andar aru angi measuring 100×30 square

feet to Mr Karim, but the stipulated house will only be fully completed in 2 months time. However, Mr

Karim has leased the house for the period of 3 years with the payment of M1000 per month prior to its


Æhis is a type of liability lease contract. ˜t is due to the benefit of usufruct leased out which forms the

monetary liability or debt owed by Mr Karim to Mr Ahmad. According to this concept, Mr Ahmad can

claim the rental payment from the conclusion date though his house is not yet occupied by Mr Karim. ˜n

this concept, obligation and responsibility on Mr Karim to Mr Ahmad is a specific usufruct for the terrace

house and not the house itself.

Æhe ruling among jurists and scholars in determining the status of this type of lease contract is briefly

stated as follows:-

c Majority of  Maliki, ryafie, Hanbali) and AAO˜F˜: the arrangement is

permissible with conditions. However, they differ among themselves as to the time of rental

payment, whether it can be paid when the contract is concluded, or not.

c ryafie and Maliki: it has to be paid at the time of contract conclusion because it is

analogous to salam contract rules and regulations. ˜f the parties separate before the rental

payment is paid, the contract is invalid and void. Æhis condition is also important in order to

avoid the case of purchasing debt by debt which is forbidden in ˜slam. However, Mazhab Maliki

gives up th three days delay, which is line with their opinion   

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c Hanbali and AAO˜F˜: the price is only to be paid at the conclusion of the contract if the

contract used the pronounciation of   

 ie the pronouncement whereby, it can

be made in the future time). Æherefore, when the contract is concluded using the pronounciation

of lease, rent or  , other than   

, the rental payment is not required to be

paid at the conclusion of the contract.

c Hanafi: it is illegal and invalid because the subject matter of lease contract must be of a

specific item. ˜n this type of lease contract, the subject matter is not specific on the asset per se

and it only specific on its usufruct. ˜t means, the lessee can find another house that enables him to

get same specific usufruct of the house if the construction of the house is not completed.

b)c rAG AN ˜Ær N rÆ CÆ 

˜f   is to be viewed from the perspective of its utilization and its new structure, it can be divided into

2 types of lease as follows:-

i.c Operating Lease

ii.c Financial Lease

˜t is worthwhile to comprehend the basic distinction between the two:

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 c Æhe legal and beneficial ownership of both types of Æhe lessor only possessed the beneficial

c c contract are within the ownership of the lessor ownership of the asset

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º  c Æhe lessor is still fully obligated in administrative Æhe lessor will transfer almost his entire

  c affairs and basic maintenance of his asset, whereby original obligation on the asset to the

the lessee will only be liable on the daily lessee. Æhus, responsibility on the asset

maintenance of the asset which is directly affected insurance, quit rent etc is on the shoulder

by his usage of the asset. He then has to pay rental of the lessee.

payment as agreed in the agreement.

½  c Any risks such as small damage which is not All types of risks whether it is caused by

caused by the lessee¶s negligence on the asset will the negligence of the lessee or otherwise,

be under the responsibility and liability of the is under the responsibility of the lessor.

lessor and not the lessee, for that reason, the lessor

will insure the asset through the Æakaful scheme.

½º c Can be terminated anytime with the consent of Can be terminated but the lessee must pay

both parties without having to pay any indemnity all the arrears of the rent in one lump

or compensation or the sum of arrears of the rent sum. Æhen, the asset will be reverted back

depending upon the terms of the contract); after to the lessor fully. Æhis is the motive and

the termination of the contract, the asset will be the objective of this type of lease.

reverted back to the owner of the asset as usual.

i. Operating Lease

˜t is deemed as the original form of  , thus the contents and terms of the contract are similar to a

normal lease. Æhis type of lease will normally occur between the original owner of the asset and the

lessee. Æhis lease is hardly found in ˜slamic banking practice due to its high risk.

c c
However, there are several ˜slamic Finance ˜nstitutions which are not banks, offering the products based

on this concept, such as, in purchasing airplanes, factory machines and leasing them out from time to time

to the identified lessee for a specified period. At the end of the period, the institution will find new

lessees, and they will gain profit from the revenue of the rental payment.

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˜llustration: Operating lease as financing product


×c Lease Agreement- the client approaches the ˜slamic Financial ˜nstitution and uncovers his plan to

use certain assets such as 5 buses for the period of 5 years. After the ˜nstitution¶s credit approval,

the customer submits an undertaking to lease the document to the bank.

×c Purchase the asset- the ˜nstitution purchases the asset 5 buses) from the seller

×c Lease contract- the ˜nstitution leases out the buses to the customer for the period as per agreed.

After the contract ends, the institution will either find new customers or sell the assets.

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Æhe above is the flow of contract for the operating lease of an ˜slamic financing product. However, as per

mentioned, it is rare to find such product being offered by ˜slamic banks due to its high risk.

ii.c Financial Lease

˜t is a type of lease which is normally used and offered by ˜slamic banks as Financial ˜ntermediaries, in

order to help their customers in:

×c Obtaining their desired asset

×c Obtaining cash money for various purposes

asically, it can be said that it differs from the type of common lease but it has the same attributes as

found in operating lease. Financial lease in the light of its process and its name as the product in ˜slamic

banking practice are:




c c
Æhe following are several structures of financing lease, based on its aims and objectives.

a.c Financial Lease for the Customer to Obtain esired Asset

˜n order for the customer to purchase the desired asset, he will then approach the bank asking for

financing product, then the following process will take place:




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˜llustration: Financial Lease for the Customer to obtain desired asset


Æhere are two possibilities;

×c eposit- in several occasions before seeking the bank¶s approval, the customer has already paid

the deposit to the seller. ˜f this happens, there will be rissues regarding its flow and the

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product at large. Æhis is due to the conflict of ownership between the customer and the bank.

Æherefore, any sale and purchase agreement between the customer and the seller of the asset, at

the initial stage, must be avoided, if this concept is to be applied.

×c Promise undertaking- the customer undertakes to lease the asset from the bank. Æhis process will

take place after the customer has identified the desired asset. As an alternative to the normal

deposit, the customer will have to pay a security deposit    ) and the sale and

purchase agreementbetween them should not be concluded. ˜f not, it will be regarded as .

×c Purchase the asset- the bank will buy the asset from the seller for cash

×c Leasing contract- after having the beneficial ownership on the asset, the bank will lease it out to

the customer. ˜n Malaysia, the legal ownership will still be retained by the lessor who is the end

owner of the asset, as for the bank, it will hold the the beneficial ownership in order to enable the

leasing process to be carried out. ndoubtedly, this will trigger several disputed rhari¶ah issues.

×c Full transfer of Ownership- it is done after the end of the last period of the lease, the bank will

transfer its full ownership to the customer, either in the form of gift 

) or selling at the minimum price A˜ÆA).

1 rum of money payable to the seller of the asset to show the intention or determination to buy the stipulated asset either through the

bank or directly from him. Æhis is to be paid by the customer at the request of the institution, both as an indication of the financial

capacity of the customer and to ensure the compensation of any damage to the institution arising from a breach by the customer of his

binding promise. Having taken his    , the institution need not demand compensation for damage as this may be charged

against the    . ˜t is being done before the conclusion of any sale and purchase agreement, in other word; it outside the main

agreement of sale and purchase.

2 Amount of money that the customer as purchase orderer or lessee pays to the institution after concluding a  or sale contract,

with the provision that if the sale or lease is completed during the prescribed period, the amount will be counted as part of the price or

rental. ˜f the customer fails to execute the or lease contract, the institution may retain the whole amount.

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b.c Financial Lease for the Customer to Get Cash

˜n certain situation, the customer is in need of enormous amount of cash in order to extend its

business premises etc. for the company which possesses its own high valuable asset, it can use

financial lease product to obtain the desired fund.





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˜llustration: Financial Lease for the Customer to Get Cash


×c Æhe customer, who is a gigantic company and possesses its own asset, sells its asset to the bank

for the cash needed by it. However, the value of the asset must be priced according to the market

value, or it can be slightly lower or higher according to the market accepted level. ˜n this case,

say M5 millions. As mentioned before, only the beneficial ownership is transferred to the bank,

whereby the legal ownership is still retained by the customer. rubsequently, the bank pays the

purchase price to the customer on a cash basis.

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×c After having the ownership on the asset, the bank will then leases out the asset to the customer for

the value of rent, for example, M7 millions, as the total accumulated rental amount, for the

period of 4 years.

×c After the 4 years period end and the customer successfully settles out his rental payment as per

agreed, the bank will give its beneficial ownership as a gift to the customer or to sell it at a

minimum price.


×c Æhe customer obtains the desired cash money ie M5 millions

×c Æhe bank gains profit amounting to M2 million from the rental payment

×c oth of them are able to stay away from the interest based loan and their business is permissible

and valid

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×c Financial lease causes the lessee to be fully responsible on the asset risk; this situation is

considered as non-compliant with the r principle as stated by AAO˜F˜. Many ˜slamic

banks which practice this concept seem to have failed in finding the best way out for this matter.

Notwithstanding the fact, majority of r Advisory Council of ˜slamic anks in Malaysia

take the lenient view which approves that the basic maintenance of the asset is to be shouldered

by the lessee with his/her consent.

×c ˜nsurance on the asset, tax, etc. are also borne by the customer; in fact it is supposedly under the

responsibility of the owner, not the lessee. However, several ˜slamic banks endeavor to find the

way out by taking the risk responsibility. Nevertheless, the rental payment will be higher to

accommodate this cost.

×c ˜n Malaysia, currently all A˜ÆA products, particularly in purchasing cars, are placed under the

Hire Purchase Act 1967. As a result, if any dispute arises, it will be dealt in the court under the

act which is not complying with the ˜slamic principle. ˜n fact, the basic product of A˜ÆA is the

same as conventional lease under the Act and several clauses in the Act clearly show that the

nature of the contract is loan with fixed interest. esides, it is also the obligation of the bank to

conclude the contract from the very beginning, thus making it clearly in contradict to the real

concept of A˜ÆA. Æhe conventional Act also requires both parties to amalgamate all the lease

and sale and purchase contract in a basket, which is considered by ras repugnant.

×c Æhe issue also arises if the customer is unable to pay the rental payment for several months event

of default). hen the situation occurs, the product usually gives the choice to the bank whether to

terminate the lease and fully take over the asset or the customer is asked to buy the asset with the

price, equivalent to the outstanding balance. Apparently, such condition will trigger r

repercussion which needs to be observed in depth by the rcholars.

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×c Furthermore, rissues also arise in the issue of Æakaful beneficiaries on the asset should

anything happen to the asset, such as the asset is being stolen, burned, damaged by nature etc.

Æypically, the lessee will be made responsible to pay the insurance, but in the event of

destruction, the bank will be benefited from the insurance company/Æakaful.

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r ˜ , rental ˜slamic bonds that are embraced by r scholars worldwide, are the most

popular form of ˜slamic bonds, last year, according to a rating by Mood¶s Agency. Æhe report also said

rtandard & Poor¶s estimated that more than 45% of ˜slamic bonds issued in 2008 were structured

according to the   principle. ˜ is a lease where a bank buys an asset and rentals it to its client for

a fee that includes the purchase price and the profit rate, to be earned by the bank during the rental period.

˜   is the securities representing ownership of well-defined existing and known assets tied up to

a lease contract, rental of which is the return payable to holders. Payment of   rentals can be

unrelated to the period of taking usufruct by the lessee. ˜t can be made before the beginning of the lease

period, during the period or after the period, as the parties may mutually decide. Æhis flexibility can be

used to evolve different forms of contract and  that may serve different purposes of issues and the


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˜llustration: Æhe asic rtructure of r˜  applicable worldwide


rcenario- rime arby Company needs M500 millions to expand its business. ˜n order to get sufficient

capital, with the approval of the bank, they will issue an   . For the purpose, they will establish

a special company which called as rpecial Purpose Vehicle rPV) or rpecial Purpose Company rPC) or

entity rP).

×c rPV will purchase rime arby asset worth M500 millions on the basis of deferred payment.

However, according to the practice, only beneficial ownership of the assets is transferred to rPV

and not the Legal Ownership.

×c Having the ownership of the asset, rPV issues  to represent the beneficial ownership

of the asset bought from rime arby. Æhis  is then bought by several investors from banks,

net worth individuals and corporate companies where the total amount targeted will be amounted

to M500 million. rPV will then pay rime arby either in bullet payment or any agreed payment


×c rubsequently, rime arby needs the asset to run its business, hence they agreed to rent out the

asset that was sold in the period of 7 years for instance, with the total sum of the rental payment

for M600 millions.

×c Æhe accumulative sum ie M600 millions will from time to time to be divided among the rukuk

holders in that period of 7 years.

At the end of 7 years time, as per sukuk agreement, rPV will redeem all the sukuk certificates from

the investors with a pre agreed formula. Lastly, the assets will be returned to rime arby


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×c rime arby Company is able to obtain the cash money which they require for their business


×c ˜nvestors will potentially gain profits amounting to M100 millions from the rental payment.

˜n ecember 2000, Kumpulan Guthrie erhad Guthrie) was granted a M1.5 billion  r400

 by a consortium of banks. Æhe original facility was

raised to re-finance Guthrie¶s acquisition of a palm oil plantation in ˜ndonesia. Æhe consortium was

then invited to participate as the underwriter/primary subscriber of the sukuk transaction.

r350million rukuk Ærust Certificates by rarawak Corporate rukuk ˜nc. rCr˜) rarawak

conomic evelopment Corporation rC) raised financing, amounting to r350 milion by way

of issuance of series of trust certificates issued on the principle of   . Æhe certificates were

issued with a maturity of 5 years and under the proposed structure, the proceeds will be used by the

issuer to purchase certain assets from 1st rilicon Malaysia) rdn. hd. Æhereafter, the issuer will lease

assets procured from 1st rilicon to rC at an agreed rental price for an agreed lease period of 5


c c

rtandard & Poor's has rated ˜  r transactions backed by various types of underlying credit

lessees including sovereign governments, regional governments, corporations and multilateral lending

institutions. rtandard & Poor's also rates financial institutions that provide ˜slamic banking and insurance


˜n most cases, rtandard & Poor's has assigned ˜ r the same ratings as it assigns to the lessees

creating the payment stream. Æhis practice reflects the unconditional, irrevocable nature of the lease, any

third-party lease guarantees, sale and purchase agreements, and/or financial hedges that are found in the

transaction. atings lower than those given to the lessee are assigned where there are diminished recovery

prospects, greater risks associated with lease payments or other factors supporting such a distinction.

Higher ratings are unlikely without additional risk-mitigating features in the case of sovereigns, although

for corporates, ˜  r may resemble certain characteristics of secured loans and be notched up


rtandard & Poor¶s has rated two µbroad types¶ of ˜slamic financing:-

×c ˜ r where the whole transaction, including the ownership structure as well as the notes,

is rhari'ah-compliant

×c and the 'ownership' r -compliant structure, where the bonds are issued by an unaffiliated rP

with the proceeds used to acquire the assets from the lessee/seller, combined with a put/tender

feature. ˜n this configuration, the securities themselves may not necessarily be r -compliant.

Most ˜ r that rtandard & Poor's has rated are set up in the following manner:-

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i)c Æhe seller sells certain assets such as an office building, land, or an airport) to a special

purpose entity the rP) that may be affiliated or unaffiliated with the seller depending on

the degree of compliance with r ) for a determined price the purchase price).

ii)c Æhe rP raises financing to purchase the assets by issuing ˜ r to investors in an

amount equal to the purchase price. Æhe ˜ r represents an equity interest in the

rP's assets, which may be indirect or direct depending on the type of rP.

iii)c Æhe rP then leases the assets to the lessee - an affiliate of the seller, or directly back to

the seller itself - in exchange for periodic lease payments. Æhese lease payments should

match the obligations of the rP under the ˜ r.

iv)c At maturity, or on a dissolution event, the rP sells the assets back to the seller at a

predetermined value. Æhat value should be equal to any amounts still owed under the terms

of the ˜ r.

Other transaction configurations are possible. For example, the rP may sub-lease back to the lessee the

assets that have been first leased to the rP by the same lessee. Æypically, the headlease has a longer

maturity than the sub-lease. ruch configurations do not include the sale of assets and may be preferred

when the sale of an asset is difficult, either legally or for political reasons for example, a sovereign may

not wish to sell the country's main airport).

Additionally, depending on the extent of r  compliance, prior to maturity the lessee may have the

right to call for the assets upon certain amounts due under the ˜ r as well as other expenses, and

the rP might have the right to tender the assets back to the lessee. Æhe lease may also be supported by

affiliate guarantees. Currency or other hedges may also play a part in transaction dynamics.

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On last 20th March, we made a visit at Am˜slamic ank to see what they have in hand with

regards to ˜jarah. Mr Haris, the manager, introduced to us ½c

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. Æhis is a

convenient package provided by Am˜slamic ank that is based on Al-˜jarah Æhumma Al-ai

A˜ÆA) Principle which refers to two contracts undertaken separately: the ˜jarah

leasing/renting) contract followed by ai¶ purchasing) contract after a certain period of

payment. ˜ndividuals aged 18 and above are eligible to apply for A˜F P CHAr-i. ˜t¶s open

to individuals, sole proprietorships, partnerships, private limited and public listed companies, and

other commercial organizations.

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nder this scheme, Am˜slamic ank will purchase the vehicle that had been chosen by a

customer and subsequently hire the vehicle to him/her at a pre-agreed rental amount and hiring

period. pon the expiry of hiring period and full settlement of all rentals, the vehicle will

automatically be his/hers. rhould the customer fully settle the financing before its maturity,

he/she would be entitled to statutory rebate on the unexpired rental period. Æhe rebate shall be

calculated in accordance with the following formula:

ebate = Æerm Charges Profit Charges) Àc c c

n = remaining rental period
N = original rental period
Æerm Charges Profit Charges) = total profit charge

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rhould the customer fail to fulfill his/her obligations under this scheme, the compensation

charges Æa¶widh) are as follow:

uring financing period 1% p.a is chargeable on overdue payment

pon expiry of financing period Charged based on ˜slamic ˜nterbank Money

Market ˜˜MM) ate and calculated on


principal only

Æhe ank has the right to utilize any credit balance in his customer¶s account s) maintained with

them to settle any outstanding balance in this financing account. However, notice should be

made to customer.

Æhe ank also has the right to repossess the vehicle if there had been two successive defaults.

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On March 4, 2011, we went to visit ˜NC˜F ˜nternational Centre for ducation in ˜slamic

Finance) in order to gain more information on the application of ˜  in today¶s business

world! ˜NC˜F is a dedicated university set up by ank Negara Malaysia, focused on ˜slamic

finance at the postgraduate level and is delivered solely in nglish. ˜t combines the study of

rhariah, theories of finance & practical issues in its curriculum and modules - developed

together between industry, rhariah experts and academia. At ˜NC˜F, students are encouraged to

spend time in the industry to gain practical knowledge. Furthermore, ˜nternational rhariah

esearch Academy in ˜slamic finance is part of ˜NC˜F ± it is an institution which promotes

dialogues among rhariah scholars to push the boundaries of knowledge and to achieve

congruence in many areas.

pon arrival, we were warmly greeted by Mr. Zainal Abidin Mohd Æahir, a teaching fellow at

the ˜slamic anking epartment, ˜NC˜F, who gave us his opinions about the application of

rhariah contracts in products and services of various financial institutions in Malaysia.

Æhe visit was indeed insightful as we were exposed to the operation of ˜jarah in the realm of

˜slamic banking as well as conventional banking.

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Mr. Zainal Abidin Mohd Æahir of ˜NC˜F and us.

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For the subject Æransactions in ˜slamic Law 2, we were required to do a group research on any of

the ˜slamic forms of transactions that we have come across in the syllabus. After a series of

discussion among the members, we undertook to do a detailed research on ˜jarah leasing).

Æhis report would not have been possible without the assistance by these individuals:

i)c r usni Hassan, our dedicated instructor, who was ever so helpful to guide us

throughout the course.

ii)c Mr. Zainal Abidin Mohd Æahir of ˜NC˜F, without whom these findings would be


iii)c Mr Haris of Am˜slamic ank, who was very resourceful in guiding us to the various

products provided by the ank.

Many thanks to all who had a part in making this work happen. You are all equally appreciated.

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