You are on page 1of 6

llxaLlon and paymenL

of renLal

1he renLal of Lhe asseL wlll be flxed keeplng ln vlew Lhe demand and supply condlLlon ln Lhe markeL
lL ls worLh menLlonlng LhaL defaulL ln Lhe paymenL by Lhe hlrer cllenL shall cause lncrease of Lhe LoLal
renL as Lhe renLal ls flxed on predeLermlned raLe applled on dlmlnlshlng balance assumlng Llmely
repaymenL accordlng Lo Lhe schedule Such exLra renL may however be reallzed aL Lhe concluslon of
Lhe LransacLlon 8uL lL ls noL permlsslble Lo charge anyLhlng exLra on Lhe accrued renL 1he cllenL
parLner shall pay Lhe renL as per agreemenL usually from Lhe daLe he Lakes dellvery of Lhe asseL

roducL name Mode 1ype of roducL 8asls for rlclng
AlMakhra[ Car l[arah l[arah Wa lqLlna consumer 8enLals can be flxed
or varlable llnked wlLh Lhe bench mark havlng floor and cap

1enors 1argeL CusLomers
13 ?ear lndlvldual and CorporaLe cllenLs

roducL name Mode 1ype of roducL 8asls for rlclng

AlMakhra[ LqulpmenL l[arah l[arah Wa lqLlna SML corporaLe 8enLals can be flxed/ varlable llnked
wlLh Lhe bench mark havlng floor and cap 17 ?ear Small Medlum LnLerprlses / CorporaLe cllenLs
Ifara in simple terms implies leasing or hiring oI a physical asset. It is a
popular debt-based product in which the IsMFI assumes the role oI a 0884r and
allows its client to use a particular asset that it owns. The client or (lessee) is in
need oI the asset. Through ifara, it receives the beneIits associated with
ownership oI the asset against payment oI predetermined rentals. Ifara is Ior a
known time period.
In ifara, the IsMFI continues to be the owner throughout the ifara
period while the client receives the beneIits oI using the asset. As such, risks
associated with ownership oI the asset remain with the IsMFI and the asset is
supposed to revert back to the IsMFI at the end oI the ifara period. The cash
Ilows are structured in a way that cover the cost oI the asset and provide Ior a
Iair return on the same to the IsMFI. The IsMFI aIter recovering its cost and Iair
return may simply donate the asset or sell the asset at a nominal price to its
client. Micro-leasing or micro-ifara serves as a mode oI microIinance. All kinds
oI income-generating equipment or physical asset, such as, tools and machines
to manuIacture commodities, rickshaws and boats to transport people, carts as
also shops to sell merchandize, low-cost houses may be Iinanced through this
mode Ior the poor.
An important Shariah rule governing ifara as a tool oI microIinance is
that the risk and liabilities emerging Irom the ownership oI the asset
substantially remain with the 0884r - IsMFI in order that its proIits are deemed
legitimate in the eyes oI Shariah. In a conventional Iinancial lease, the 0884r
transIers substantially the risks and rewards incidental to the ownership oI the
leased assets to the lessee even while the title oI the leased asset may or may not
eventually be transIerred to the lessee. The complete transIer oI risk makes the
Iinance lease unacceptable Irom the Shariah point oI view.
In Islamic leasing or ifara, the leased asset remains as amana or in trust
with the lessee. There is no compensation in amana in case oI destruction oI
asset value, except when the loss is caused due to the negligence oI the lessee.
Thus, the leased asset remains in the risk oI the 0884r throughout the ifara
period, in the sense that any loss, damage or loss caused by the Iactors beyond
the control oI the lessee shall be borne by the 0884r. In this sense, Islamic ifara
is diIIerent Irom conventional leasing. Agreements oI conventional Iinancial
lease generally do not diIIerentiate between the two situations. In an Islamic
ifara, both situations are to be dealt with separately.
A 0884r can, oI course, mitigate his risk by making the lessee
speciIically liable Ior damages, theIt and/or loss on destruction oI assets except
in the case oI Iorce majeure. Further, speciIic risks oI the 0884r relating to the
physical damage, theIt and/or loss on destruction oI the leased asset may be
covered by Islamic insurance or takafu. The 0884r- IsMFI may include the cost
oI takafu premium in the ifara rental. Any escalation in the takafu premium
may also trigger rent adjustment iI it is speciIied in the ifara.

l[arah lease llke a convenLlonal lease ls an agreemenL Lo renL ouL
properLy and servlces ln an l[arah lease Lhe lessor (Lhe person
granLlng Lhe lease) malnLalns ownershlp of Lhe properLy or servlce
whlle Lhe lessee (Lhe person Lo whom Lhe lease ls granLed) galns use of
Lhe properLy and Lhe resulLlng proflL ln convenLlonal flnanclal
leaslng Lhe lnLeresL paymenLs have Lo be made Lo Lhe lessor wheLher
Lhe lessee galns Lhe beneflL from Lhe properLy or noL lf Lhe properLy
ls damaged Lhrough no faulL of Lhe lessee's Lhe lnLeresL paymenL ls
sLlll payable So Lhe ownershlp rlsk does noL enLlrely resL ln Lhe
owner's hands l[arahs on Lhe oLher hand clearly dlsLlngulsh beLween
ownershlp and usufrucL or Lhe use and proflL of a Lhlng and sLlpulaLe
Lhe renLal raLes unllke Lhe lnLeresL raLe be known and agreed upon
1he cenLral componenL of a valld l[arah agreemenL
ls Lhe approprlaLlon of rlsk speclflcally Lhe ownershlp of rlsk ln an
lslamlc lease rlsk assoclaLed wlLh Lhe lease properLy or servlce
remalns wlLh Lhe lessor Lhe beneflclary of Lhe renLal paymenLs

does noL forbld flxaLlon lL ls permlsslble Lo flx proflLs (ln
percenLage noL absoluLe Lerms) prlces renLs and lnsLalmenL plans
Lo name a few measure 8uL lL ls forbldden Lo exchange money for a
larger amounL of money (unless Lhe currency ls dlfferenL ln whlch case
lL ls permlsslble aL spoL) 1he unllke exchange of llke moneys creaLes
rlba 8uL exchanglng asseLs or servlces for money and money for asseLs
and servlces ls enLlrely permlsslble So Lhe problem does noL relaLe Lo
wheLher an lnLeresL raLe ls flxed or floaLlng buL Lo Lhe lnLeresL

Ijara : The mode under which any asset owned by the bank, by creation, acquirement
/ or building-up is rented out is called Ijara or leasing. In this mode, the leasee pays
the Bank rents at a determined rate Ior using the assets/properties and returns the same
to the Bank at the expiry oI the agreement. The Bank retains absolute ownership oI
the assets/properties in such a case. However, at the end oI the leased period, the asset
may be sold to the client at an agreed price.

Ijarah (Leasing)
Ijarah is an alternative to Iinancing in which a Iinancer buys and rent a productive asset to a
person short oI Iunds and is in need oI such asset.
O The aim oI such arrangement is to obtain the rentals and proceeds by receiving the
beneIits oI the assets through time.
O Lessor`s ownership.
O elivery oI assets to lessee essential to claim rentals;
O Lesser`s ownership during the entire term oI lease.
O #ental in absolute terms.... Predetermined lease period
O Penalty Ior delay.
O amage to the asset, with or without lessee`s Iault.
Lessee bear the operating expenses.
Unilateral promises. Ijara
Ijara is a rental contract whereby IFI leases an asset Ior a speciIic rent and period to the
client. Ownership risks oI the asset are born by IFI while expenses relating to use the
asset are the responsibility oI client. The diIIerence between Ijara and sale is that
ownership in Ijara remains with lesser while in case oI sales it is transIerred to
purchaser. Ending Ijara in sale oI asset is allowed by IFA through a separate contract at
completion oI term oI lease. Contract can be executed prior to purchase and possession
oI asset. Consumables cannot be leased out. #ight oI lessee to use the asset is restricted
to lease agreement or/and as per normal course oI business. Lessee is liable Ior any
harm to the asset caused by any misuse or negligence on his part. #entals oI joint
property are shared according to equity. A joint owner can rent his share only to the co
partner. Inter Bank #ate can be used as a benchmark Ior amount oI rentals. At the
completion oI Ijara term either asset is returned to IFI or purchased by client (Sharia
standard 9). Ijara has replaced successIully the Iacility oI leasing under conventional
Iinancial system.

One common risk Iactor associated with ifara Iinancing Ior the lessor is the risk oI Iinding an
alternative use oI the asset, oI locating a new client, where the lease period is shorter than the
economic liIe oI the asset. There is also the risk oI the asset becoming obsolete and the
uncertainty about realization oI salvage value in the absence oI an active secondary market
Ior assets. The risk is higher in case oI ifara oI specialized plant and machinery in the context
oI project Iinance. The lessee also Iaces the risk oI identiIying an alternative source and
supplier Ior its specialized requirements at the end oI the lease period. This risk can be
managed by going Ior ifara wa-iktina or hire-purchase, under which the lessee has an option
to purchase the equipment at the end oI the lease period. The eIIective reduction oI risk Ior
both parties has made this Iorm oI Iinancing quite popular among Islamic Iinancial

The main characteristics oI the above type oI home loan under Islamic Banking are: a proper
evaluation and assessment is made oI the repaying capacity oI the borrower and Iixation oI
the appropriate loan amount. Another notable Ieature, which is in Iact the bedrock oI Islamic
Banking, is the absence oI Interest on the loan amount. Instead the Bank adds up a proIit
margin to the cost oI the asset and divides the total amount into equal installments payable
usually monthly.

Article Source:
l[ara ln Lhe l[ara meLhod of flnance Lhe flnancler purchases Lhe properLy and sells lL Lo Lhe
cusLomer for Lhe same amounL of money wlLh Lhe paymenL spread over a perlod of Llme agreed
beLween Lhem 1he cusLomer also has Lo pay renL Lo Lhe flnancler over Lhe repaymenL Lerm 1he
lnsLallmenL of Lhe purchase ls somewhaL llke Lhe caplLal paymenLs under a convenLlonal loan whlle
Lhe lnLeresL ln Lhe convenLlonal loan ls llke Lhe renL ln Lhe l[ara under l[ara Lhe bank wlll buy Lhe
asseL you wanL and you wlll be allowed Lo use Lhe asseL for an agreed perlod ln reLurn for a monLhly
paymenL whlch covers Lhe banks caplLal lL ls a klnd of leaslng

led under Loans, Muhammad Haidar, Other - Business & Finance
Leave a Comment
013943: Ijarah is the equivalent oI Leasing oIIered by Islamic Banks and Financial
Institutions. The activity oI Leasing involves permitting the usage oI a property, say a car, or
a shop etc, owned by one person, by another, Ior a consideration, i.e. a monetary return.
While the ownership oI the asset remains with the owner, or the lessor, the lessee, or the
person that leases out the asset, will have the Ireedom to put such asset to beneIicial use, in
order to gain some beneIit Irom the same. There are two types oI Ijarah-Ijarah Salam and
Ijarah wa Iqtina.
Ijarah Salam: Under this type oI lease agreement, the lessee retains the possession oI the
asset Ior the duration oI the productive liIe oI such asset, which may be 10 years or 15 years
as the case may be.
For example, a person takes a car on lease whose productive liIe is estimated to be, say 10
years. The lessee would be entitled to the use oI the car Ior 10 years by paying the lease
rentals as agreed upon in advance, Ior the Iixed amount within the stipulated date without
deIault. The car will remain in the possession oI the lessee Ior the duration oI its productive
liIe cycle, in this case, 10 years, aIter which the lessee will return the asset to the owner, who
by the way, continues to retain the ownership oI the car during the lease period. This type oI
lease contract is convinient to both the lessor and the lessee and IulIils their respective
Ijarah wa Iq93a: Under this type oI lease contract, the lessee has the option, though not the
compulsion, to buy the asset leased out Irom the lessor upon completion oI the lease period.
The rate at which the asset would be purchased by the lessee would be mutually decided upon
by both the parties to the lease contract. As in the Iirst type oI lease contract, the ownership
oI the asset vests in the lessor and the lessee would only have the right to put the asset to
beneIicial use. And the lessee would be obliged to pay the lease rentals at the rate agreed
upon at the stipulated intervals without deIault. At the end oI the lease period, the lessee
would have the option oI buying the asset oII the lessor and become the owner oI the same.
The rate at which the asset would be sold to the lessee would depend upon the quality oI the
asset, the remaining liIe cycle oI the asset, the market conditions, the demand and supply
position etc. Arra30m039: Ijarah and Ijarah wa Iqtina contracts are beneIicial to both the
lessor and the lessee. The lessor, who owns the asset, may not have the time and the
inclination to put his asset to beneIicial use and may only be incurring expenditure in
maintaining the same. This arrangement provides an ideal way Ior him to put his asset to
good use and derive some Iinancial beneIit Irom it. In the same way, the lessee may have
the necessary skills to utilize the asset and derive Iinancial beneIit Irom the same, but may
not have the capital to purchase the asset. This lease arrangement, thus provides him the
medium to possess the asset without owning it and to apply his knowledge and skills to put
the asset to beneIicial use. What`s more , he has the option to buy the asset Irom the owner,
in Iuture, iI that suits his needs. Hence it is a mutually beneIicial arrangement.
As in other types oI Iinancing under the Islamic system, the Ijarah contract also relies to a
great extent upon the integrity and honesty oI the parties to the contract. Some oI the most
important responsibilities oI the parties to the Ijarah contract are: the lessor should not only
be the owner oI the asset, but must have possession oI the same. Ownership without
possession, or vice versa does not IulIil the requirements oI this kind oI contract. In the
same way, the lessee is expected to take good care oI the asset, as he would iI it belonged to
him, even though he not the owner oI the asset.