KULLIYYAH OF EDUCATION

FIQH AL-USRAH AND AL-MU’AMALAT

EDIE 2501 – SECTION 1

TOPIC: IJARAH (LEASE)

LECTURER’S NAME:
DR ABDUL GAFUR ARIFIN

PREPARED BY:
WAN NUR ‘AIN BINTI WAN ZULWANI (2012538)
NURUL HUDA FARHANAH BINTI SAHAR (1916612)
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Table of Contents

Table of Contents 2

Introduction 3

Definition of Ijarah 3

Dalil of Ijarah 4

Pillars of Ijarah 6

Conditions of Ijarah 6

Validation of Ijarah 12

Cancellation of Ijarah 13

Types of Ijarah 13

Flow of Basic Ijarah 14

Application of Ijarah in Islamic Finance 14

Flow of Ijarah IMB and AITAB 16

Mechanism of Ijarah in Islamic Bank 16

Comparison between Ijarah and Conventional Lease 17

Benefits of Ijarah 18

Current Issues of Ijarah: The Rulings of Hire Purchase for Water Filter 19

Conclusion 21

References 21
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Introduction

A contract known as an al-Ijarah allows the property owner to give another person access to it
for an agreed-upon period in exchange for an agreed-upon amount of consideration. Al-Ijarah is
comparable to a sale contract and has many of the same features as well as certain differences.
As a result, it can also mean the sale of usufruct (manfaah), yet the owner retains ownership.
People in society depend on Al-Ijarah to meet their needs for specific items. This is because an
individual typically needs more resources to meet all of his requirements. Certain products are
occasionally only required temporarily. Thus, the Al-Ijarah contract is permitted to facilitate the
fulfillment of societal obligations.​ (LexisNexis Group, 2009)​

Definition of Ijarah

Literally, the word of al-Ijarah is a noun for al-ujrah. It is derived from the word al-ajr which
means a reward for the job or wages. Another word in common with al-Ijarah is al-kira'.
Besides, the word al-Ijarah is also used with the meaning of ijar, which is the act of renting
something or hiring someone. The “Kamus Dewan” translates the word al-Ijarah into wages, day
pay, and rent. In addition, the “Kamus Besar Bahasa Melayu Utusan” added the translation of
al-Ijarah to the fare. ​(Ghafar, 2009)​

Furthermore, the definition of al-Ijarah according to Syariah has various definitions

given by jurists from four madhhab according to their understanding of the concept of al-Ijarah
itself. Madhhab Hanafi has defined al-Ijarah as a contract on usufruct with a charge (payment).
Madhhab Maliki has defined it as a contract of ownership on the use of something that is
permissible for a certain period of time with a charge (payment). Most of the jurists in Maliki
specialize the word al-Ijarah with a usufruct that comes from humans as well as the result of a
usufruct that can be transferred except ships and animals, while the word kira’ is used with the
benefit of an immovable usufruct such as property, house, and also a transferable usufruct,
especially ships, and animals. The Syafie madhhab has defined it as a contract on the usufruct
that is intended and known, where it can be obtained through a certain payment of something
permissible for a certain payment. The Hanbali madhhab has defined it as a contract on certain
goods allowed, at a certain period, for certain ‘ayn or in liability or for certain work with a
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certain charge (payment). While current jurists such as Sayyid Sabiq define Ijarah as a contract
on usufruct with a charge (payment). ​(Hama, 2013)​

Based on the definitions stated by the jurists on al-Ijarah, it is found that the definition of
Hanbali madhhab contains more complete conditions of on al-Ijarah and also covers its division
clearly which is ijarah on 'ayn, ijarah in liability, and ijarah with employment or service. Thus,
al-ijarah can be understood as the sale of benefits which is the transfer of the right of use
(benefit) on an item or service or occupation within a certain time through payment or wages
without being followed by the transfer of ownership of the goods themselves. Most of the jurists
agreed that the contract of al-ijarah is carried out on benefits and not things. This is the purpose
of al-ijarah to obtain the benefits only, not to own the property itself. The role of al-ijarah is to
transfer property benefits from the property owner to another party. Aqad al-ijarah has no
change of ownership but only the transfer of the rights from the owner to the tenant. ​(Hama,
2013)​

Dalil of Ijarah

Most of Islamic jurists agree that al-Ijarah is permissible, and their opinion is based on the the
Qur'an and al-Hadith. ​(Ghafar, 2009)​

1. Al-Quran

َ ْ‫ِّك َنحْ نُ َق َسمْ َنا َب ْي َن ُه ْم َمعِي َش َت ُه ْم فِي ْال َح َيا ِة ال ُّد ْن َيا َو َر َفعْ َنا َبع‬
‫ض ُه ْم‬ َ ‫﴿َأ ُه ْم َي ْقسِ م‬
َ ‫ُون َرحْ َم‬
َ ‫ت َرب‬

َ ‫ِّك َخ ْي ٌر ِممَّا َيجْ َمع‬

﴾‫ُون‬ َ ‫ت َرب‬ ُ ْ‫ت لِ َي َّتخ َِذ َبع‬
ُ ‫ض ُه ْم َبعْ ضًا س ُْخ ِر ًّيا َو َرحْ َم‬ ٍ ْ‫َف ْو َق َبع‬
ٍ ‫ض دَ َر َجا‬

]32 :‫[الزخرف‬

Meaning: «Do they distribute the mercy of your Lord? It is We who have apportioned
among them their livelihood in the life of this world and have raised some of them above
others in degrees [of rank] that they may make use of one another for service. But the
mercy of your Lord is better than whatever they accumulate». ​(Tahir & Ahmad, 2009)​
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َ ‫ت اَل َّت َخ ْذ‬

:‫ت َع َل ْي ِه َأجْ رً ا﴾ [الكهف‬ َ ‫﴿… َف َو َجدَ ا فِي َها ِجدَ ارً ا ي ُِري ُد َأنْ َي ْن َقضَّ َفَأ َقا َم ُه َقا َل َل ْو شِ ْئ‬

]77

Meaning: « And they found therein a wall about to collapse, so al-Khidhr restored it.
[Moses] said, "If you wished, you could have taken for it a payment."»

َ ْ‫ت اسْ َتْأ ِجرْ هُ ِإنَّ َخي َْر َم ِن اسْ َتْأ َجر‬
]26 :‫ت ْال َق ِويُّ اَأْلمِينُ ﴾ [القصص‬ ِ ‫ت ِإحْ دَ ا ُه َما َيا َأ َب‬
ْ ‫﴿ َقا َل‬

Meaning: «One of the women said, "O my father, hire him. Indeed, the best one you
can hire is the strong and the trustworthy."» ​(Hama, 2013)​

َ ‫ضعْ َن َل ُك ْم َفآ ُتوهُنَّ ُأج‬

]6 :‫ُورهُنَّ …﴾ [الطالق‬ َ ْ‫﴿… َفِإنْ َأر‬

Meaning: « And if they breastfeed for you, then give them their payment and
acceptably confer among yourselves;». ​(Hama, 2013)​

2. Hadith Nabawi

‫) ما بعث اهلل نبيا إال رعى الغنم‬:‫ عن النبي ﷺ قال‬،‫عن أبي هريرة رضي هللا عنه‬

.)‫ نعم كنت أرعى الغنم على قراريط ألهل مكة‬:‫ وأنت؟ فقال‬:‫فقال أصحابه‬

Meaning: Narrated by Abu Hurayrah, the Prophet: Allah did not send a prophet and
he herded goats. His friends ask: what about you? The Prophet ‫ ﷺ‬replied: Yes, I
once herded goats of Meccans with some qirat (currency).
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،‫ ثالثة أنا خصمهم يوم القيامة‬:‫) قال هللا‬:‫ عن النبي ﷺ قال‬،‫عن أبي هريرة رضي هللا عنه‬

‫ ومل‬،‫ ورجل استأجر أجيرا فاستوفى منه‬،‫ ورجل باع حرا فأكل ثمنه‬،‫رجل أعطى بي ثم غدر‬

.)‫يعطه أجره‬

Meaning: "It is from Abu Hurairah from the Prophet Muhammad ‫ ﷺ‬that he said: "Allah has
said: "There are three people who will be hostile to him on the Day of Judgment. The three men
are: the one who promises Me and breaks it, the one who sells free people (not slaves), and the
proceeds of the sale are eaten, and the one who has workers who have done a good job and are
not immediately paid their wages".

Pillars of Ijarah

The jurists have differing opinions on determining the pillars of al-Ijarah. For madhhab Syafie,
Maliki, and Hanbali, the pillars of al-Ijarah are al-sighah, which is ijab and qabul; two parties
who made the contract are al-mu’jir (the giver of ijarah) and al-musta'jir (the recipient of
ijarah); and the two things that the contract carries out on it, which are usufruct and al-ujrah
(rent or wages). For Madhhab Hanafi, the pillars of al-Ijarah are ijab and qabul. The difference
in determining these pillars stems from the determination of what constitutes a contract. For
Madhhab Hanafi, a contract is formed only with ijab and qabul. Other matters are considered
external or complementary to a contract. Most jurists opined that all matters that are the basis of
the existence of a contract are counted as pillars. ​(Ghafar, 2009)​

Conditions of Ijarah

The Hanbali jurist lays out three requirements for the condition of al-ijarah: understanding
usufructs, understanding al-ujrah, and understanding types of usufructs that are permitted by
syarak. Madhhab Hanafi categorizes the terms of al-ijarah into four categories: legal conditions,
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common conditions, terms of execution, and terms of contract creation. According to Madhhab
Syafie and Maliki, the condition of al-Ijarah is the condition set for each pillar. ​(Ghafar, 2009)​

1. Ijab and qabul (shighah).

Shighah can be in the form of verbal pronunciation, writing, gesture, or others which indicates
the contract of al-ijarah. Jurists from madhhab Hanafi and Syafie differ the use shigah for a
contract in al-bay’ and contract in al-Ijarah. The first opinion among both madhhabs is that it is
permissible because al-ijarah is a branch in al-bay’ (buy and selling transaction). The second
opinion states that it is not permissible because al-ijarah is a contract to have benefits, while
al-bay' is a contract to own things. The second opinion is more dominant. In addition, Hanafi
requires the use of al-ijarah and al-kira' or any phrase that carries the same meaning. For them,
the phrase al-bay' can be used if backed up to usufructs rather than objects. They insist that as
long as the phrase is understood for Ijarah, it is permissible. Jurists for madhhab Shafie requires
ijab and qabul to be mentioned consecutively and not interspersed with long silences or other
conversations that symbolize disagreement to continue the contract. ​(Ghafar, 2009)​

2. Two contracting parties (al-Mu’jir and al-Musta'jir).

According to the jurists of Madhhab Syafie and Hanbali, two contracting parties are
required to be people who have reached puberty and have a conscious mind. Therefore, people
who have not yet reached puberty or are mindless, such as children and crazy people, who rent
out their property or make them laborers, are invalid in the contract. However, the jurists of
Madhhab Hanafi and Maliki agreed that two contracting parties are not required for those who
have reached puberty but enough for someone who is mumayyiz, which is a person who knows
the contract of al-Ijarah. ​(Tahir & Ahmad, 2009)​
Moreover, it is not required for two contracting parties to be Muslims because Muslims
can hire non-Muslims to be their laborers. ​(SH, 2002)​On the other hand, Fuqaha Shafie opines
that giving ijarah to non-Muslims is makruh. Fuqaha Maliki inferred that a Muslim who receives
ijarah from a non-Muslim for labor in the halal sector, such as construction, is makruh, and it
becomes haram if the labor is in the haram sector, such as working on a pig farm. Jurists from
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Madhhab Hanbali said that Muslims should not work for non-Muslims because it is an insult to
Muslims. However, it became harus for Muslims to work for non-Muslims as long as the
procedure in the industry did not harm Syariah Law. Furthermore, a slave is allowed to undergo
the contract of ijarah with the consent of his master. Then, there are two opinions for the prisoner
or person affected by sanctions to do this contract. The first opinion is not allowed, and the
second opinion is allowed, depending on the approval of the guardian. ​(Ghafar, 2009)​

3. Usufruct or benefits of things (manfaah).

Two categories of usufructs exist in Al-Ijarah, which are manfaat al-ayn and manfaat
al-amal. Manfaat al-ayn is a property or capital asset (either corporeal or personal). For example,
property, residence, or transportation. Moreover, manfaat al-amal is a labour, work, or service,
such as the practical work of an engineer, a carpenter, or a tailor. It is recognized that these kinds
of al-Ijarah are acceptable by Madhhab Syafie as they contain the element of sale, which turns
into the guiding principle of al-Ijarah as a form of sale. ​(Hassan, 2007)​The conditions agreed
upon by the Islamic jurists about usufruct are something that is known and can be delivered or
accomplished. They also agreed that usufruct should be valuable, targeted, for the benefit of
musta'jir, and owned by mu’jir. ​(Ghafar, 2009)​In addition, there are several more conditions for
usufruct to be permitted in the contract of al-Ijarah, which are:

1. Something permissible by syarak.

Something permissible by syarak and beneficial is included in three categories. First, the
infrastructure for meeting basic needs such as food production, residential, electricity supply,
clean water, health care, education, communication, transportation, and security. Secondly, the
usufruct for meeting support needs such as media tools, information technology, banking and
finance, legal services, business management, and marketing. Thirdly, the usufruct for meeting
the additional comforts allowed by syarak, such as beauty salons, sports and recreation, tourism,
and arts activities. Several things are harus to al-Ijarah, such as the benefits of books, jewelry,
bathrooms, breastfeeding and babysitting, cupping, land use for agriculture, and many more.
​(Ghafar, 2009)​
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Al-Ustaz Haji Idris Ahmad explained some of the jobs that are allowed by Madhhab
Syafie to earn wages. The first is cupping, that is, the act of removing blood from a person's
head. This ruling is based on the hadith narrated by Bukhari: "Ibnu Abbas r.a. said: Once, the
Prophet Muhammad ‫ ﷺ‬gave wages to those who had cupped him. If it were illegal, he would
not have given him a wage". The second is the wages to teachers who teach the knowledge of
Islam, based on the hadith narrated by Bukhari and Muslims: "From what Ibnu Abbas r.a. said:
The Prophet Muhammad ‫ ﷺ‬said: The job for which you are more entitled to receive a wage is
to teach the book of Allah (al-Quran)". ​(SH, 2002)​

2. Something valuable.
Usufruct should be something valuable, and the musta’jir can benefit from the usufruct. The
contract of al-Ijarah only allows musta’jir to take advantage of the usufruct and not take part in
it. For example, the contract of al-ijarah cannot be executed on a tree for its fruit and on a goat
for its milk because the fruit is part of the tree, and the milk is part of the goat. In addition,
al-ijarah is not permissible for farm animals to obtain their breed because its semen is part of the
animal, and al-ijarah is also not permissible for money because it means musta’jir has spent the
value of the money itself. ​(Tahir & Ahmad, 2009)​
Furthermore, things that have no value are not permissible in al-ijarah, such as giving a
short speech or advice something that is not exhausting if spoken. The opinion of Imam
al-Ghazali states that it is not permissible for doctors to take payment from patients if they
simply tell the type of medicine because it does not cause any difficulties. There should also be
no al-ijarah for the benefit of something that is quickly depleted or lost like the smell of
fragrances. ​(Ghafar, 2009)​

3. Something can be delivered or accomplished.

An ijarah contract must be executed on an asset owned by the mu’jir, and it is required for the
mu’jir to be the absolute owner of the asset or his agent. A jointly owned property by two or
more persons can be leased out, and the rental is to be distributed among all the joint owners
according to the proportion of their respective shares in the property. So, it is the responsibility of
the mu’jir to maintain the property leased in such a way as to retain the benefit. The leased
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property thus must be free from any defects that could prevent the use of the usufruct. In
addition, musta’jir of an immovable property may sub-lease the same to a third party but is not
allowed to lease it to mu’jir. ​(LexisNexis Group, 2009)​

Therefore, the robbery of property is not allowed for ijarah, as the owner of the property
is able to take back his property. Moreover, it is not necessary to reward blind workers as
security guards to observe people coming in and out of the building. Nor should it be al-ijarah
for a sick animal to carry goods. It is also not permissible for a hunting dog, as it is not certain
that the dog will follow the orders of the musta’jir and go hunting. ​(Ghafar, 2009)​

4. The types, criteria, and period of the usufruct are known.

This condition is necessary for both contracting parties. On behalf of the musta’jir, information
about the types and characteristics of the usufruct is necessary in making a choice that suits their
needs. On behalf of the mu’jir, this information about the usufruct is also necessary, along with
the period of the contract, so that he is able to provide it perfectly before it is handed over to the
musta’jir. After that, the contract can be agreed upon between both parties with a willingness to
spare any disagreements. Before the contract is made, the usufruct has to be clearly included in
the contract. Knowledge about the usufruct is important to know for budgetary purposes. The
usufruct can be known by looking at the criteria of the item or through the culture. If there are
special characteristics of the goods, then it is necessary to mention them. For the other usufructs,
like houses, garments, and equipment, the duration of the contract should be determined.
Moreover, usufruct for special employees is determined by time, while that of the general
employee is determined by the criteria of the work. Abu Hanifah and some of the jurists from
Madhhab Maliki and Syafie agreed that the use of time and the criterion of simultaneous work
are not permissible. According to jurists from Madhhab Syafie, al-Ijarah, which is not mentioned
during the period, is invalid. Jurists from Madhhab Hanbali inferred that it is permissible if the
recipient of ijarah does not specify the period. ​(Ghafar, 2009)​

5. Usufruct on ibadah.
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Islamic jurists discussed the permissibility of ijarah to be carried out for specific worship
(ibadah) or acts that can draw closer to Allah. The debate is focused on who will benefit from
the act. If the worship is intended to draw closer to Allah, then, of course, the benefits are
obtained by the person who commits the act. If the act is done to satisfy the religious or fardhu
demands of others, then the benefits will be obtained by others. Therefore, al-Syarbini uses this
scheme by looking at the status of worship, whether it is fardhu ain or fardhu kifayah. They are
opined that it is impermissible to ijarah towards fardhu ain except for performing Hajj, and
instead they enable ijarah towards fardhu kifayah. Some scholars of Madhhab Syafie allow ijarah
for people who recite the Quran to the corpse in the grave because it can bring benefits to the
corpse. Then, Ibn Juzi gave an opinion on ijarah to the imam, which is permissible if the imam
performs other duties in the management of the mosque. Regarding the management of the
corpse, al-Kasani opined that it is impermissible for ijarah to bathe and shroud the corpse, but it
is permissible for digging the grave and moving the corpse to the grave. ​(Ghafar, 2009)​

6. Rent or wages (Ujrah)

Ujrah is a payment of wages given by the musta’jir to mu’jir on the usufruct obtained. There are
two types of ujrah: al-ajr al-Musamma (ujrah that has been agreed upon and mentioned); and ajr
al-Mith (reasonable wages). Al-Ajr al-Musamma is agreed upon by the willingness of both
parties and is mentioned in a contract. Thus, the musta’jir should not be forced to pay more than
what has been mentioned in the contract, just as the mu’jir should not be forced to get a lesser
payment than what has been mentioned in the contract. The payment of ujrah can be agreed upon
in the form of cash (al-ajr bi al-naqd), benefits (al-ajr bi al-manfa'ah), or goods (al-ajr bi 'ayn).
Moreover, al-ajr al-mith is a fair wage for mu’jir according to the type of work; through the
definition of reasonable wages, any dispute that occurs in the contract of ijarah can be resolved
fairly. If it has not been mentioned or there is a dispute over the wages mentioned, then ajr
al-mith will be paid as wages. ​(Hama, 2013)​

Furthermore, Islamic jurists agreed that the origin of ujrah is in the form of cash and can
also be in the form of goods, as long as it is explained in the contract. For ujrah in the form of
usufruct, the jurists allowed it, and Hanafi's jurists require that ujrah in the form of usufruct be
different from the usufruct of ijarah, as it can lead to usury. While a mist of jurists from Maliki,
 12

Syafie, and Hanbali allowed that even the type of usufruct for ujrah is the same type of usufruct
of ijarah. In addition, the determination of ujrah is based on the work or usefulness of one's
labour benefits. Work skills are so valued that an employee's wages are truly based on the skills
and benefits provided by the employee. Most jurists agreed that both parties can provide the
conditions in the contract to expedite the payment, or with instalment payments, in accordance
with the agreement of both parties. ​(Hama, 2013)​

Validation of Ijarah

There are two implications when a contract of al-Ijarah has fulfilled its pillars and conditions.
The implication is that mu’jir must be delivered or accomplish the usufruct to mu'jir and the
ujrah given to mu'jir. Both parties are responsible for carrying out the obligations as agreed in
the contract. After the contract is signed, musta’jir has a right to own the usufruct, and mu’jir has
a right to get an ujrah. This implication is based on the fact that the Ijarah contract is an
exchange contract. ​(Ghafar, 2009)​

The responsibility of the mu’jir is to start the work immediately after the contract has
been signed or to hand over the usufruct to the mu'jir. If the usufruct is in the form of property
such as land or houses, the mu’jir is responsible for vacating the area from anything that may
prevent the musta’jir from benefiting the place. However, additional tools for ease of use of
usufruct based on culture should be included, e.g., a seatbelt for a car, keys for properties, or a
taxi driver should provide comfort to passengers along the road. ​(Ghafar, 2009)​

Moreover, as mu'jir is still the owner of the asset, he cannot exclude his liability for any
defects in the leased asset that could impair the intended use of the asset. Mu’jir is responsible
for maintaining the asset, but he may take out permissible insurance on the property to protect
his rights, but the expenses must be done by himself. However, he may consider the cost of
insurance expenses while fixing the rental amount accordingly. ​(LexisNexis Group, 2009)​

Furthermore, on behalf of musta'jir, there is a responsibility to be carried out, which is to

take good care of the leased asset. If there is any damage due to his negligence, then he is
responsible for indemnifying (at the rate of the maintenance price) or repairing it. Musta’jir is
 13

also not allowed to do anything beyond the limit set out in the contract, or the contract will be
canceled. In addition, musta'jir is responsible for paying the ujrah at the rate and at the agreed
time. Usufruct needs to be returned to the mu’jir in good condition after the contract has expired.
​(Ghafar, 2009)​

Cancellation of Ijarah

The contract of ijarah is binding; thus, no party may unilaterally terminate the contract without
the other party's consent. However, if musta’jir contravenes any term of the agreement, for
example, by using the asset for a purpose other than that specified in the contract, mu’jir has the
right to terminate the contract unilaterally. If the parties mutually agree to terminate the contract,
they may voluntarily rescind the contract by way of iqalah (voluntary deposition). Mu'jir, in the
case of ijarah, is recommended to grant consent to rescind the contract if requested by Musta'jir.
​(LexisNexis Group, 2009)​

In addition, scholars think that the ijarah contract will end or be voided if the benefits
are lost or destroyed, such as the rental house being burned. The contract will also end if the time
agreed upon has expired. Jurists from madhhab Hanafi are opined that if one of the individuals
who performed the contract dies, then the contract of ijarah will be void, but most of the jurists
agreed that the contract of ijarah can be passed on to the heir after the death of one of the
contracting parties. ​(Tahir & Ahmad, 2009)​

Types of Ijarah (Hama, 2013)

The jurists have divided Ijarah into a few parts, and the one related to this subtopic is the
division of Ijarah into al-Ijarah ala a'mal and al-Ijarah ali 'ayn.

As for Al-Ijarah, al-Amal is A hire contract to employ a person in return for a

consideration (wages) for his/her services. This type of lease contract is related to work or
service, that is, employing someone with wages as payment. The employer is called musta'jir, the
employee is called ajir, and the wage paid is called ujrah, such as sewing clothes, building
houses, etc. Al-Ijarah 'ala al-Amal is divided into two types:
 14

1. Ijarah Khusus i.e., ijarah performed by an employee who cannot work other than with
the person who has paid him wages.-
2. Ijarah Musytarak, i.e., ijarah, is done jointly or through cooperation.

Al-Ijarah al- 'ayn is defined as a lease contract of a usufruct of an asset to another party
in exchange for a consideration. In general, it's a rental due to using the benefits of something
owned related to the rental of 'ayn, that is, transferring the right to use from a certain a'yan to
another person with the payment of rent. The party that rents is called musta'jir, the party that
rents out is called mua'jir, and the rent is called ujrah, such as car and house rent.

Flow of Basic Ijarah

Diagram 1: Flow of Basic Ijarah

As illustrated above, in a basic Ijarah arrangement, the lessor owns the Ijarah asset at the
end of the Ijarah period. The lessor does not transfer the ownership of the asset to the lessee.
 15

Application of Ijarah in Islamic Finance

Ijarah contracts are standard in hire purchase financing (Bank Islam, 2023). Customers seek
financing from financial institutions to finance the purchase of assets in this regard.

In the context of Ijarah Muntahia Bittamleek, it is a leasing facility that allows the
customer to lease an asset from the Bank at an agreed rental payment over a specified period and
ownership of the asset will be transferred to the customer by way of sale at the end of the facility
tenure. The financial institutions (the lessor) do not intend to own the asset; they are simply
financing providers who promise to transfer the asset to the customer (lessee) at the end of the
ijarah contract if all rental rents are paid. This can be accomplished by selling the asset at the
token price or the asset's market price. On the other hand, the customer intends to own the assets
at the end of the financing period. This ijarah arrangement is widely used in Islamic banks and is
supported by several contemporary scholars. As a result, the Ijarah contract frequently includes a
transfer of ownership to the customer at the end of the financing/leasing term. At the end of the
Ijarah period, the asset's ownership can be transferred through a sale or a gift contract.

However, two conditions need to be observed in this arrangement.:

1. The Ijarah agreement (lease) must be independent and not subject to the promise of sale or
gift. The promise undertaking should be recorded in a separate document.
2. This promise should be unilateral and binding on the promisor only. Because if it’s a bilateral
promise and binding on both parties, then it’s equivalent to an entire contract effected from the
future date. That’s not allowed, according to the majority of scholars.
These conditions are essential to ensure the obligations and liabilities of both contracts are
independent and not linked with each other.

An operation lease is a regular lease in which the asset is rented out based on Ijarah for a
set period in exchange for a fixed return. It is appropriate for expensive assets that must be
purchased with much money. Leased assets include aircraft, ships, industrial equipment, and
agricultural machinery. The operating lease is a simple rental agreement in which the lessor
(owner) leases his asset to the lessee for a set time and receives rent in exchange. At the end of
 16

the lease period, the asset is usually returned to the lessor. The operating lease has the same
structure as conventional finance in Islamic banking and finance. However, there are some key
distinctions between the two types of leases. The operating lease is subject to the rules and
conditions of the ijarah contract in Islamic finance. For example, interest is not permitted, and a
penalty clause is not permitted in the event of late payment. Similarly, ownership risks such as
asset depreciation will be borne by the lessor, who is the asset's owner.

Lastly, Ijarah thumma al-Bai is a hire purchase facility, which allows the customer to hire
an asset and subsequently purchase the asset from the Bank at the end of the lease tenure. refers
to how parties will enter into contracts that come into effect in a serial manner to form a
complete lease or buyback transaction. The first contract in this serial process is known as Ijarah,
and its purpose is to outline all of the terms for leasing or renting across a fixed period. The
second contract in the serial process is known as Bai, and its purpose is to trigger the sale or the
purchase as soon as the term outlined in the Ijarah has been completed. (Bank Islam, 2023)

Flow of Ijarah IMB and AITAB

 17

Diagram 2: Flow Ijarah IMB and AITAB

Mechanism of Ijarah in Islamic Bank (Bank Islam, 2023)

1. The customer visits the Islamic bank and applies for a leasing facility.
2. The Islamic bank purchases the asset from the supplier and pays the full amount according to
their bargaining.
3. The customer and Islamic bank enter into an ijarah contract in which they agree on the terms
and conditions of ijarah and specify the period of lease and rental amount.
4. During the lease period, the title of ownership remains with the lessor, and the lessee has the
right to use the assets.
5. In a standard lease, the asset is returned to the lessor at the time of completion of the lease
period.
6. In the case of ijarah muntahia bittamleek, the ownership title of the asset is transferred to the
lessee either through sale or gift.

Comparison between Ijarah and Conventional Lease (Mazni, 2008)

A conventional lease is an agreement between a lessor and a lessee that grants the lessee the right
to use specific property owned by the lessor for an agreed-upon period. The lessee agrees to pay
the lessor periodic cash payments (rents) for this right. Furthermore, the conventional accounting
standard classified leasing into two types, operating lease, and finance lease, based on whether
the risks and rewards associated with ownership of the leased asset are borne by the lessor or the
lessee. Ijarah, on the other hand, is an Islamic fiqh term that means to rent something out.
According to Islamic law, Ijarah can be applied to two situations. In the first case, it means to
hire a person based on wages given to him in exchange for his hired services. The employer is
called "musia'iir," and the employee is called "aiir" in this type of Ijarah. Meanwhile, the second
type of Ijarah pertains to usufructs of assets and properties rather than human services. In this
context, Ijarah refers to transferring the usufruct of a specific property to another person in
exchange for a rent claimed from him. The term usufruct refers to the right of possession.
 18

Furthermore, the substance over form concept used in determining finance leases as
prescribed by conventional accounting standards does not apply to Islamic leases. If the
substance over form concept applies in Islamic leasing, it implies that the lessee has complete
control of the asset, whereas, in Ijarah, the lessee only has the right to the benefits (usufruct) of
using the asset but no ownership rights to the leased asset. As a result, the concept of substance
over form is incompatible with Shariah. Aside from the concept of substance over form, it is
essential to note that Sharia law forbids any transaction involving interest and contingency. As a
result, unlike traditional leases, there is no element of interest or contingent revenue.

In addition to these principles, it should be noted that an Ijarah asset is distinct from a
conventionally leased asset in that the asset must be a legitimate asset free of elements that could
render it Shariah non-compliant to be considered an Ijarah asset. To meet this condition, the
lessor (mu'jir) must ensure that the asset is a lawful asset from a Shariah standpoint, which
means that the asset is lawful as long as it is not derived from, involves the use of, or is used to
produce unlawful elements. Illegal assets include stolen cars, vats used in the production of
alcoholic beverages, and slot machines used for gambling. Thus, under an Islamic lease contract,
the leased asset must be deemed "halal" under Shariah and not contain "haram" elements.

Benefits of Ijarah

As previously stated Islamic leasing necessitates using real assets. This ensures and strengthens
the link between the economy's financial and real sectors, contributing to economic stability. In
this way, lease finance relates to a distinguishing feature of Islamic finance that the conventional
system lacks. The proliferation of financial assets with no counterpart in the real economy
exposes financial markets to speculative games, threatening to turn these markets into casinos. It
also employs many highly skilled individuals in activities that have nothing to do with producing
goods and services. The income generated by these activities has contributed to the rise in
inequality in the distribution of income and wealth in the United States.

Lease finance combines some advantages of debt financing with none of the
disadvantages of sharing-based financing. There is less risk of moral hazard/adverse selection
 19

than other modes of sharing. There is no agency relationship between the lessor and the lessee, as
there is with mudarabah (profit sharing). The lessee's payment obligation, the rent, is fixed, just
like a debt. It is not an adverse selection case because no portion of unforeseen losses/costs can
be passed on to the lessor.

Islamic leasing offers significant potential for securitization. Sukuk based on ijara can be
traded in the market, providing a convenient instrument for investing savings to most people in
developing countries in general and Muslim countries in particular.

Islamic leasing is particularly suited to sectors of the economy where sharing-based

modes have proven challenging to implement, such as the consumer and public sectors. It can
manage public-sector infrastructure projects such as roads and bridges, airports, irrigation
systems, hospitals, and schools. The majority of leasing-based sukuk issued recently fall into this
category.

Lease finance is more straightforward to implement because it requires less

documentation and takes less time to complete a transaction. Unlike lending, it does not require
collateral and does not necessitate extensive credit checks on the lessee. These formalities are
rendered unnecessary by the physical presence of a tangible asset, the subject of the lease, whose
ownership may remain with the lessor. This may make it particularly suited to the rural sector,
where formalities can stymie operations.

Current Issues of Ijarah: The Rulings of Hire Purchase for Water Filter (Noor, 2016)

Question:
I took a water filter hire purchase package where the monthly payment is RM103, including the
water filter change service package for 5 years with the total amount for 5 years being rm 6180.
However, if I buy it in cash, it is only RM3342 with filter change service for 2 years. Does
buying and selling through this system include usury?
 20

Answer:
The first issue is what form the transaction contract takes. If it involves two contracts in one
transaction, it will cause problems in the contract's validity. In other words, two contracts are
simultaneously mentioned in one contract's wording. For example:

"I am selling this land for RM1000 in cash and for RM2000 in installments or a year."

Then, the buyer agrees to the contract in cash or installments. This contract is forbidden
by Syarak and is considered void because the price is not specified in the same sentence. From
Abu Hurairah RA:
َ ‫صلَّى هللاُ َعلَ ْي ِه َو‬
‫صلَّ َم ع َْن بَ ْي َعتَي ِْن فِي بَ ْي َع ٍة‬ َ ِ ‫نَهَى َرسُو ُل هَّللا‬

Meaning: Rasulullah SAW forbade placing two (prices) in one (sighah) contract.
)Hadith narrated by Imam al-Nasaie (4632

However, if two contract prices are offered in two different contracts for one item, either
in cash or in installments, then the law of the offer is mandatory and valid if the buyer chooses
one of them. For example,

"I offer you to buy this land for RM1000 cash," or;
"I offer you to buy this land for RM2000 in installments."

About the question above, if the two prices are in the same contract, then the contract is
void, while if the two prices are for two different contracts, then one of the contracts is allowed
and valid.

The second issue is that the hire purchase contract should occur in two separate contracts.
It is illegal and void if the hire purchase is in the same contract. The contract can take the
concept of al-Ijarah thumma al-Bay' (AITAB), used in modern fiqh muamalat.
 21

Conclusion

In conclusion, Ijarah is an Islamic financial concept, that serves as a viable alternative to the
conventional leasing model based on Sharia principles. It promotes fairness and risk-sharing
between parties by emphasizing the ethical aspects of financial transactions. It is aligned with
Islamic values and provides a framework for responsible and equitable economic practices. As
the Islamic finance industry continues to evolve, Ijarah stands as a testament to the compatibility
of financial innovation with ethical considerations.

References

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LEASE (IJARAH). Ikim Journal of Islam and International Affairs.

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(n.d.). http://www.siddiqi.com/mns/Economic_Benefits_of_Islamic_Leasing.htm

Ghafar, M. S. (2009). Al-Ijarah: Doktrin dan Praktik Dalam Sistem Perbankan Islam

Masakini. Salak Selatan, Kuala Lumpur: Pusat Penerbitan Universiti (UPENA), UiTM.

Hama, D. Z. (2013). Konsep Ujrah dari Perspektif Fiqh. Muzakarah Cendekiawan Syariah

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enure.

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​LexisNexis Group. (2009). Islamic Commercial law (Fiqh al-Muamalat). Petaling Jaya,

Selangor: Securities Commission Malaysia.

Noor, U. M. M. (n.d.). Laman Utama. Pejabat Mufti Wilayah Persekutuan.

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​SH, H. I. (2002). Fiqh Syafii (Vol. 2). Kuala Lumpur: Pustaka Antara.

​Tahir, H. M., & Ahmad, S. (2009). Aplikasi Fiqh Muamalat dalam Sistem Kewangan

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