FIQH MUAMALAT

“IJARAH”
INTRODUCTION

 A form of contract allowed by Islam based on the textual

evidences of Al-Quran and Sunnah.
 It is permitted to facilitate public needs and to provide facilities in
life.
 Some of the products are house financing, car financing, project
financing and some structured products.
 DEFINITION OF IJARAH

 Literally: To give something on rent

 Technically, it has two different meanings.

 1. To employ the services of a person on wages given to him as a

consideration for his hired services.

2. To transfer the usufruct of a particular property to another person in

exchange for a rent claimed from him.
1. To employ the services of a person on wages given to him as a
consideration for his hired services.
 Includes every transaction where the services of a person are hired
by someone else.
 Employer: musta’jir
Employee: ajir
 Example: a doctor, lawyer, teacher or any person who can render
some valuable services.
2. To transfer the usufruct of a particular property to another person in
exchange for a rent claimed from him.
 Related to the usufruct of assets and properties, not the services of
human being.
 Has the same meaning with ‘leasing’.
 Lessor: mu’jir
Lessee: musta’jir
Rent payable: ujrah
 The Hanafis:
A contract pertaining to usufruct with compensation.
 The Shafi’is:
A contract over a desirable, known, permissible, and accessible usufruct, in
exchange for a known compensation.
 The Malikis and Hanbalis:
The transfer of ownership of a permitted usufruct for a known period in
exchange for compensation.
 SOURCES OF LAW
 Al-Quran
1. Al-Qasas: 26-27
Allah says: And said one of them (the two women): “O my father!
Hire him! Verily, the best of men for you to hire is the strong, the
trustworthy”. He said: “I intend to wed one of these two daughters
of mine to you, on condition that you serve me for eight years, but if
you complete ten years, it will be (a favour) from you. But I intend
not to place you under a difficulty. If Allah will, you will find me
one of the righteous.”
 2. Al-Talaq: 6
“….Then if they give suck to the children for you, give them their
due payment,…”

o It indicates the obligation of the father to provide adequate wages

for the women who breastfeed his child.
o According to al-Shafi’i, both verses show that the contract of Ijarah
is lawful in permissible transaction. Plus, it was commonly
practised during the time of Musa.
 Sunnah
1. The Prophet (s.a.w) said: “Pay the hired worker his wages before
his sweat dries off”. (Narrated by Ibn Majah).
2. The Prophet (s.a.w) is reported to have said: “He who hires a
person should inform him of his fee.” (Narrated by al-Baihaqi).
3. Saa’id ibn al-Musa’ib narrates that Sa’d said. “We used to hire
land in return for plants on water canals, the Prophet (s.a.w)
interdicted this and commanded that we hire it for gold or silver.”
 4. The Prophet said, “Allah said, “I will be an opponent to three
types of people on the Day of Resurrection: One who makes a
covenant in My Name, but proves treacherous; One who sells a free
person and eats his price; and One who employs a labourer and
takes full work form him but does not pay him for his labour.”

 When the contract of sale of such goods and services is permitted,

the leasing of its usufruct shall also be permitted on the grounds of
public interest (maslahah) and needs.
 The Conditions of Ijarah

 There are three elements of Ijarah contracts:

• The contracting parties - The lessor (the owner of the asset), lessee (party who
benefits fromthe useof the asset ).
• Offer and Acceptannce.
• Subject matter - The consideration (rent), The benefits (manfa'ah).
• The basic modus operandi of Ijarah:
3. the bank leases the asset with monthly rental of
RM 235 for 36 months

BANK (lessor) BANK (lessor)

4. customer pays the monthly rental of RM235

for 36 months

1. customer identifies the

2. the bank purchased
VENDOR assetto be leased.
the asset at RM 7, 000
 Contracting Parties

 Eligable to perform the contract:

-Should be sound mind and judgement.
-legal age, sane, and free of any legal restrictions.
 Person that not have the legal right to act or dispose their property
without the consent of their guardian are:
- Infants, insane individuals. those legally restricted from making financial
transaction.
 Offer and Acceptance

 Offer - the expression of the first party.

 Acceptance - the expression of the other party to indicate.
 Expression can be done by either by word, action, in writing or by signs.
 The most important element of offer and acceptance is expressing of the will.
 Modern transactions - done over the phone or by e-mail or other but it is
advisable to have something written as the proof.
 verbal expressions will be considered valid though void of writing unless
agreed otherwise.
 Conditions of Expression
I. Clear and understandle wording.
II. Offer and acceptance must be in the same subject matter..
III. The unity of time and place (majlis al-aqd).

 Subject matter
 Two element namely the benefits (the use of the asset) and the rent (the use of
the usufruct).
 The benefits (the use of the asset) must be something that has value and is
possible to be utilised.
 Renting of a demolished house or a house that is not fit for occupation is
disallowed.
 continued...

 The fulfillment of the benefit should be of a permissible nature (shariah).

 should be identified in such a way as to remove lack of knowledge (jahala)
which leads to dispute.
 The rent (the use of the usufruct) is what the lessee is committed to paying
as a consideration for the benefit enjoyed by him.
 Everything that suitable to be considered a price in a sale is suitable to be
considerd as a rent in the ijarah contract.
 Issues related to the rent that have to be clarified

 The rent should be known by both parties.

 The majority of jurists have permitted the payment of rental in the form of
benefit of the same kind of the subject of the contract.
 Receipts of an advance payment is allowed in shariah, but only on the basis
that is in advance payment of the total actual amount of the rental.
 It should not, however, be considered as aa profit on the lease.
 Silent features of Ijarah contract

 The lessor must be the absolute owner of the rented item or the agent of the
owner or his natural or legal guardian.
 The consideration given for the rent and the amount of the rent should be fully
nd precisely known to both parties.
 In a contract of hir, it is necessary to make known the use of the item hired, to
avoid diputes between contracting parties.
 In all kind of Ijarah, the period of lease must be fixed and the purpose for which
it is rented shoul be specefied.
 In the Ijarah of services, the benefits should be made known by a statement of
the nature and method of the service offered.
 continued...
 It is the responsibility of the lessor to maintain the property leased in such a
way as to retain the benefit of the property.
 If the lessee intentionally damages the property hired, the lessor has the
right to terminate the lease agreement and seek compensation.
 The lessee is allowed to sub-let immovable property provided that there is
no any restriction from doing so in the agreement of the contract.
 The hired item should be treated as a trust in the hands of the user.
 Lessor's and lessee's obligations in the
Ijarah contract

 Lessor's obligations in the Ijarah contract:

-Ensuring the leased asset is availabe and utilizable
*The lessor is obliged to enable the lessee to benefits from the leased assetby
making it available throughout the duration of the leased.
-Guarantee in respect of defects
*Treated as the same way as a sale contract.
*The defects cause an impairment in the benefits.
*The lessee shall have the option of revoking or accepting the impaired.
benefit while being obliged to pay the full rent.
*Some jurist hold the view that the deduction of a portion of the rent as .
the compensation for the defects is allowed.
 continued...

-Maintenance of the leased asset

*The lessor is obliged to maintain the asset.
*It is not permissable to stipulate that the maintenance of leased asset is carried
out by the lessee because would lead to paying an unknown charge.
-The lessee can be requested to carry out the following maintenance, which are:
I. The operating maintenance - it is essential in order to continuous utilization.
II. Periodic maintenance - to enable the asset continue providing the benefit.
III. Maintenance that is specified in decription and amount in the contract or
according to practise irrespective of whether such maintenance is merely
work or it involves the use of known materials or spare parts.
 Lessee's obligations in the Ijarah
contract:
-Required to utilise the leased asset according to the conditions of the contract or
according to the normal acceptable practices.
-Responsible for keeping the leased asset intact and for payment of the rental.
-The jurist agree that the leased assets is the trust in the hands of the lesssee.
-The lessee is not liable to the impairment of asset, violation of what is
permitted, or negligence in keeping it intact.
-Except, the lesse has committed negligence and misconduct in utilising the
leased asset.
 Commencement of Ijarah

 Contract of the Ijarah can be affected for a future date on the condition that the
rent will be payable only after the leased asset is delivered to the lessee.
 Cases in Financial Leased - might lead to the assumption that the lessee's
liability for the rent start before the lessee takes delivery of the asset.
 This is not allowed by the Shari'ah- because can lead to riba
 According to shariah, is that the rent be charged after the lessee has taken
delivery of the asset , and not from the day the price has been paid.
 After the supplier delayed the delivary after receiving the full payment, the
lessee should not be liable for the rent of the period of delay.
 Revocation of Ijarah

 Ijarah contract shall be intact as long as all the terms of agreement are
honoured by both parties.
 If the lessee commited negligance, the lessor has right to terminate the lease
contract unilaterally.
 If there is no commited negligance by lessee, the lease contract cannot
terminated without mutual consent.
 In some Ijarah agreement, the lessor has been given unrestricted power to
terminate the lease unilateraly whenever he wishes.
 Some has stated that in the case of termination of lease, even at the option of
the lessor, the rent of the remaning lease period shall be paid by the lessee.
 The above situation is obviously against shariah and the principles of equity
and justice.
 continued...

 The right termination of lease is that the asset should be taken back by the
lessor.
 the lessee should be asked to pay the rent as due up to the date of the
termination.
 If the termination has been effected due to the misuse or negligence on the part
of the lessee, he can also be asked to compensate the lessor for the lose, but he
cannot be compelled to pay the rent for remaining period.
 The lessor can insert the put option clause to the lessee to enable the lessor
purchase the lease subject matter in the case of default of contract.
 Types of Ijarah

 There are two types of Ijarah:

1. Use of Corporeal Property (ijarah or manfa'at al-'ayn)
-immovable property, such as land or premises.
-merchandise such as furniture, machinery.
-animals.
*Leasing of the above assets for a specific purpose with particular amount of
rental for a specific duration of time.
2. Personal Services (Ijarah or manfa'at al-'amal)
Hiring of services or labour such as hiring of an engineer, a carpenter or a
tailor to undertake a specific task.
-Personal Services can also be into individual ijarah (ijarah al-fard) and
collective ijarah (ijarah al-musha').
-individual ijarah (ijarah al-fard) is the leasing of assets or services done by an
individual.
-collective ijarah (ijarah al-musha') occurs when a group of persons jointly
hire a good or service.
 Imam Abu Hanifah, maintains the view that collective Ijarah is invalid
because its collectivity may creates disputes amongst the group of the
lessees regarding the ownership of the usufruct.
 continued...

 In contemporary application, the concern with regard to the ownership of the

usufruct can be regulated by having an agreement amongst the group of
lessee to determine the ownership of the usufruct.
 Therefore, collective ijarah can be implemented where there is need to do so.
 MECHANISM OF IJARAH
 Islamic Financial Instituition have two modes of Ijarah

i- Operating Lease

ii- Ijarah muntahia bi al-tamlik (leasing ending with

ownership)
 OPERATING LEASE
 This mode of leasing, the Islamic bank maintains a number of various
assets to respond to the needs of different customers.

 The bank leases out these assets to any party who wishes to utilize it
for a term agreed upon between them.

 After the termination of the lease period the assets would return to the
bank and on its part, the bank will look for a new lease.
 A.PRACTICAL STEPS IN
OPERATING LEASE
First

 The first step would require the bank to purchase the equipment in
which after studying and evaluating the market, the bank purchases
the equipment and pays and the seller immediately or defers the
payment.

 The seller agrees on the sale and delivers the equipment to the bank.

 The contract at this stage involves the equipment purchase contract

between the bank and the supplier of the equipment.
Second

 After purchasing the equipment, the bank looks for lessee and
leases out the equipment in exchange for compensation and the
lessee pays the agreed rental on the specified period.

 The contract period comes to an end, the lessee either returns the
equipment to the bank or renews the lease contract for another
agreed period of time.
Third

 If the bank recovers the assets at the end of the lease period, it will
look for a new lessee to let the equipment and this process will
continue until the bank chooses to scrap or dispose of the assets
 B.AREAS OF APPLICATION
 Operating lease transaction are suitable for high cost expansive
assets, that demand large amounts of money in order to possess and a
long duration for its production.

 Bank can carry on business in the line of operating lease in many

assets such as industrial equipment and agricultural machinery and
transportation.

 Bank benefits from this mode by retaining the assets in possession

and at the appropriate time without bearing large capital cost.
IJARAH MUNTAHIAH
BITTAMLIK
(Leasing Ending
 There are many With
types of Ijarah Ownership)
Muntahiah Bittamlik, it can
be categorized into major and secondary types.

 These types aim at transferring the legal title of the leased

asset to the lessee.
 A. Ijarah Muntahia Bittamlik through Gift
(Transfer of Legal Title for No Consideration)

 It is a form of lease whereby the legal title is transferred to the lessee for
no consideration by entering into a gift contract.

 The legal title is then automatically transferred without the need to enter
the new contract.

 In Islamic jurisprudence there have two different opinion

i. It is not valid to make the gift conditional and this is the opinion of
Hanafis, Shafi’is, Hanbalis,Zaidis and Imamiyah.

ii- A Hanbalis scholar, as well as the Hanafis is that , it is permissible

to make the gift conditional on something suitable or acceptable.
 B. Ijarah Muntahia Bittamlik through Transfer
of Legal Title
(Sale at the End of Lease Period for an Amount
Specified in the Lease)
 A promise to enter into a sale contract to be concluded at the
end of the Ijarah period, if the lessee whishes so and has paid
the agreed consideration.

 This type of Ijarah is permitted as there is no limit to the

consideration to be paid in a bargained sale.

 The consideration may be equal to the value of the asset or

otherwise, and it would be sufficient id a mutual agreement is
reached on the consideration.
 C. Ijarah Muntahia Bittamlik through Transfer
of Legal Title
(Sale at the End of Lease Period for an Amout
Specified in the Lease)

 It is includes an Ijarah contract and a promise to enter into a sale

contract.

 The sale contract, includes an amount for the sold asset to be paid
by the lessee (the buyer) after the expiry of the Ijarah period.

 The lessee’s paying the agreed consideration , the leased asset

becomes sold and its titled transferred to the lessee and it will
entitled to the right of benefit.
 D. Ijarah Muntahia Bittamlikk through
Transfer of Legal Title

 This agreement includes promise made by the lessor that he will

transfer the title of the leased asset to the lessee at any time.

 It can be do during the Ijarah period and at a price equivalent to the

remaining installment of Ijarah.

 The juristic character of this form of Ijarah is that when the

agreement becomes effective it is treated as an Ijarah contract and
remains so until the legal title is transferred to the lessee.
 E. Ijarah Muntahia Bittamlik through Gradual
Transfer of Legal Title of Leased Asset.
 Agreement includes an Ijarah contract with a promise made by the
lessor.

 Lessor will gradually transfer the legal title of the leased asset to the
lessee until the lessee has full legal title of the leased asset.

 It will involve determining the price of the leased asset which is to be

divided over the period of the Ijarah contract

 So the lessee is able to acquire a share of the leased asset for the
proportionate consideration of the total price.
 SALE AND LEASEBACK
 The common forms of Ijarah is the case where an individual sells
his own asset to another party and then leases it back from him.

 It is a juristic rule that the execution of the sale transaction must

not be made conditional on execution of the lease transaction.
 DOCUMENTATION
1. LEASE
 The lessor leases the assets (eg. house) to the lessee and agrees to pay
some money as deposits.
 Deposits can be return after deduction of any costs or expenses at the
end of lease.
2. TERM AND PERIOD OF LEASE
 Should follow the term of the lease as mentioned in the lease
document.
 Example: rental paid monthly/ quarterly/ semi-annually
 The agreement can be terminated only with the mutual consent of the
parties.
 Such termination shall take effect after agreed days from the date of
the parties’ consent.
 .. Cont.
3. SECURITY
 Furnish to the lessor, collateral, substantially in the form and substance
attached hereto as Leased Document.
 Execute such further deeds and documents as may time to time be
required by the lessor for the purpose of more fully securing.
 Create such other securities to secure the lessee’s obligations under the
Principal Documents.

DELIVERY:
 Should be delivered by the lessor to the placed stated in the Lease
Document.
 Any costs incurred shall be borne by the lessor.
 The lessee shall execute and deliver to the lessor a receipt or acceptance in
the form as Lease Document.
 USE OF LEASED ASSETS
 Use and operate the leased assets carefully and strictly in conformity
with the instructions of manufacturers or lessor.
 Leased assets shall be handled, used and operates by authorised and
suitably trained persons.
 Each item of the leased assets shall be used or the normal and usual
purpose of the business of the lessee except with prior permission
from the lessor.
 Use and operate the leased assets in compliance with all relevant
laws, rules, regulations, orders and directions.
 MAINTENANCE OF LEASED
ASSETS
 The lessee agrees to maintain each item or leases assets in reasonable
condition satisfactory to the lessor.
 All maintenance work shall be carried out strictly in accordance with:
1. The maintenance manuals.
2. The instructions and directions of the manufactures.
3. The best practice in the industry.
 The lessee agrees to be solely responsible for:
1. All maintenance and operating costs and expenses.
2. To pay all fees, taxes, fines or penalties of operational nature
except the income tax of the lessor.
 TAKAFUL ACCIDENTS. INJURIES
AND INDEMNIFICATION
 The leased assets should be comprehensively covered
against all insurable risks. (fire, theft)
 The lessee shall be responsible for and keep the lessor
indemnified against accidents, injuries, damages and losses.
 The lessee shall indemnify and keep indemnified the lessor
against any and all actions, claims, proceedings, liabilities,
losses, expenses.
 The lessee agrees to pay the lessor the cost or repairing any
damage arising out of misuse to the leased assets.
 .. Cont.
 All proceeds of Takaful shall be applied at the option of
lessor towards:
1. The replacement restoration or repair of the leased asset if
the same may be reasonably possible.
2. The payment obligations of the lessee to the lessor
hereunder.
 COMPENSATION
• The compensation rate that shall be applied is 1% per annum on the
overdue amount of rental.
(or any other method approved by BNM)

• For failure to pay the rent beyond the term of lease, the compensation
rate that shall be applied is the current Islamic Money Market Rate on
the overdue rental amount.
(or any other method approved by BNM)
THANK YOU 