Center of Islamic Finance

COMSATS Institute of Information Technology

Lahore Campus

The Concept of Ijarah

Adopted from open source lecture of

Meezan Bank.

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 Ijarah

 Ijarah is a term of Islamic Fiqh

 Literally, it means “To give something on rent”
 The term “defined as “LAND” in Islamic Economics.

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Ijarah as a mode of financing

 Ijarah is an Islamic alternative of Leasing.

 Leasing backed by an acceptable contract is an acceptable
transaction under Shariah.
 The question of whether or not the transaction of leasing is
Shariah compliant depends on the terms and conditions of
the contract.
 Several characteristics of conventional agreements may not
conform to Shariah thus making the transaction un-Islamic
and thereby invoking a prohibition.

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Ijarah-Key Difference

 Risk and rewards of ownership lies with the owner i.e.

any loss to the asset beyond the control of the lessee
should be borne by the Lessor.
 Late payment penalty cannot be charged to the income
of the Lessor.
 Lease and Sale agreement should be separate and non
contingent.

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Process of Ijarah

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 Any country that has a significant Islamic population
would need Islamic banking systems to help the
Islamic community avail banking services. Per the
Islamic laws, giving or taking interest is considered
haram or illegal. Islamic banks operate per the laws
laid down by Islamic Religion and thus more and
more Islamic people can use their banking services.
They may not be willing to open an account with a
regular bank as it is forbidden per their religion.
 Ijarah

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VENDOR ISLAMIC BANK Agreement-1 CUSTOMER

The customer approaches the Bank with the request for

financing and enters into a promise to lease agreement.

The Bank purchases the item required for leasing and

receives title of ownership from the vendor.

The Bank makes payment to the vendor.

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Ijarah as a mode of financing

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VENDOR ISLAMIC BANK Agreement-2 CUSTOMER

The Bank leases the asset to the customer after

execution of lease agreement.

The customer makes periodic rental payments as per the

contract.

At the end of the tenure customer can purchase the

asset from the bank with the help of separate Sale
agreement. 9
Rules governing Ijarah

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 Ijarah

• Rules governing Ijarah are similar to the rules

governing sale.
• Because in both cases something is transferred from
one person to another
 The only difference is:
• In case of sale, title of property is transferred to Buyer.
• In case of Ijarah, title remain with the Lessor.
• Only the use of the property is transferred to Lessee.

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Rules of Ijarah

1. Leasing is a contract where the owner of an asset

transfers its use to another person against an agreed
price.
2. However, ownership of the leased asset remains with
the Lessor

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Rules of Ijarah

3. Since ownership of the leased asset remains with the

Lessor, all rights and liabilities relating to ownership
are borne by the Lessor.
 All rights and liabilities relating to use are borne by the
Lessee e.g.“A” gives his house to “B” on rent.
Property taxes are to be borne by the owner. Water
tax, electricity bill etc are to be borne by the Lessee.

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Rules of Ijarah

4. Subject matter of Lease should be Valuable, Identified

and Quantified.
5. The period of Lease must be determined in clear terms.
6. The Lessee is responsible for damage to the asset
caused by fraud or negligence.
7. Any damage to the asset not caused by the Lessee’s
neglect, is to be borne by the Lessor.

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Rules of Ijarah

8. Normal maintenance is Lessee’s responsibility.

9. Lease rentals for the entire lease period must be
fixed at the time of Lease Agreement;
a) Different amounts of rents can be fixed for
different periods, but they must be known.
b) The rent may be tied to a known benchmark,
acceptable to both the parties.

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Rules of Ijarah

10. The Lessor cannot increase the rent unilaterally

11. The Lessor may receive the rent in advance, but
such payment should be recorded as an Advance
rental. Balance Sheet should reflect this payment
as Liability, since rent can be received only for use
of an asset.

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Rules of Ijarah

12. The Lease period will start when the asset has been
delivered to the Lessee
 - in a usable condition
 - whether or not the Lessee has started using it

13. If the leased asset is destroyed, the lease will terminate.

14. If the Lessee is at fault, he is liable to compensate the
Lessor for the loss.

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Termination of Ijarah

 If the Lessee contravenes any term of the Lease

agreement the Lessor may unilaterally terminate the
agreement.
 If there is no contravention, the agreement can only be
terminated by mutual consent.
 Conventional Financial Lease agreements give
termination right to Lessor in all cases. This is contrary to
Shariah laws.

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 Ijarah

 Difference b/w Conventional Lease & Ijarah

1. In conventional lease the Lessor has the unilateral right
to rescind the lease contract at his sole discretion,
which is against the laws of Shariah,
2. Expenses under Ijarah are as follows:
 Lessor- expenses relating to the corpus of the asset
i.e. insurance, accidental repairs etc. will be borne by
the lessor
 Lessee- actual operating/overhead expenses related
to running the asset will be borne by the lessee

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 Ijarah

 Difference b/w Conventional Lease & Ijarah

3. Two contracts into one contract is not permissible in
Shariah therefore, we cannot have the agreement of
hire and purchase into one agreement, only we can
undertake/promise to purchase the leased asset.
4. In conventional lease the lease starts even before
the existence of assets, which is also not permissible
in Shariah.
5. Penalty income is charged for late payments in
Conventional lease.

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THANK YOU

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