Basic rules of ijarah:
(1) Transferring of usufruct not ownership:
In leasing an owner transfer its usufruct to another person for an agreed period, at an agreed consideration. For example if a persone have some property and he want to give it to another person on the basis of Ijarah, so in this agreement the owner of the property only trasfer the usage rights to the other person who want to lease the asset. The owner does not transfer the ownership rights to the other party. Therefore, it is necessary to keep in mind that in case of Ijarah only the usage right are transferred to the other party and not the ownership rights.
(2) Subject of lessee:
The subject of lessee should be valuable, identified and quantified. This sentence means that the leased asset that an owner is going to provide to the other person on the basis of leas agreement must have value. If it has no value then it can not be leased out. Similarly the subject of lease of
(3) All consumable things can not be leased out:
The corpus of the released property remains in the ownership of the lessor, and only its usufruct is transferred to the lessee. Thus, anything, which cannot be used without consuming, cannot be leased out. For example money, wheat etc can be leased out.
(4) As the corpus of the leased property remains in the ownership of the lessor, all the liabilities emerging from the ownership shall be born be the lessor.
(5) Period of lease:
Period of lease must be determined in clear terms.
It is necessary for a valid lease that the leased asset is fully identified by the parties.
(6) lease for specific purpose:
The lessee can not use the leased asset for any purpose other than the purpose specified in the lease agreement. However, if no such purpose is specified in the agreement, the lessee can use it for what ever purpose it is used in the normal course.
(7) Lessee as amen:
The lessee is liable to compensate the lessor for every harm to the leased asset caused by any misuse or negligence. The leased asset shall remain in the risk of the lessor throughout the lease period in the sense that any harm or loss caused by the factors beyond the control of the lessee shall be borne by the lessor.
(8) lease of jointly owned property:
A property jointly owned by two or more persons can be leased out, and the rental shall be distributed between all joint owners according to the proportion of their respective shares in the property.
A joint owner of a property can lease his proportionate share to his co-sharer, and not to any other person.
(9) Determination of rental:
(a) The rental must be determined at the time of contract for the whole period of lease.
(b) It is permissible that different amounts of rent are fixed for different phases during the lease period, provided that the amount of rent for each phase is specifically agreed upon at the time of affecting a lease. If the rent for a subsequent phase of the lease period has not been determined or has been left at the option of the lessor, the lease is not valid lease.
(c) The determination of rental on the basis of the aggregate cost incurred in the purchase of the asset by the lessor, as normally done in financial leases, is not against the rules of Shariah, if both parties agree to it, provided that all other conditions of a valid lease proscribed by the Shariah are fully adhered to.
(d) The lessor can not increase the rent unilaterally, and any agreement to this effect is void.
(e) The rent or any part thereof may be payable in advance before the delivery of the asset to the lessee, but the amount so collected by the lessor shall remain with him as on account payment and shall be adjusted toward the rent after its being due.
(f) The lease period shall commence from the date on which the leased asset has been delivered to the lessee.
(g) If the leased asset has totally lost, the function for which it was leased, the contract will stand terminated.
(h) The rental can be used on or benchmarked with some index as well. In this case the ceiling and floor rental can be identified for validity of lease.
Lease as a mode of financing:
Lease is not originally a mode of financing. It is simply a transaction meant to transfer the usufruct of a property from one person to another for an agreed period against an agreed consideration. However, certain financial institutions, have adopted leasing as a mode of financing instead of long term lending on the basis of interest.
This transaction of financial lease may be used for Islamic financing, subject to certain conditions. It is not sufficient for this purpose to substitute the name of “interest” by the name of “rent” and replace the name of “mortgage” by the name of leased asset. There must be a substantial difference between leasing and an interest bearing loan. That will be possible only by following all the Islamic rules of leasing, some of which have been mentioned earlier.
To be more specific, some basic differences between the contemporary financial leasing and the actual leasing allowed by the Shariah are indicated below.
The commencement of Lease:
Unlike the contract of sale, the agreement of Ijarah can be effected for a future date. Hence, it is different from Murabahah.
In most cases of financial lease the lessor i.e. the financial institution purchases the asset through the lessee himself. The lessee purchases the asset on behalf of the lessor who pays its price to the supplier, either directly or through the lessee. In some lease agreements, the lease commences on the very day on which the price is paid by the lessor, irrespective of whether the lessee has effected payment to the supplier and taken delivery of the asset or not. It may mean that lessess’s liability for the rent starts before the lessee takes delivery of the asset. This is not allowed in Shariah, because it amounts to charging rent on the money given to the customer, which is nothing but interest, pure and simple.
Rent should be charged after the delivery of the leased asset:
The correct way, according to Shariah, is that the rent will be charged after the essee has taken delivery of the asset, and not from the day the price has been paid. If the supplier has delayed the delivery after receiving the full price, the lessee should not be liable for the rent of the period of delay.
Difference between Murabahah and leasing:
Both are considered as mode of financing. The main points of distinction between the two are given below.
(1) In Murabahah, actual sales take place while Ijarah is not a sale contract.
(2) In Murabahah, the ownership of the asset as transferred to the buyer while in Ijarah the ownership does not transfer.
Expenses consequent to ownership:
As the lessor is the owner of the asset and he has purchased it from the supplier through his agent, he is liable to pay all the expenses uncured in the process of its purchase and its import to the country of the lessor for example expenses of the freight and customs dusty etc.
He can, of course, include all these expenses in his cost and can take them into consideration while fixing the rentals, but as a matter of principal, he is liable to bear all these expenses as the owner of the asset. Any agreement to the contrary, as is found in the traditional financial leases, is not conformity with Shariah.
Lessee as Ameen/Liability of the parties in case of loss to the asset:
As mentioned in the principal of leasing;, the lessee is responsible for any loss caused to the asset by his misuse or negligence. He can also be made liable to the wear and tear, which normally occurs during its use. But he cannot be made liable to al loss caused by the factor s beyond his control. The agreements of the traditional financial lease generally do not differentiate between the two situations. In a lease based on the Islamic principles, both the situation should be dealt with separately.
(1) Transferring of usufruct not ownership:
In leasing an owner transfer its usufruct to another person for an agreed period, at an agreed consideration. For example if a persone have some property and he want to give it to another person on the basis of Ijarah, so in this agreement the owner of the property only trasfer the usage rights to the other person who want to lease the asset. The owner does not transfer the ownership rights to the other party. Therefore, it is necessary to keep in mind that in case of Ijarah only the usage right are transferred to the other party and not the ownership rights.
(2) Subject of lessee:
The subject of lessee should be valuable, identified and quantified. This sentence means that the leased asset that an owner is going to provide to the other person on the basis of leas agreement must have value. If it has no value then it can not be leased out. Similarly the subject of lease of
(3) All consumable things can not be leased out:
The corpus of the released property remains in the ownership of the lessor, and only its usufruct is transferred to the lessee. Thus, anything, which cannot be used without consuming, cannot be leased out. For example money, wheat etc can be leased out.
(4) As the corpus of the leased property remains in the ownership of the lessor, all the liabilities emerging from the ownership shall be born be the lessor.
(5) Period of lease:
Period of lease must be determined in clear terms.
It is necessary for a valid lease that the leased asset is fully identified by the parties.
(6) lease for specific purpose:
The lessee can not use the leased asset for any purpose other than the purpose specified in the lease agreement. However, if no such purpose is specified in the agreement, the lessee can use it for what ever purpose it is used in the normal course.
(7) Lessee as amen:
The lessee is liable to compensate the lessor for every harm to the leased asset caused by any misuse or negligence. The leased asset shall remain in the risk of the lessor throughout the lease period in the sense that any harm or loss caused by the factors beyond the control of the lessee shall be borne by the lessor.
(8) lease of jointly owned property:
A property jointly owned by two or more persons can be leased out, and the rental shall be distributed between all joint owners according to the proportion of their respective shares in the property.
A joint owner of a property can lease his proportionate share to his co-sharer, and not to any other person.
(9) Determination of rental:
(a) The rental must be determined at the time of contract for the whole period of lease.
(b) It is permissible that different amounts of rent are fixed for different phases during the lease period, provided that the amount of rent for each phase is specifically agreed upon at the time of affecting a lease. If the rent for a subsequent phase of the lease period has not been determined or has been left at the option of the lessor, the lease is not valid lease.
(c) The determination of rental on the basis of the aggregate cost incurred in the purchase of the asset by the lessor, as normally done in financial leases, is not against the rules of Shariah, if both parties agree to it, provided that all other conditions of a valid lease proscribed by the Shariah are fully adhered to.
(d) The lessor can not increase the rent unilaterally, and any agreement to this effect is void.
(e) The rent or any part thereof may be payable in advance before the delivery of the asset to the lessee, but the amount so collected by the lessor shall remain with him as on account payment and shall be adjusted toward the rent after its being due.
(f) The lease period shall commence from the date on which the leased asset has been delivered to the lessee.
(g) If the leased asset has totally lost, the function for which it was leased, the contract will stand terminated.
(h) The rental can be used on or benchmarked with some index as well. In this case the ceiling and floor rental can be identified for validity of lease.
Lease as a mode of financing:
Lease is not originally a mode of financing. It is simply a transaction meant to transfer the usufruct of a property from one person to another for an agreed period against an agreed consideration. However, certain financial institutions, have adopted leasing as a mode of financing instead of long term lending on the basis of interest.
This transaction of financial lease may be used for Islamic financing, subject to certain conditions. It is not sufficient for this purpose to substitute the name of “interest” by the name of “rent” and replace the name of “mortgage” by the name of leased asset. There must be a substantial difference between leasing and an interest bearing loan. That will be possible only by following all the Islamic rules of leasing, some of which have been mentioned earlier.
To be more specific, some basic differences between the contemporary financial leasing and the actual leasing allowed by the Shariah are indicated below.
The commencement of Lease:
Unlike the contract of sale, the agreement of Ijarah can be effected for a future date. Hence, it is different from Murabahah.
In most cases of financial lease the lessor i.e. the financial institution purchases the asset through the lessee himself. The lessee purchases the asset on behalf of the lessor who pays its price to the supplier, either directly or through the lessee. In some lease agreements, the lease commences on the very day on which the price is paid by the lessor, irrespective of whether the lessee has effected payment to the supplier and taken delivery of the asset or not. It may mean that lessess’s liability for the rent starts before the lessee takes delivery of the asset. This is not allowed in Shariah, because it amounts to charging rent on the money given to the customer, which is nothing but interest, pure and simple.
Rent should be charged after the delivery of the leased asset:
The correct way, according to Shariah, is that the rent will be charged after the essee has taken delivery of the asset, and not from the day the price has been paid. If the supplier has delayed the delivery after receiving the full price, the lessee should not be liable for the rent of the period of delay.
Difference between Murabahah and leasing:
Both are considered as mode of financing. The main points of distinction between the two are given below.
(1) In Murabahah, actual sales take place while Ijarah is not a sale contract.
(2) In Murabahah, the ownership of the asset as transferred to the buyer while in Ijarah the ownership does not transfer.
Expenses consequent to ownership:
As the lessor is the owner of the asset and he has purchased it from the supplier through his agent, he is liable to pay all the expenses uncured in the process of its purchase and its import to the country of the lessor for example expenses of the freight and customs dusty etc.
He can, of course, include all these expenses in his cost and can take them into consideration while fixing the rentals, but as a matter of principal, he is liable to bear all these expenses as the owner of the asset. Any agreement to the contrary, as is found in the traditional financial leases, is not conformity with Shariah.
Lessee as Ameen/Liability of the parties in case of loss to the asset:
As mentioned in the principal of leasing;, the lessee is responsible for any loss caused to the asset by his misuse or negligence. He can also be made liable to the wear and tear, which normally occurs during its use. But he cannot be made liable to al loss caused by the factor s beyond his control. The agreements of the traditional financial lease generally do not differentiate between the two situations. In a lease based on the Islamic principles, both the situation should be dealt with separately.