AlHuda Presentation on Ijarah (PowerPoint)

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                           IJARAH
                     ( Islamic Lease )



Zubair Mughal
 Chief Executive Officer
 AlHuda : Centre of Islamic Banking & Economics
 Editor in Chief.
 Islamic Banking and Finance News , True Banking.



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IJARAH (LEASING)



 IJARAH AL ASHKAAS

 IJARAH AL AAyyan




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IJARAH (LEASING)

 Ijarah is to offer for a consideration the
 usufruct of a thing of value from which
 benefit can be derived without consumption,
 while retaining the ownership of the leased
 assets and assuming risks pertaining
 thereto.




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ESSENTIALS OF IJARAH



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IJARAH (LEASING)

 The leased commodity remains in the ownership of
 the lessor and only its usufruct is transferred to the
 lessee.
 Any thing which cannot be used without
 consuming the same cannot be leased out like
 money, edibles, fuel, etc.
 Only such assets which are owned by the lessor
 can be leased out except that a sub-lease is
 effected by the lessee with the express permission
 of the lessor.
 Until such time that assets to be leased are
 delivered to the lessee, lease rentals do not
 become due and payable                               6
IJARAH (LEASING)

 During the entire term of the lease, the
 lessor must retain title to the assets, and
 bear all risks and rewards pertaining to
 ownership.

 If any damage or loss is caused to the
 leased assets due to the fault or negligence
 of the lessee, the consequences thereof
 shall be borne by the lessee.
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IJARAH (LEASING)

 The lessee is also responsible for all risks and
 consequences in relation to third party liability,
 arising from or incidental to operation or use of the
 leased assets.

 The insurance of the leased asset should be in the
 name of lessor and the cost of such insurance
 borne by him.

 A lease can be terminated before expiry of the
 term of the lease but only with the mutual consent
 of the parties.
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IJARAH (LEASING)



 Either party can make a unilateral promise to buy/sell the
 assets upon expiry of the term of lease.

 Alternatively, the lessor may make a promise to gift the asset
 to the lessee upon termination of the lease.

 However, there shall not be any stipulation in the lease
 agreement purporting to transfer of ownership of the leased
 assets at a future date.



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IJARAH (LEASING)

 The amount of rental must be agreed in
 advance


 Contract of lease will be considered
 terminated if the leased asset ceases to
 give the service for which it was rented.
 However, if the leased asset is damaged
 during the period of the contract but is
 capable of being repaired, the contract will
 remain valid.                                  10
IJARAH (LEASING)



 Late   Payment Plenty

 The  banks can also approach competent courts
 for award of damages.


 Also,security or collateral can be sold by the
 bank (purchaser) without intervention of the court.


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MECHANISM



            12
Leasing (Operating Lease)
                                              Beneficial use
              Transfer of asset                 of asset

                                  Financier                    Entrepreneur
    Vendor                                                       (Lessee)
                                  (Lessor)
                Payment of                     Lease rentals
               purchase price
   Another popular instrument – 15% of the transactions
   Right available to lessee to purchase
   Asset ownership risk with owner; operational risks with lessee
   Features close to a financial lease
   Used for machinery, equipment, property, vehicles, aircraft etc.
   Ownership usually transferred at the end

                                                                          13
         Ijarah Operating Lease

GENERAL MECHANICS

                     .   .
  VENDOR         ISLAMIC BANK   Agreement   CUSTOMER


  The  customer approaches the Bank with the
   request for financing
  The Bank purchases the item required for
   leasing and receives title of ownership from
   the vendor
  The Bank makes payment to the vendor

                                                       14
         Ijarah Operating Lease
GENERAL MECHANICS

                                                 .   .
    VENDOR           ISLAMIC BANK   Agreement   CUSTOMER



   The Bank leases the asset to the customer
   The customer makes periodic payments as per the
    contract
   The asset title transfers to the customer based on
    the method disclosed in the agreement

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USAGE OF IJARAH



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IJARAH (LEASING)

 Ijarah (Operating Lease) Examples:
      Houses
      Rent-A-Car
      Agricultural Durables
      Aircrafts, etc.

 Issues
     Asset Price Risk
     Repair and Maintenance
     Running Expenses (depending upon contract)
     Credit Risk (Default in rental payment)      17
IJARAH (LEASING)

 Ijarah Muntahia Bittamleek Examples:
     Vehicles Ijarah Financing
     Plant and Machinery
     Consumer Durables
     House Financing
     Project Finance, etc.



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RISKS AND ISSUES



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                   Risks
   Credit Risk
   Rate of Return Risk
   Customer may decline to enter into Ijarah.
   Damage to Asset
   Overdue Rentals
   Non-Compliance/Violation of contract.
   Early Termination
   Asset Price Risk
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Risks and Practical Issues
   How to treat insurance cost paid by the
    Lessor?
   Treatment of Security deposits received
    from customers.
   Treatment of Advance rentals.
   Accounting rule/policy regarding repairs
    of Leased assets.


                                           21
 Leasing/Ijarah Contract


     Conventional Leasing                       Car Ijarah

There are two types of contracts,    The Ijarah contract does not
Financial lease and loan for car     contain any condition that makes
financing. Both these contracts      the contract void under Sharia'h
contain conditions that are          perspective.
contravenes with the Islamic
Sharia'h. Financing lease contains
conditions of hire purchase, which
is not permissible by Sharia'h.
Car financing or loan agreement
contains conditions of interest.
Interest is considered Riba by
Sharia'h                                                         22
Rights & Liabilities of Lessor and Lessee


     Conventional Leasing                    Car Ijarah


In Conventional Leasing Products, All risks pertaining to ownership
the Customer is responsible for all are borne by Lessor.Customer
kinds of losses or damages to the only bears usage-related risks
Leased asset, irrespective of the
circumstances.

If the insurance company does not Lessor bears the risk         of
compensate the entire outstanding Insurance claim settlement.
amount in case of total loss, the
customer is liable to pay the
balance.
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Rentals recovery in case of theft and
loss

      Conventional Leasing                        Car Ijarah


  If the Leased Asset is stolen or     Under the Islamic Ijarah, rent is
  completely     destroyed,      the   consideration for usage of the
  conventional leasing company or      leased asset, and if the asset has
  Bank would continue charging         been stolen,        destroyed or
  the lease rent till the settlement   temporarily out of order and not
  of the Insurance claim               in use of Customer, the concept
                                       of rental becomes void. In such
                                       situations rental is not charged
                                       from the lessee.


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Penalty for late payment

    Conventional Leasing                    Car Ijarah


In most contemporary financial Under Ijarah, the Lessee may be
leases, an extra monetary      asked to undertake that if he
                               fails to pay rent on its due date,
amount is charged if rent is not
paid on time. This extra amounthe will pay a certain amount to a
is the considered Riba and is  charity Fund, which will be
Haram.                         administered      through     the
                               Islamic Bank.
This amount is taken by the For this purpose the bank
leasing institution into their maintains a charity fund where
income.                        such amounts may be credited
                               and disbursed for charitable
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                               purposes.
Insurance premium

    Conventional Leasing                      Car Ijarah

Insurance is independent of the    Takaful / Insurance should be at
lease contract. The insurance      the expense of the Lessor and
expense of the asset is directly   not at the expense of the lessee.
borne by the lessee                The Lessor may increase the
                                   lease rent to recover any costs
                                   incurred by him in connection
                                   with the asset. However, as a
                                   matter of principal, the cost
                                   should be paid for by the Lessor.


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Registration Charges

    Conventional Leasing                     Car Ijarah

Lessee is responsible for the     The Leased Asset(vehicle) is
Registration of Leased Vehicle.   registered in the name of the
                                  Bank and registration charges are
                                  paid by the Bank (Lessor).

                                  The Lessor may increase the
                                  lease rent to recover any costs
                                  incurred by him in connection
                                  with the asset


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Purchase of asset



     Conventional Leasing                      Car Ijarah

Under conventional leasing         There is not such clause in the
contracts, the vehicle is          Ijarah Agreement that Leased
automatically transferred in the   Asset will automatically transfer to
name of the customer upon          Lessee.
completion of the lease period,
whether or not he wants to         Separate sale agreement is required
purchase it.                       to execute sale transaction at the
                                   end of lease term.



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Commencement of Rentals

    Conventional Leasing                    Car Ijarah

In case of Booking of Leased     In case of Car Ijarah, the
Asset, recovery of Lease         recovery of rentals is associated
installment commence after the   with delivery of Leased Asset.
payment of cost of Asset to
manufacturer/dealer.             Rental recovery should not be
                                 commenced before the delivery
                                 of Asset.




                                                                     29
 Signing of Lease Contract

     Conventional Leasing                    Car Ijarah

Lease Agreement can be signed by In case of Ijarah, the Ijarah
the Lessee and Lessee any time   Agreement can not be signed by
even if the Leased Asset is not  the Lessor and Lessee unless:
owned by the Customer.
                                 Asset has come in to existence
                                 Assets is in the ownership of
                                 the Lessor
                                 Lessor has taken possession of
                                 the Asset


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 Termination before delivery

      Conventional Leasing                     Car Ijarah

The customer will suffer loss of   The loss of customer is only
interest paid during the booking   limited to actual loss, if any,
period because installment         suffered by the Lessor on sale of
commence immediately after         asset in the open market.
payment of cost of asset to the
Manufacturer/Dealer.               Since the customer has not paid any
                                   rental during the booking period,
                                   no other cash loss is expected
                                   under Ijarah.


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OTHER DOCUMENTS

Undertaking for Personal use of
Ijarah Asset
Trust Receipt
Authorization to Take possession
of Leased Asset
Sale Deed
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Thank You.




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posted:12/14/2010
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