2. IJARAH & ISSUES RELATEED TO IJARAH – DM & ISSUES RELATED TO DM By: Abdul Samad AlHuda Centre of Islamic Banking & Economics (CIBE)

3. What is Ijarah? Transferring of usufruct of an asset to another person for an agreed period, at an agreed consideration.

4. Basic Rules of Ijarah • Anything, which cannot be used without consuming, cannot be leased out. e.g. Money, wheat etc. • Leasing is not originally a mode of financing but it is a sale transaction. So all basic elements of lawful sale transaction must be present. • It is necessary for valid lease that the leased asset is fully identified by the parties.

5. Basic Rules of Ijarah • It is necessary for valid lease that the corpus of the leases property remains in the ownership of the lessor. • The period of lease must be determined in clear terms. • The lease period shall start from the date on which the leased asset has been delivered.

6. Liabilities of Parties • Lessor’s Responsibilities: • Since corpus of leased property remains in the ownership of the lessor therefore all liabilities of ownership are borne by lessor. • Expenses: • As the lessor is the owner of the asset he is liable to pay all the expenses incurred in the process of its purchase and its import to the country of the lessor example expenses of shipment and customs duty etc.

7. Lessee Responsibilities • Being user of the lease asset lessee can be made liable to any normally occurring wear and tear. • The lessee cannot use the leased asset for any purpose other then the purpose specified in the lease agreement. • If no such purpose is not specified in the agreement, the lessee can use it for whatever purpose it is use in normal course.

8. Lessee as Ameen The lessee is liable to compensate the lessor for every harm caused to the leased asset by his misuse or negligence.

9. Rental • The rental must be determined at the time of contract for the whole period of lease. • It is permissible that different amount of rent are fixed for different phases provided that the amount of rent for each phase is specifically agreed upon at the time of affecting a lease. • The lessor cannot increase the rent unilaterally and any agreement to this effect is vied.

10. Rental • A lease contract can have a condition that the rent shall be increased according to a specified proportion (e.g. 5%) after a specified period (like one year). • The rent or any part thereof may be payable in advance before the delivery of the asset to the lessee, but that amount so collected by the lessor shall remain with him as Amana and shall be adjusted towards the rent after its being due.

11. In Case of Late Payment • The lessor cannot charge an additional amount in case the lessee delays payment of the rent. • Penalty of late payment is given to charity by lessee.

12. Insurance of the Assets • Legally, it is required for all leasing companies to insure the leased asset. Presently IMFI insure its leased assets. However our BoK Ijara policy clearly stated that BoK will use Conventional Insurance as long as Takaful is not available.

13. Termination : contractual • Lease is binding contract. • It can be terminated by mutual consent. • The lessor may terminate it when the lessee doesn’t pay the rent or fails to pay it on time or because of violation of any other term and condition of the agreement. Ø With total destruction of the leased asset • Upon the expiry of term. • Two parties may terminate it before it begins to run.

14. Difference Between Murabaha and Ijarah

15. Procedure of IMFI Ijarah Undertaking to Ijarah  Agency Agreement  Purchase  Payment of Purchase Price  Lease Agreement

16. Expenses Related To Ownership

17. Recovery of Rental

18. Increase in Price of Ijarah Asset

19. Covering Risks Under Takaful

20. Proportionate Takaful

21. Sale and Lease Back

22. Sale and Lease Back

23. Sale and Lease Back

24. Diminishing Musharakah

25. Diminishing Musharakah • It is a form of partnership in which one of the partners promises to buy the equity share of the other partner gradually until the title to the equity is completed transferred to him. • According to this concept a financer and his client participate either in a joint property or an equipment or in joint commercial enterprises.

26. FEATURES OF DIMINISHING MUSHARAKAHIN SHIRKAT-UL-MILK (JOINT OWNERSHIP) Two partners purchase any asset (machinery/property) and their intention is that one or both partners will use this asset or they rent out their share and one Shareek undertakes to purchase the share of other gradually.

27. Rules of Diminishing Musharakahin Shirkat-ul-Milk (Joint Ownership) 1. There will be an agreement of Shirkat ul Milk and it will be decided How much investment will be made by each partner? 2. Asset will be purchased and all partners will be owner of this asset as per ratio of his investment and all other rules of Shirkat-ul-Milk will be applicable.

28. Rules of Diminishing Musharakahin Shirkat-ul-Milk (Joint Ownership) 3. One Shareek can rent out his share to other partner or to a third party and Ijarah Agreement will be signed. 4. Within period of Ijarah, Shariah Ahkaam relating to Ijarah will be applicable.

29. Uses of Diminishing Musharakah in IMFI Diminishing Musharakah usually being used in House Financing for these purposes: • Purchase of House • Construction of House • Renovation of House

30. Procedure of DM D M Agreement (IMFI +Client)  Undertaking to Ijarah (from the client)  Sale Agreement (Client + owner of the house)  Payment of Purchase Price (to the client)  Lease Agreement (IMFI + client)

31. Procedure of Sale and Lease Back D M Agreement (IMFI +Client)  Undertaking to Ijarah (from the client)  Sale Agreement (IMFI + client)  Payment of Purchase Price (to the client)  Lease Agreement (IMFI + client)

32. Value of Units at Face Value

33. Covering Risks Under Takaful

34. Proportionate Takaful

35. Repair & Maintenance

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