AL-IJARAH

Presentation PresentationOutline Outline

Concept Shariah Evidences Necessary conditions

Types

Al-Ijarah

Literally, al-ijarah refers to sale of usufructs/services. Technically it is: Aqd of usufruct with compensation (Hanafi) Aqd of specific, known and permissible usufruct which can be delivered (Shafii). Ownership of usufruct from a permissible asset for specific time period upon compensation

Al-Ijarah

Shariah Evidences Al-Quran; 65:6 (...and if they breastfeed for you (your children) give them (the mothers) their fee). Also alQuran; 28:26-27. (Verily the best person to hire is one who is strong and trust worthy) Al-Sunnah: Give the employee his wage before his sweat dries Whoever hires a worker must inform him of his wage

Al-Ijarah

Necessary Conditions The contracting parties must have legal capacities. The property and the usufruct must be permissible The property and the usufruct must be specified. In case of labour, the job specification must be known.

Al-Ijarah

Necessary Conditions In case of rent, the tenant pays for maintenance cost and the hand lord bears the infrastructural cost. The fee, wage, rent must be specified. The duration of usufruct/service must be determined. The usufruct/services must not be related to the obligatory Ibadat, e.g. hiring someone to pray on

Al-Ijarah

Types of al-Ijarah

Ijarah of labor (Private and Public)

Ijarah of Property - Operating (Tashghiliyyah) -Al-Ijarah wa al-Iqtina/ Al-Ijarah al-Muntahiyah Bi al-Tamlik

Al-Ijarah Wa al-Iqtina
This type of leasing is fully amortized, meaning that the total amount of leasing must be settles in full ( value of the asset plus mark up).The Lessee bears all the cost of maintaining the asset, such as insurance, tax, etc. This type of leasing cannot be terminated before the tenure. Otherwise the lessee will be liable to settle all outstanding payments in lump sum. This leasing aims to achieve two objectives: i) transfer of ownership of the asset to the lessee, after having settled all the total lease payments, and ii) realize investment for the lessor who would receive the cost of the asset plus mark up.

Al-Ijarah Wa al-Iqtina

This leasing gives the lessee three (3) options at the end of the tenure:
Renew the lease contract at reduced cost

Purchase the asset at reduced cost

Transfer ownership free of charge

Al-Ijarah Wa al-Iqtina

Types (Refer to the notes for the diagram) Financial or Capital Lease (Al-Ijar al-Mali/AlRasmali) Sale and Leaseback (Al-Bai Wa Iadah al-Istijar)

Al-Ijarah Thumma al-Bay (AITAB)

Asset 3.Bank Purchases The asset

Car Dealer
2.Customer Seeks financing

1.Customer identifies asset

4.AITAB Contract Rent Asset Bank Promise to sell Customer Sell Asset

DirectFinancial Financial Lease Direct Lease

2. Buys Aircraft

Bank
4.Lease

3. Delivery 5.Purchase aircraft After maturity

BOEING

1. Oders Aircraft

MAS Airlines

Sale and Lease Back

Bank

1. Sells Plant 2. Cash 3. Lease Back 4.Repurchase after maturity

Proton Car Plant

Sale and Lease Back serves 2 primary objectives: liquidity and repossession of asset

Sukuk Al-Ijarah
5.Lease Income

Originator

1.Sell asset
PSV

2. Cash

Investors
3. Issue Sukuk

4.Lease Asset 6. Resell asset

7.Payment of cash to investors and redemption of sukuk

WA ALLAH ALAM

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