Professional Documents
Culture Documents
FOUR SCHOOLS OF
JURISPRUDENCE
The Maliki School defines ijarah as a transfer of ownership of permitted
The Hanbali School has described ijarah as a contract where the subject
matter is lawful and for defined use (manfaah); corporeal object (ayn) is
also lawful and determined; and for a specific period of time.
The Shafiis view ijarah as a contract where the subject matter is the
ORIGIN
The term ijarah originates in the Arabic verb ajara which denotes
rewarding or recompensing
DEFINITION
Ijarah is an Islamic alternative of Leasing.
Leasing backed by an acceptable contract is an acceptable transaction under Shariah.
Ijarah is a contract whereby the owner of an asset, other than consumer, transfers its usufruct to
another person for an agreed period at an agreed consideration.
Until the assets to be leased are delivered to the lessee, no lease rental become due and payable. (i.e. Ijarah cannot be
The title of the assets remains with the Lessor during the entire lease term.
The Lessor bears all the risk and reward associated with the ownership to the asset.
All cost associated with the asset to bring it into usable form and condition should be borne by the lessor.
TYPES/CLASSIFICATION OF
IJARAH
1.
Operating Ijarah
Operating Ijarah is a lease that does not include a promise that the legal title in the leased asset
will pass to the lessee at the end of the lease
TYPES/CLASSIFICATION OF
IJARAH
2. Ijarah Muntahia Bittamleek (Ijarah wa Iqtina)
It is a lease that concludes with the legal title in the asset passing to the lessee after Ijarah. Ijarah Muntahia Bittamleek includes:
TYPES/CLASSIFICATION OF
IJARAH
3. Ijarah tul Musha or Joint ownership Ijarah
It is a lease where Bank & customer jointly own the leased asset. Bank gives its share to the
customer on lease.
After the term of Ijarah, the treatment is similar to Ijarah Muntahia Bittamleek
PROCESS OF IJARAH
Transfer of Title
VEND
OR
ISLAMIC
Payment of Purchase
Price
.
BANK
Agreement-1
CUSTOMER
The customer approaches the Bank with the request for Ijarah
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
PROCESS OF IJARAH
Transfer of Title
VENDOR
Transfer of Title
ISLAMIC BANK
Agreement-2
CUSTOMER
The Bank leases the asset to the customer after execution of lease
agreement.
The customer makes periodic 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.
1)
2)
3)
4)
5)
PROCESS OF ACCOUNTING
Example
Asset Price
Monthly rentals
Tenure
Security Deposit
Delivery Time
Amount in Rs./%
100,000
5,000
3 years
10,000
1 month
100,000
100,000
10,000
10,000
Feb 1, 2007
2) When the asset is deliver to the lessee
100,000
100,000
Dr Rental receivable
Cr Rental Income
5,000
5,000
Feb 28, 07
4) Recording of depreciation on Ijarah Asset
Dr Depreciation expense
Cr Accumulated depreciation
{(100,000-10000)/36}
2,500
2,500
Assets at cost
100,000
Less:
Accumulated Depreciation
(2,500)
Provision for Impairment
(
)
Net book value
97,500
5) At the time of receiving of Rental following entry would be passed:
Dr Security Deposit
Cr Party Bank A/c
10,000
10,000
10,000
XXX
XXX
XXX
(XXX)
(XXX)
XXXX
Rental Receivable
Rental receivable
Less:
Provision for doubtful debt
Net rental receivable
XXXX
(XXX)
XXXX
CURRENT MARKET
PRACTICE
Residual Value Ijaarah
Ijarah Introduces Residual Value Financing enabling customer to afford luxury
with economy, where the customer can enjoy the benefits of eased rental.
Key Features
Low monthly rental
Rental paid after delivery, not in advance
Fastest processing and delivery
Tracker option available (in case of car)
Minimum security deposit as low as 10%
CONT.
Takaful instead of insurance
According to the Pakistan rules and regulation, leased must be insured but in
charged, in their income, if the rent is not paid on time. This extra
amount is the considered asRibaand is Haram. Under Ijarah, the
Lessee may be asked to undertake, that if he fails to pay rent on its
due date, he will pay certain amount to a charity, which will be
administered through the Islamic Bank. For this purpose the bank
maintains a charity fund where such amounts may be credited and
disbursed for charitable purpose
THANK
YOU