Ijarah is emerging as a popular technique of financing among Islamic banks. Some of the products that utilise ijarah concepts include house

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1 Ijarah is emerging as a popular technique of financing among Islamic banks. Some of the products that utilise ijarah concepts include house financing, car financing and even project financing and structured products.

2 Ijarah literally means 'to give something on rent'. In its technical sense, however, the term 'ijarah' is used with two different connotations. In the first, it means: (1)'to employ the services of a person on wages given to him as a consideration for his hired services. The employer in this case is called 'musta jir' while the employee is called 'ajir'. This type of ijarah includes every transaction where the services of a person are hired by someone else. He may be a doctor, a lawyer, a teacher, a labourer or any other person who can render some valuable services.

3 (2)The second meaning of ijarah relates to the usufruct of assets and properties, and not to the services of human beings. Ijarah in this sense means 'to transfer the usufruct of a particular property to another person in exchange for a rent claimed from him.' In this case, the term 'ijarah' has the same meaning with the term 'leasing'. In this instance, the lessor is called 'mu jir', the lessee is called 'musta jir' and the rent payable to the lessor is called 'ujrah'.

4 The Hanafis definition: A contract pertaining to usufruct with compensation. The Shafi'is definition: A contract over a desirable, known, permissible, and accessible usufruct, in exchange for a known compensation. The Malikis and the Hanbalis definition: The transfer of ownership of a permitted usufruct for a known period in exchange for compensation.

5 In fact, ijarah is analogous to the rules of a sale, because in both cases something is transferred to another person for a valuable consideration. The only difference between ijarah and sale is that in the latter case the corpus of the property is transferred to the purchaser, while in the case of ijarah, the corpus of the property remains in the ownership of the transferor, but only its usufruct i.e. the right to use it, is transferred to the lessee.

6 In order for ijarah to be a viable tool of banking, the jurists have extended its application to include ijarah and purchase or what is termed as ijarah wa iqtina or ijarah muntahiah bi altamlik. This concept allows the ijarah contract to be extended so as to serve as a hire purchase tool.

7 It is a combination of leasing movable or immovable properties with granting the lessee an option of eventually acquiring the object of the lease by selling it with a minimal value. With this application, ijarah is an alternative to a hire purchase contract in the conventional system as it allows the bank to earn profits by charging rentals on the asset leased to the customer instead of lending money and earning interest.

8 The verse which describes the story of the Prophet Musa (a.s) being hired by his father in-law for a certain period of time is normally quoted to support ijarah contract. Allah says: And said one of them (the two women): "O my father! Hire him! Verily, the best of men for you to hire is the strong, the trustworthy. He said: "I intend to wed one of these two daughters of mine to you, on condition that you serve me for eight years, but if you complete ten years, it will be (a favour) from you. But I intend not to place you under a difficulty. If Allah will, you will find me one of the righteous." (Al-Qasas: 26-27). This verse is a clear indication of ijarah as Musa a.s. was hired for a specific period of time with specific remuneration.

9 .Then if they give suck to the children for you, give them their due payment, (Al- Talaq: 6) The above verse indicates the obligation of the father to provide adequate wages for the women who breastfeed his child. This is clearly related to the concept of ijarah where wages are given as a consideration for hired services.

10 The Prophet (s.a.w.) said: "Pay the hired worker his wages before his sweat dries off".' (Narrated by Ibn Majah) The order to pay wages ('ajr) as instructed by the Prophet in this Hadith is clearly an indication of the validity of hiring the worker's labour for a specific period of time. The Prophet (s.a.w.) is reported to have said: "He who hires a person should inform him of his fee. (Narrated by al-baihaqi)

11 In order to determine as to what extent the practice of ijarah conform to the Islamic principles of ijarah, it is important to understand the elements and the conditions for the validity of ijarah contracts. There are three elements of the ijarah contract which are as follows: The contracting parties which are the lessor or the owner of the asset, and a lessee or the party who benefits from the use of the asset. Offer and acceptance. Subject matter of the contract which includes the consideration (rent) and the benefits (manfa'ah) from the use of the assets. Each and every pillar has to fulfill certain conditions in order for it to be valid.

12 The lessor must be the absolute owner of the rented item or the agent of the owner or his natural or legal guardian. The considerations given for rent and the amount of rent should be fully and precisely known to both parties. In a contract of hire, it is necessary to make known the use of the item hired, so as to avoid later disputes between the contracting parties. In all kinds of ijarah, the period of lease must be fixed and the purpose for which it is rented should be specified.

13 In the ijarah of services, the benefit should be made known by a statement of the nature and method of service offered. It is the responsibility of the lessor to maintain the property leased in such a way as to retain the benefit of the property. If the lessee intentionally damages the property hired, the lessor has the right to terminate the lease agreement and seek compensation. The lessee is allowed to sub-let immovable property provided that there is no any restriction from doing so in the agreement of the contract. The hired item should be treated as a trust in the hands of the user.

14 The lessor in an ijarah contract has the following obligations: 1. Ensuring the Leased Asset is Available and Utilizable The lessor is obliged to enable the lessee to benefit from the leased asset by making it available throughout the duration of the lease. Making the asset available includes preparing the asset in the manner which - according to normal practice - is considered necessary in order for the specified benefit to be enjoyed. Making the asset available also entails enabling the lessee to enjoy the benefit of the leased asset. However, if anything happens during the period of the lease that prevents the lessee from enjoying the benefit of the leased asset, for a reason not attributable to the lessee, then the lessor is obliged to rectify the situation.

15 2. Guarantee in Respect of Defects In ijarah, the option of defects is treated in the same way as a sale contract. The defect which entitles a lessee to an option is one which causes an impairment in the benefits which are the subject of the contract. The same applies if the defect occurs before fulfilment of the benefit but after the contract is concluded. In either case, the lessee shall have the option of revoking the contract or accepting the impaired benefit while being obliged to pay the full rent.

16 3. Major Maintenance of the Leased Asset As mentioned earlier, the lessor is obliged to maintain the asset. As such, it is not permissible to stipulate in the contract that the maintenance of the leased asset is to be carried out by the lessee because this would lead to the lessee paying a charge that includes an unknown element.

17 The operating maintenance which is required as a result of using the leased asset and is essential in order to ensure its continuous utilization (for example, lubricants and petrol needed for machines and equipment). Periodic maintenance which is required to enable the asset to continue providing the benefit. Maintenance that is specified in description and amount in the contract or according to practice irrespective of whether such maintenance is merely work or it involves the use of known materials or spare parts.

18 Ijarah Muntahiah Bittamlik (Leasing Ending With Ownership )

19 It is a form of lease whereby the legal title is transferred to the lessee for no consideration by entering into a gift contract in fulfilment of a prior promise upon the settlement of the last lease instalment or by means of issuing a gift deed made conditional on the settlement of all ijarah instalments. The legal title is then automatically transferred without the need to enter into a new contract and without any extra payment other than the amounts paid by the lessee in the settlement of ijarah instalments.

20 This agreement includes: a) An executable ijarah contract whereby the rent and ijarah period are determined. If the ijarah period expires, then the ijarah contract will be nullified. b) A promise to enter into a sale contract to be concluded at the end of the ijarah period, if the lessee wishes so and has paid the agreed consideration.

21 This agreement, like the earlier one, is also a contract that includes an ijarah contract and a promise to enter into a sale contract. The sale contract, includes an amount for the sold asset to be paid by the lessee (the buyer) after the expiry of the ijarah period. Thus, upon the lessee s paying the agreed consideration, the leased asset becomes sold and its title transferred to the lessee (the buyer) who will be entitled to the right of benefit and disposal of the asset in any of the legitimate forms of disposal.

22 This agreement is an Ijarah contract and all the Shari'ah rules relating to ijarah are applicable to it. The agreement also includes a promise made by the lessor that he will transfer the title of the leased asset to the lessee at any time the lessee wishes to do so during the ijarah period and at a price equivalent to the remaining installment of ijarah, when there is a desire to purchase. The juristic character of this form of ijarah is that when the agreement becomes effective it is treated as an ijarah contract and remains so until the legal title is transferred to the lessee. At that time, the ijarah contract lapses for the remaining period because both the benefit and the leased asset become the lessee's asset.

23 This agreement includes an ijarah contract with a promise made by the lessor that he will gradually transfer the legal title of the leased asset to the lessee until the lessee has full legal title of the leased asset. This would involve determining the price of the leased asset which is to be divided over the period of the ijarah contract so that the lessee is able to acquire a share of the leased asset for a proportionate consideration of the total price until the full title of the leased asset is transferred to the lessee at the end of the ijarah contract period.

24 One of the common forms of ijarah is the case where an individual sells his own asset to another party and then leases it back from him. It is a juristic rule that the execution of the sale transaction must not be made conditional on the execution of the lease transaction in order not to violate the juristic rule that the execution of a contract must not be made contingent on the execution of another contract. However, it is permissible for the parties to the contract to reach an understanding between them. It is also permissible that one party promises the other party to lease to/from him the asset. In this arrangement the lessor and lessee have to abide by all the conditions and obligations stipulated in the ijarah contract. In fact this type of ijarah is commonly used in securitisation which is known as sukuk al-ijarah.

25 In law, an option is the right to convey a piece of property. The person granting the option is called the optionor (or more usually, just the grantor) and the person who has the benefit of the option is called the optionee (or more usually, just the beneficiary). Options characteristically exist in one of two forms: Call options, which give the beneficiary the right to require the grantor to sell or convey the property to them at the agreed price on exercise Put options, which give the beneficiary the right to require the grantor to buy or receive the property at the agreed price on exercise. In case of AITAB, Call option is exercised by the customer for early settlement/ownership, and Put Option is exercised by the bank in case of default.