Ijarah Definition: The major Characteristics of Ijarah Contract The Major Characteristics of lease-to-own Ijarah (muntahia bittamleek) (

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1 Ijarah Definition: it is the transfer of the usufruct of a property from one person to another for an agreed period against an agreed fee. Islamic banks use Ijarah as a mode of finance as it acquires property and assets in order to put them at the disposal of its clients to avail of their benefit in return for a fee paid ( the subject matter of contracting is the usufruct, and not the asset, for a limited period of time. The major Characteristics of Ijarah Contract - The major characteristics of Ijarah Contract (not ending with transfer of property Muntahia Bittamleek ) - The lessor owns the leased asset, and the lessee owns the benefit. - Ijarah is a binding contract: neither party can unilaterally revoke or amend the contract without the consent of the other party, unless for an emergency flow or excuse. - The period of lease must be defined in clear terms, because Ijarah is a temporary transfer of the usufruct of a property.(failure to define the period of Ijarah can lead to conflict) - The commencement of Ijarah has to be specified. It should be the date of conclusion of the contract, unless the two parties agreed otherwise (the added Ijarah is that which commencement is set for a future date agreed upon by both parties). - If delivery of the leased asset is delayed on the date agreed upon, the value of the delay period has to be deducted from the amount of the rent. - It is permissible to take urbun upon the conclusion of Ijarah contract. urbun is deemed as an immediate part of the rent in case the contract is implemented. If the lessee breaches the contract, the lessor can retain the urbun (however, it is preferable to retain only the amount corresponding to the damage and to render the remnant amount to the lessee) The Major Characteristics of lease-to-own Ijarah (muntahia bittamleek) (Lease with a promise to transfer Ownership) in addition to what was stated above: - The leased asset must be owned by the lessor (the bank here). It is permissible for the lessee (he who is wishing to lease the asset) to request the purchase of the asset he wishes to lease from the bank, and this is what is called Ijarah muntahia bittamleek.

2 - If the bank is going to take possession of the asset to be leased on the basis of Ijara muntahia bittamleek, Ijarah cannot be concluded then, unless the bank acquires the asset, takes responsibility of it and bears all the liabilities relating to its property and does not transfer them to the lessee. - It is permissible to entrust to the lessee the purchase of the assets he wishes to lease provided that such purchase is executed on the account of the bank and on its full responsibility. - It is permissible for the bank to require the client (promising to enter into Ijarah contract) to pay an amount of money to be retained by the bank as advance payment (Hamish al jiddiya). Advantages of the use of Ijarah muntahia bittamleek in Islamic banks: - The leased asset remains under the ownership of the lessor (the bank) and is reflected as an asset in the balance sheet. - In case of the lessee's bankruptcy, the bank has exclusive rights to the leased asset between the adversaries. - The real economic role of the bank is more clearly reflected in Ijarah than in Murabaha, for the bank bears the risks in Ijarah. - Flexibility in rescheduling rent installments in case of delay in payment.

3 - Flexibility through the possibility of using a variable benchmark to determine rent installments. - Ijarah operations can be securitized and presented in tradable portfolios, funds or investment pools. Types of Ijarah: First: Types of Ijarah according to the kind of benefit: Ijarah of usufructs (Ijarah of assets) is a type of Ijarah concluded about the usufruct of assets and goods, such as aircrafts, cars, equipment and real estate. Ijarah of Services (Ijarah of services of people) is a type of Ijarah concluded about the performance of certain services in return for determined wages. Second: Types of Ijarah according to the type of the leased asset: The lease of the usufruct of a specified asset (defined Ijarah): it is the Ijarah which subject is real estate, equipment or a defined asset (it is the most common type in practical use). Ijarah Mawsufa fi dhimmah: in this case the leased asset is not available at the time of the contract; therefore the contract is about the usufruct of an asset described in detail (a description that prevents any possible conflict). Islamic banks use this type of Ijarah to lease heavy equipment such as aircrafts and ships, as well as in the contracts of: Timeshare ownership: (Ijarah of a share in a jointly owned asset): under this contract the lessee acquires the right to the usufruct of a residential hotel unit for example- during some determined time units (a number of weeks) of each year for a specified number of years in return for a defined sum of money. Third: Types of Ijarah according to the Type of Ownership of the Asset: Ijarah Asliya: the lessor fully owns the leased asset. Ijarah min al batin (subleasing): the lessor does not own the asset, but owns its usufruct by renting it form its owner. Ijarah ala shuyu' (Lease of Jointly Owned Property): the lessor owns a share in a collective property -30 or 50 %- of an asset so he leases his share on a collective basis)

4 Rules Governing the Rent: - Determination of Rent Jurists view that the rules and provisions applying to the price regarding its determination should apply to the rent, so what can be valid as price in the sale, can be valid as rent in Ijarah. However, modern applications of Ijarah reflect various methods in determining the rent: Determination of rent as a lump sum paid in a single payment at the start of the contract or at its end. Determination of the rent for periodical phases, such as the year or the month whether the amounts are equal or different. Determination of a periodical increasing rent by agreeing on an annual increase rate to protect against potential inflation. Determination of a periodical decreasing rent. This is applicable when the usufruct of the asset is expected to diminish such as cars and appliances which efficiency decreases by use Determination of rent as a specified share (a percentage) of the rent or of the proceeds of the leased asset (cars, aircrafts, agricultural machinery.). Payment and maturity of Rent: - The rent should not be charged -even the advanced rent- but after delivery of the leased asset to the lessee. - The lessor has the right to the rent upon the delivery of the asset to the lessee (whether the lessee uses it or not). - If the leased asset is destroyed, the amounts of money paid for future periods should be paid back to the lessee. Rules governing the Usufruct: - Type of the leased asset Ijarah rules stipulate that the leased asset should be of the type that persist after using its usufruct (consumable things such as food cannot be leased out) - Legitimacy of using the usufruct of the asset: The usufruct of the leased asset should be used in conformity with Shari'a Law. It is not permissible for example to lease out real estate to someone who uses it for a forbidden activity (leasing a building to a usurious bank, or a tavern and the like). However, it is permissible to lease to someone whose most work is tolerable

5 (leasing out a car or a house to a non-muslim to live in it or to use it to sell goods most of which is halal). - Maintenance and insurance of the leased asset: A- Basic maintenance: it is the maintenance on which depends the performance of the asset of the usufruct intended from its lease. This maintenance is the responsibility of the lessor, even if the lease will end up with transfer of ownership (Ijarah muntahia bittamleek), because the lessee's access to the use of the usufructs of the asset (the condition for the payment of the rent) depends on it. B- Usual Periodical Maintenance: (operational): it is permissible to be borne by the lessee because it results from his use of the leased asset (for example, changing the car oil), in addition to the great damage that can result from failing to perform it. C- Insuring the Leased Asset: the insurance of the leased asset should be at the expense of the lessor. The lessee can be entrusted by the bank to insure the leased asset on its account and on its behalf. - Loss of the Leased Asset: A- Total loss: it is the damage that renders the asset useless and not likely to generate any benefit from it, or makes the usufruct too small to meet the benefit intended in the contract. In this case Ijarah contract should be cancelled if the leased asset is defined. Conversely; if the leased asset is a non-specified usufruct defined by its detailed description, the lessor has to replace the lost asset with a new asset (because the contract was not essentially related to the asset). If replacement of the lost asset fails, the contract has to be rescinded. B- Partial loss: In this case the lessee can cancel the contract-as in the case of total loss- as he may negotiate with the lessor the adjustment of the rent (the lessor is not entitled to the rent for the period during which the use of the asset is halted, unless this period is compensated for with a similar period after the end of the term of the contract.