Issues in Ijarah

(Week 7)

Dr. Ugi Suharto

Lease Back

• Can a client, who owns an asset, sells it to an Islamic financial institution and then lease back to the client?

• An asset may be acquired from a party and then leased to that party. In this case, the ijarah transaction should not be stipulated as a condition of the purchase contract by which the institution acquires the asset.

Lease Back on Ijarah Ending

With Ownership• If the leased asset was purchased from the

lessee before it was leased back to the lessee

on the basis of ijarah muntahiyah bittamleek, a

(reasonable) period of time, between the lease

contract and the time of the sale of the asset to

the lessee, must have expired, to avoid the

contract of ‘inah.

• This period must be long enough so that the

leased property or its value could have changed.

Sub-lease with the Owner

• Can the lessee lease back to its owner?

• The lessee may lease the asset back to its owner in the first lease period for a rental that is lower, same or higher than what he is paying, if two rentals are paid on a spot basis.

• However, this is not permissible if it should lead to contract of ‘inah, by varying the rent or the duration.

Sub-lease with the Owner: ‘inah

case with varying the rent

• It is not permissible, if the first rental is, for example, £100 payable on a spot basis, for the lessee to sublet it to the lessor for £110 payable on deferred basis.

• Or if the first rental is £110 payable on a deferred basis, for the second to be for £100 payable instantly.

Sub-lease with the Owner: ‘inah

case with varying the duration

• It is not permissible if the two rentals are of the same amount, but the payment of the first rental is deferred for one month and the second rental is deferred for two months.

• Example: An Islamic bank leases an asset to a client for £100 payable in one month and then the client leases back to IB for £100 payable in two months.

Leasing an Asset not Yet

Owned• Can a party lease an asset not yet owned?

• An ijarah contract may be executed for an asset

undertaken by the lessor to be delivered to the

lessee according to accurate specification, even

if the asset so described is not owned by the

lessor.

• In this case, an agreement is reached to make

the described asset available during the duration

of the contract, giving the lessor the opportunity

to acquire or to produce it.

Lease with Co-Owner

• Can two parties co-own an asset and then lease the asset to one of the parties?

• An institution’s customer may jointly acquire an asset that he wishes to lease with the institution, and then

lease the institution’s share of the asset from the

institution.

• In this case, the rental specified as receivable by the

institution should only be in proportion to its share in the ownership of the asset.

• Since the lessee is a co-owner of the asset, he therefore has to pay rent only on the share that he does not own.

Earnest Money (‘urbun) in

Lease• Can a lessor demand an earnest money

(‘urbun) from the lessee?

• ‘Urbun (earnest money) may be taken in respect of lease at the execution of the contract of lease and this is treated as an advance payment of the rental.

• If the ijarah contract is not executed for a reason attributable to the lessee, the lessor may retain the ‘urbun.

Successive Leases

• Successive leases refer to lease of the same asset for different periods for several lessees. Is this permissible?

• Yes this is permissible. Ijarah contracts may be executed in respect of the same asset for different periods for several lessees, provided that two contracts are not executed in respect of the same asset for the same period.

Time Sharing

• An ijarah contract may be signed with several

lessees being entitled to the same specified

usufruct of a particular asset and duration of

rent, without specifying a particular period of

time for a particular person.

• In this case, each lessee may benefit from the

property during the time assigned to him in

accordance with specified rules. This is one form

of time-sharing in benefitting from the usufruct.

Sharing the Usufruct with Co-

Lessee• A lessee may invite co-lessees to share

with him in the usufruct to which he has a right, by assigning them shares in the usufruct before entering into a sub-lease.

• In this case, they become his shares in the usufruct of the leased property. If the property is sub-leased, each co-sharer is entitled to a share in the sub- lease rental pro rata to his share in the usufruct.

Guarantees on Lease

• Can the lessor demand a guarantee to secure rental payment?

• Permissible security, of all kinds, may be taken to secure the rental payments or as a security against misuse or negligence on the part of the lessee.

• This guarantee can come from the lessee or the third party.

Selling the Leased Asset

• The lessor may sell the leased asset to a third party, and the title to the asset together with the rights and obligations of the lessor under ijarah contract is thereby transferred to the new owner.

• The lessee’s consent is not necessary when the lessor decides to sell the asset to a third party.

Selling the Leased Asset to the

Lessee• If the lessor sells the least asset to the

lessee, the ijarah contract is terminated due to the transfer of ownership of the leased asset and ownership of usufruct to the lessee.

• This is the basis for ijarah ending with ownership, though in this concept the sale contract cannot be taken as an integral part of the contract of ijarah.

Rental Adjustment when the Leased Asset is

Destroyed in IEWO

• If the leased asset is destroyed or if the

continuity of the lease contract becomes

impossible up to the expiry period without the

cause being attributable to the lessee in either

case, then the rental is adjusted based on the

prevailing market value.

• In this case, the difference between the

prevailing rate of rental and the rental specified

in the contract must be refunded to the lessee if

the rental is higher than the former.

Reason for the Rental

Adjustment• This is to avoid loss to the lessee, who

agreed to a higher rental payment compared to the prevailing rate of rental in consideration of lessor’s promise to pass the title to him upon the expiry of the lease term.

Ijarah Card (Case Study of

KFH-Bahrain)• KFH has taken the Ijarah financing to the next level,

introducing a “New Era in Card Finance” through the development of the Ijara Card.

• The Ijarah card is the first financing card of its kind that allows the user maximum credit, up to six times their salary at 0.7% which is the lowest profit rate around.

• KFH gives two years to pay and there are over 250 outlets accepting the card to shop for durable goods.

• KFH’s Ijarah Card was designed to enable the customers to own goods and commodities that they may otherwise not be in a position to access on a cash – and – carry basis.

• Customers can now own goods or commodities and pay for them inconvenient monthly installments using the Ijarah Card on a “lease to own” basis.

How does it work?

1. The Ijarah Cardholder identifies the products that he desires to “lease to own” from the list of merchants and durable goods thatare pre-approved by KFH-Bahrain

2. The Merchant will “swipe” the Ijarah Card through a point of sale machine and obtain authorization on the transaction

3. The Ijarah Cardholder is then eligible to receive the relevant product on behalf of KFH –Bahrain

4. A repayment schedule is structured for the client to repay the total amount including the rental expenses over a period of up to 24 months

5. Ijarah Installments can be debited on a monthly basis from the Ijara Cardholder’s account with KFH-Bahrain.

6. The Ijarah Card can be used to “lease to own” more than one product provided that the total amount of the relevant durable goods which will be “leased to own” does not exceed the predefined credit limits as set by KFH-Bahrain

7. Ownership of the durable goods is transferred to the IjaraCardholder after re-payment, in full, of all rental.

Ijarah Mawsufah fi al-Dhimmah

(Forward Lease Contract)

• A case study from Zam-Zam Tower which

involves ijarah sukuk in a special manner.

• Normally the leased asset has been existed

before being leased, but in the case of forward

lease contract, the leased asset has not been

existed, or yet to be constructed.

• Zam-Zam Tower Sukuk involved the

development of one of the apartment towers

near the Grand Mosque in Mecca, Saudi Arabia.

Zam-Zam Tower Case

• A real estate company by the name of Munshaat had been awarded with a 24 year lease to construct one of six towers (Zam-Zam Tower) on waqf land adjacent to the Grand Mosques.

• The sukuk issuance was to finance the construction.

• Under forward lease, Munshaat leased the asset under construction to the sukuk holders (for 22 years) who paid the lease rental in advance in one lump sum.

• Due to restriction on ownership of non-Saudis of real property rights in Mecca, the sukuk holders would enjoy the usufruct (intifa’) of the asset after its construction based on time-sharing slots.

Zam-Zam Tower Case

• The time-sharing rights under the forward lease

were evidenced by the issuance of sukuk intifa’.

• It involves the right to benefit or enjoyment (haqq

al-intifa’) in the form of time sharing in the use of

the common property.

• The advance lease rental (sukuk proceed) was

used by Munshaat to pay for the 24 year lease

rental on the waqf, as well as the construction

costs of Zam-Zam Tower.

Negotiable Ijarah Sukuk

• The Zam-Zam Tower Ijarah Sukuk are fully negotiable.

• They can be sold, leased, lent, given, bequeathed, exchanged, etc.

• The investors participate by purchasing the sukuk and paying their value in advance, plus payment of annual charges for maintenance and managerial services.