BANK RAKYAT SCHOOL OF BUSINESS AND ENTREPRENEUR (BRSBE)

FIQH MUAMALAT (RZB4443) TOPIC: IJARAH

PREPARED BY: REOZYLHEZA LIM @ NUR'HIDAYAH ABDULLAH (KLC 1080057) SITI NABILA BINTI MOHD AZNAN (KLC1080089) MUNIRAH RAO BINTI SYARIL SUBRAMANIAM (KLC 1050020) FARAH-NADIA BINTI MOHD NOH (KLC1050014) MOHAMED NOORULLAH BIN YUSUF IBRAHIM (KLC1160027)

PREPARED TO: MR. AHMAD MUKARRAMI BIN AB MUMIN

TABLE OF CONTENTS

1. DEFINITION OF IJARAH1 2. PILLARS OF IJARAH.. 1 3. LEGALITY OF IJARAH ..2-3 4. TERMS AND CONDITIONS OF IJARAH..4 5. TYPE OF IJARAH 5 6. OPERATING LEASE ...5
a. Variations in the Terms of Contract in Ijarah as an Operating Lease.. 6 b. Application of Ijarah as an Operating Lease7

7. FINANCIAL LEASE.7
a. Different Between Financial Lease And Operating Lease..8

8. IJARAH MUTHIYAH BITAMLIK9-10 9. IJARAH THUMMA AL-BAY (AITAB).11-12 10.IJARAH MAWSUFAH FI ZIMMAH..13
a. Advantages of IjarahMawsufah Fi Zimmah14

11.CHALLENGES IN THE OPERATION OF AITAB..16-18 12.DOCUMENTATION OF IJARAH..19-20 13.REFERENCE.21

Fiqh Muamalat

Page 2

DEFINITION OF IJARAH

Ijarah is a contract the distribution of funds to use right transfer (benefit) of an item within a certain time to the lease payments (ujrah), between the finance company as the lessor (mu'ajjir) with tenants (musta'jir) not followed by transfer of ownership of the goods themselves . Ijarah is a contract between a bank (mu'ajjir) with customers (musta'jir) to hire an item / object leases and bank-owned banks have a service fee (Ujrah) for items rented, and end with the purchase of leasing object by the customer. Ijarah means lease, rent or wage. Generally, Ijarah concept means selling the benefit of use or service for a fixed price or wage. Under this concept, the Bank makes available to the customer the use of service of assets / equipments such as plant, office automation, motor vehicle for a fixed period and price. A contract of proposed and known usufruct with a specified and lawful return or compensation for the effort or work which has been expended. It's used to express the sale (bay') of a known benefit in return for its known equivalent.

PILLARS OF IJARAH

1. Mu'jar (people / goods are hired) 2. Musta'jir (the person who hires) 3. Sighah (offer/ijab and acceptance/qabul) 4. Wages and benefits

Fiqh Muamalat

Page 3

LEGALITY OF IJARAH The legality of Ijarah is deduced from the Quran, the Sunnah of the ProphetMuhammad (SAW) and the consensus of the Muslim jurists (Ijma

1. THE QURAN

Several verses of the Quran can be quoted as evidence for Ijarah particularly for hiring the services of a person. Among others, the verses which mean:

Al-Qasas verses 26 & 27

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." (28:26& 27)

Fiqh Muamalat

Page 4

The above verses describe the story of the Prophet Musa (a.s) being hired for a certain period of time to undertake a specific task. The compensation for the task undertaken by the Prophet is deemed as payment for the outstanding dowry for his marriage.

2. THE SUNNAH OF THE PROPHET MUHAMMAD (SAW)

Unlike the Quranic verses, the Sunnah of the Prophet Muhammad (SAW) refers to both lease and hire contracts as follows:

The Prophet (SAW) said: "Pay the hired worker his wages before his sweat dries off". (SunanIbnMajah). The Prophet (SAW) is reported to have said: "He who hires a person should inform him of his fee. (Al-Sunan Al-Kubra li Al-Baihaqi). Abdullah ibn Umar narrates, Allah's Apostle gave the land of Khaibar to the Jews to work on and cultivate and take half of its yield. Ibn 'Umar added, "The land was used to be rented for a certain portion (of its yield)." (Sahih Al-Bukhari)

3. THE CONSENT OF MAJORITY OF THE MUSLIM JURISTS

Ijarah has been unanimously approved by the companions of the Prophet Muhammad (SAW) and prominent jurists of the recognized schools of Islamic law. They view that the need to utilize the usufruct of different articles (goods and services) is similar to the need to utilize the articles. When the contract of sale of such goods and services is permitted, the lease of its usufruct shall also be permitted on the grounds of public interest (maslahah) and needs.

Fiqh Muamalat

Page 5

TERMS AND CONDITIONS OF IJARAH Ijarah contract has a number of terms and conditions in addition to the common terms and conditions that apply to all contracts. Ijarah contract is more widely used nowadays than ever before, primarily due to the creation of large commercial enterprises since the dawn of the industrial revolution. As such, these terms and conditions should be common knowledge to all Muslims. 1. The property rented or leased must be in a useable condition (i.e., the lessee should be able to use the property for its intended purpose). Similarly, in a hire contract, the employee must be able to perform the job required of him or her. 2. Ijarah has to be for inconsumable goods. 3. The lessee or the employee is not permitted to use the subject in a manner contrary to what is permitted by the contract. Specifically, the lessee or the employee is not allowed to inflict any harm on the subject of the contract. 4. Ijarah contract cannot be made for a task that is a religious obligation. For example, it is prohibited to enter into an employment contract for leading the prayer of making the azaan. Ijarahb is valid, however, for teaching the Quran or religious sciences, as well as secular subjects because these are not religious obligations. 5. If the two parties disagree on the value of the reimbursement or the rent/lease on the property, after the contract commences, the word of the lessor/employer is accepted under oath upto the time of disagreement. At that point the contract is then invalidated. 6. The majority of the scholars say that the Ijarah contract does not end by the death of one of the two parties, as long as both parties can fulfill their end of the contract. The Hanafis, to the contrary, deem the contract invalidated with the death of one party.

Fiqh Muamalat

Page 6

TYPE OF IJARAH In the Islamic jurisprudence, the term 'Ijarah' is used for two different situations. In the first place, it means 'to employ the services of a person on wages given to him as a consideration for his hired services. This type of Ijarah includes every transaction where the services of a person are hired by someone else. For example a doctor, a lawyer, a teacher, a labourer or any other person who can render some valuable services. The second type of Ijarah relates to the usufructs 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.

OPERATING LEASE The distinguishing feature of ijarah as an operating lease is that the lease contract is not associated with a purchase agreement. Also known as a service lease or a true lease, ijarah as an operating lease is usually entered into for short periods of time. The following are some characteristic features of ijarah as an operating lease:

The entire price of the asset or the piece of property specified in the contract is not amortized during the primary leasing tenure.

The lessee may opt out of the agreement, that is, cancel the ijarah as an operating lease contract anytime he wishes to. However, he must furnish a notice prior to doing so.

The right of ownership of the asset or the piece of property as mentioned in the contract is retained by the lessor. This right is irrespective of the amount of payment the lessee has tendered and also specifies the lessors obligation to bear all the risks and responsibilities associated with the ownership.

In ijarah as an operating lease, the asset has to be returned to the lessor at the end of the leasing tenure. The lessor, which may be a bank or any other financial institution, can again lease the asset, if it is functioning, to another individual or business entity.

Fiqh Muamalat

Page 7

Variations in the Terms of Contract in Ijarah as an Operating Lease There are various ways in which ijarah as an operating lease may be carried out. In its most basic form, the Ijarah as an operating lease states that a bank or any other financial institution that owns an asset, leases it to a customer in return for a specified sum of rental payment to be made at pre-determined intervals. The lessee, here is also the vendor of the asset. According to Islamic financial scholars, this type of financial agreements most closely related to the classical form of ijarah. However, this is also the least commonly found financial arrangement simply because, in real life, a bank doesnt own too many physical assets. In reality, there is usually a separate vendor along with the bank and the customer in the contract and the arrangement involves two distinct phases. In such a form of financial arrangement, the bank first buys an asset from a vendor. It then leases out the asset to the customer. The ijarah contract mentions the amount of rental payment to be made and the frequency of payment. In another form of ijarah as an operating lease, the bank appoints the customer as its agent to deal with the vendor who owns the asset. This form of contract is entered into when the bank does not wish to deal directly with the vendor. In the above-mentioned form of financial arrangement, the bank and the customer enter into two different kinds of relationship. At first, the customer is an agent of the bank. The second form of association begins from the day the customer receives the asset from the vendor and from this date, the conventional ijarah kind of lessee-lessor relationship comes into play. The responsibilities of the bank and the customer as they enact the roles in the two forms of relationship are completely different from each other.

Fiqh Muamalat

Page 8

Application of Ijarah as an Operating Lease The ijarah as an operating lease form of financial arrangement finds most use in instances involving costly assets like aircrafts, ships, and some kinds of agricultural and industrial equipment. Some such assets, apart from being expensive, may have poor resale value. In such instances, it is immensely beneficial for the lessee to enter into this contract because he is not bound to purchase the asset at the end of the leasing period. From the above discussion, the reasons for the popularity of ijarah as an operating lease as an Islamic financing mode are not hard to guess the simplicity of its working principles, the transparency in the transaction methods, and the myriad benefits for the parties involved in the contract.

Financial Lease Modern Islamic Finance often combines leasing with purchase in a single contract called hirepurchase known as IjarahWaIqtina, IjarahThummahBai, or Al-Ijarah Al Muntahiah. (The Law and Practice of Islamic Banking and Finance by Dr. NikNorzrulThani; Mohamed Ridza Mohamed Abdullah; and MegatHizaini Hassan. (2003)) IjarahWaIqtina, IjarahThummahBai, or Al-Ijarah Al Muntahiah allows for financing of a short, medium or long-life asset. A Finance is in essence similar to a loan because substantially all risk and reward related to the leased assets pass on to lessee.

It is mainly characterized by: (i) (ii) (iii) The asset being fully amortized over the lease period, The lessee is responsible for maintenance costs, and The ownership is usually transferred to the lessee at the end of the lease. In this respect, the involvement of the lessor is restricted to financier

Fiqh Muamalat

Page 9

Different Between Financial Lease And Operating Lease The basic features that differentiate an operating lease from a financial lease are related to whether the lessor or the lessee takes on the risk of ownership of the leased assets. In fact operating leases do not put the lessee in the position of a virtual owner. The lessee is simply using the asset for an agreed period. There is always dependence on the lessees commitment to pay and as a result, what the lessor takes is asset-based. In contrast to a financial lease, the rate of return in an operating lease is dependent upon the asset value, performance, or costs relating to the asset and is always a matter of probabilities and uncertainty. In an operating lease, the lessor bears the risk of obsolescence, recession or diminishing demand. In contrast, a financial lease provider operates like a lender except that the lessor has the additional collateral of legal ownership of the assets without any of the risks associated with ownership. (www.financialislam.com)

Fiqh Muamalat

Page 10

Ijarah Muthiyah Bitamlik Ijarah munthiyah bitamlik are also known as ijarah wa-iqtina. This concept involved the renting of a property, whether moveable or permanent, with the choice to own it. In the event that the tenant wishes to own the property, the rental payments prior to it would be regarded as part of purchasing price. In simple word this concept refers to leasing ending with ownership to the lessee. Ijarah muthiyah bitamlik can be in through gift, which is transfer of legal title for no consideration. Ijarah muthiyah bitamlik also can be in a few other form where transfer of legal title at the end of the end of lease for token consideration or other amount as specific in the lease, through the transfer of legal title prior to the end of the lease term for lessee of the leased a price that is equivalent to the remain ijarahs installment, through the gradual transfer of legal title of the leased assets.

Fiqh Muamalat

Page 11

1.

The lessor determine the requirement of the lessee in relation to the lease and use of the assets and the leasing period

2. 3.

The lessor purchases the assets from the dealer selected by the lessee. Thereafter, the lessor leases the assets to the lessee at an agreed sum of monthly rental over an agreed period of time.

4.

The total sum of monthly rental comprises; a. Actual cost of the assets paid by the lessor (less down payment made by lessee, if any) b. The lessors profit margin i. The lessor retains the title to the assets during the period of leasing and the lessee has the right to use the asset. ii. Upon full settlement of the rental, the title of the asset is transferred to te lessee either through gift, token price, equivalent price or gradual transfer of ownership.

Ijarah muthiyah bitamlik financing facility provides customer with short to medium term financing rental of item which may include vehicles, equipment, machinery, and other suitable and assets.

Fiqh Muamalat

Page 12

Ijarah Thumma Al- Bay (AITAB) Ijarah Thumma Al- Bay (AITAB) is a concept which rental is followed by sale and purchase of the assets. It is one of the categories of lease, which ends with the sale of the asset, which legal title of the leased assets will be transferred to the customer upon full settlement or early settlement of the contract value. AITAB consists of two different contracts were are contract of leasing or ijarah and contract of sale or bay. In the first contract, the customer agrees to rent within the agree time period. At the end of the rental period, the customer then agrees to purchase the property from owner at a mutually agreed price (Bank Negara Malaysia, 1994).

Fiqh Muamalat

Page 13

1.

The owner determines the requirement of the hirer in relation to the lease and use of the assets and the leasing period.

2. 3.

The owner purchases the assets from the dealer selected by the hirer. Thereafter, the owner leases the assets to the hirer at an agreed sum of monthly rental over an agreed period of time.

4.

The total sum of monthly rentals comprise of: a. Actual cost of the asset paid by the owner (less down payment made by hirer, if any) b. The owners profit margin

5.

The owner retains the title to the assets during the period of leasing and the hirer has the right to use the assets.

6.

Upon full settlement of the rental, the title of the assets is transferred to the hirer through the Contract of Sale.

Ijarah Thumma Al- Bay (AITAB) financing facility is to provide customers with short or medium term financing to rent such items which may include vehicles, equipment, machinery and other suitable and acceptable assets.

Fiqh Muamalat

Page 14

IJARAH MAWSUFAH FI ZIMMAH Ijarah Mawsufah fi zimmah or forward lease is a contract whereby the financier will start paying the rent to the contractor/lessor even though the asset is still under construction. The paid rent is used to finance the construction cost. The rental payment under this Ijarah represents the right of the lessee to use the property in the future whenever the property is ready to use. If the project fails, the amount paid towards the rent must be refunded to the financier by the contractor/lessor. Subject Matter Form of ijarah where asset need to be described in advance; The leased item/asset is not available during contract; The asset must be delivered on a future agreed date; No requirement should be imposed for the rental payment to be paid in advance.

Application Ijarah Mawsufah Fi Zimmah (Forward Lease) is particularly used for property under construction.

Fiqh Muamalat

Page 15

Advantages of Ijarah Mawsufah Fi Zimmah.

This method is stronger than a promise to rent secured from a party interested in renting a particular item, because that promise does not bind the promiser to proceed with the contract. In the event of non-fulfillment of such a promise by the client, the only consequence is compensation for actual damage, with the client paying the difference between the promised rent and the rent agreed to by a replacement renter. As for the renters need of the ijarah mawsufah fi zimmah contract, it is, first, to ensure the strong possibility of obtaining the (expected) usufruct by virtue of the strength of a contract rather than a mere promise. As for banking practice, ijarah mawsufah fi zimmah has allowed banks to finance activities that were not hitherto possible for them to finance when the transaction is structured as an exchange of money for money. Since it is impermissible to finance cash for cash to earn a profit, the alternative was to look at the usufruct for which the financing is done, which is obtained with an up-front payment, while the user of the benefit pays by a delayed payment, which may even be before the bank possesses the item or subject matter of the contract.

Application of Ijarah Mawsufah fi al-Zimmah Concept in Financing For House under Construction Based on Musyarakah Mutanaqisah There has been a proposal by an Islamic financial institution for the application of ijarah mawsufah fi al-zimmah concept as a supporting contract in musyarakah mutanaqisah-based financing for houses that are still under construction. In this financing product, the customer and the Islamic financial institution share the rights over the asset under construction based on musyarakah mutanaqisah contract. The Islamic financial institution then leases its portion to the customer under the contract of ijarah mawsufah fi al-zimmah as the leased asset is still under construction. The customer pays advanced rent during the construction period of the asset. Upon
Fiqh Muamalat Page 16

completion of the asset, the customer will continue to pay full rent for enjoyment of the usufruct of the asset. Usufruct the usage of shelter for house, transportation for vehicles, and others for a fee.

Example Mr Fazli leases out his townhouse in Kota Kemuning measuring 100x30 square feet to Mr Naim, but the stipulated house will only be fully completed in 3 months time. However, Mr Naim has leased the house for the period of 2 years with the payment of RM2200 per month prior to its completion. It is due to the benefit of usufruct leased out which forms the monetary liability or debt owned by Mr Naim to Mr Fazli. According to this concept, Mr Fazli can claim the rental from the conclusion date although his house is not yet occupied by Mr Naim.

Fiqh Muamalat

Page 17

CHALLENGES IN THE OPERATION OF AITAB There are a number of issues pertaining to the operation of AITAB. These prevailing issues are mostly expressed by bankers and Shariah experts who were directly and indirectly involved in AITAB operation. Problems in the provision of AITAB facility include customers attitude towards the facility, inexperienced bank officers, non-cooperative dealers, documentation problem, stiff competition in the market and inadequate legal treatment. 1. Customers Attitude One of the problems faced in offering AITAB facility is customers attitude t owards the product. Most respondents admit that many customers do not really understand the basic differences between AITAB and conventional hire-purchase facility. This is mainly due to their perception that AITAB resembles conventional hire-purchase especially in their operations, documentations and legal prescriptions. Customers do not seem to appreciate the distinction of AITAB as a shariah compliant product and in what way it would provide them with a better scheme and prospect. Some customers simply say that AITAB is used as merely a means of circumventing the prohibition of riba. For some skeptics, they even go as far as criticizing AITAB as just another way of imposing interest through a backdoor, except for its Arabic name which sounds more Islamic.

2.

Lack of experience among Bank Officers The misleading view of AITAB among the customers is partly contributed by the lack of experience and knowledge among bank officers in giving correct and satisfactory explanation about AITAB. Some of these bank officers do not even understand the distinction between AITAB and conventional hire-purchase. Many proclaim that both products are similar especially with regards to its documents, procedures and governance. Hence, they are unable to highlight the advantages and benefits of AITAB as compared to conventional hire-purchase.

Fiqh Muamalat

Page 18

3.

Lack of Awareness and Cooperation among the Dealers A dealer acts as a middleman between a financial institution and a customer. In

Malaysian context, the customer usually approaches the dealer first for the purpose of purchasing a particular vehicle before applying hire-purchase facility from a financial institution. In fact, the customers choice between conventional and Islamic financing facility depends mostly on the dealers explanation and recommendation. Ideally, a dealer with a high Islamic conscience proposes AITAB to the customer and able to explain how the facility works, its advantages and differences from conventional facility. However, not all dealers are equipped with in-depth understanding of AITAB facility. Thus, it is expected that they would not be able to educate their customers accordingly. In reality these dealers even tend to propose conventional facility either because their understanding of AITAB is limited or they do not want to expose their customers to an unnecessarily complicated situation.

Fiqh Muamalat

Page 19

4.

Competition in the market Another pertinent challenge faced by AITAB facility is in the issue of competition vis-vis conventional hire-purchase. The main issue here is how to penetrate into a market which has long been occupied by a more established conventional hire-purchase product. This is particularly true in the case of car financing whereby conventional hire-purchase has long established its name and reputation in the market. This naturally poses an enormous challenge for AITAB to penetrate into the market appealing to customers who are more accustomed to the conventional product.

The problem is further exacerbated especially when many customers still perceive AITAB is really no different from conventional product except in their use of religious or Arabic name to disguise the current established practice. Similarly, the dealers and bankers are more accustomed with conventional hire-purchase mechanism. With the lack of religious conscience, they may opt to offer customer the conventional product instead of Islamic one, not only because they are more familiar with the conventional transaction and mechanism but also they feel both products are actually identical, hence, less complication and more convenience. Another arising issue with respect to competition is cost-efficiency. Naturally, as a relatively new product, AITAB faced a challenge on how it can be offered at a lower cost compared to its counterpart. Since AITAB requires more documents and paper works to be filled by both parties, the cost issue will naturally pose an inevitable challenge to banks.

Fiqh Muamalat

Page 20

Documentation of Ijarah As for the documentation of the contract of ijarah, the followings are some important elements that shall be included in the documentation. This document contains the detailed description about the Leased Asset agreed between the parties. A. LEASE The lessor hereby leases to the Lessee and the Lessee hereby agrees to take on the lease from the lessor, the Leased Assets for the period stated herein upon the terms and condition herein set forth. B. SCHEDULE OF IJARAH RENTALS The term of the lease and the charges payable hereunder with respect to the leased assets shall be as set forth in the aforementioned leased document attached hereto. The lease rental shall be payable monthly/quarterly/semiannually in advance on the day mentioned in the leased document during the term of the lease. This agreement can be terminated only with the mutual consent of the parties hereto. Such termination shall take effect after _ days from the parties consent. This agreement and all its term and conditions shall, notwithstanding the termination lease, continue in full force and effect until all obligation of the lessee under this agreement are discharged and the payment of all sums due hereunder to the satisfaction of the lessor.

C.

RECEIPT OF THE ASSET This document confirms that customer has taken the possession of Leased Asset as described in the earlier document. This document is only signed by the Lessee on receipt of Asset, as an acknowledgement of receipt of described asset under Ijarah Contact.

Fiqh Muamalat

Page 21

D.

DELIVERY The leased assets as set out in the lease document shall be delivered by the lessor to the place stated in the leased document. All cost incurred in the connection with delivery of the leased assets up to the point of delivery as stated in the leased document shall be borne by the lessor. Upon delivery of the leased assets to the lessee, the lessee shall execute and deliver to the lessor a receipt as earlier mention in Receipt of the Asset.

E.

PROMISSORY NOTE After signing of Ijarah Agreement, the amount of rental become Debt (Dyan) to the Lessee. Promissory Note is Lessees acknowledgement to Debt amount and its promise to pay.

F.

UNDERTAKING TO PURCHASE LEASED ASSET This documents contains undertaking from the Lessee that he/it will purchase the Leased asset on the purchase Price corresponding to the Purchase Date. This document contains a schedule which shows Purchase Price(s) during the Ijarah term on which the Lessee can purchase the asset by making lump sum payment.

G.

OTHER DOCUMENTS Undertaking for personal use of Ijarah Asset Trust Receipt Authorization to take possession of Leased Asset Sale Deed.

Fiqh Muamalat

Page 22

Referrences http://www.sib.ae/en/real-estate/major-real-estate-products/ijarah-financial-lease.html Interesting Articles on Ijarah includingFatwa on Ijarah http://www.isra.my/fatwas/topics/commercial-banking/financing/ijarah.html Ijarah by Dr.AbdulSattar Abu Ghuddah Panel Dallah Al-Barakah Group ) http://www.albaraka.com/media/pdf/Research-Studies/RSIJ-200706201-EN.pdf http://www.islamic-world.net/economic/ijarah/ijarah.html ( Secretary General, Unified Shariah

http://www.financialislam.com/ijarah.html http://www.scribd.com/doc/53531873/IJARAH-Contract-of-Lease www.muamalat.com.my/wholesale-banking/.../al-ijarah.html http://www.mifc.com/index.php?ch=menu_know_principals_ijarah&pg=menu_know_pri ncipals_ija_concept&ac=413&ms=2 www.aaoifi.com/aaoifi/pdf%20forms/conference/p/6s.pdf http://www.alquranverse.com/28/27/English_Literal Economic Justice and Shari'a in the Islamic State:- RiyadAsvat Justice: Islamic and Western Perspectives By Zafar Iqbal http://www.kantakji.com/fiqh/Files/Finance/s51.pdf http://www.kantakji.com/fiqh/Files/Finance/s51.pdf

http://www.bnm.gov.my/documents/conceptpaper/ijarah_contract_20090715.pdf http://www.scribd.com/doc/97553230/Al-Ijarah http://ilovetheuae.com/tag/ijarah-mawsufah-fi-al-zimmah/

Fiqh Muamalat

Page 23