Ijara and Its Contemrary Aplication in Islamic Banking

Topics: Sharia, Renting, Lease Pages: 6 (1567 words) Published: May 20, 2011
Islamic Finance
June 2010 www.globalislamicfinancemagazine.com


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Mutual Funds & Wealth Management:


John Sandwick
Structure features in Shari’ah-Compliant Project financing: Case Study-based Part I P. 12 Brand New Way: Selling Islamic Finance to NonMuslims. Part II-Marketing and Selling

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Principles of Islamic Finance

28 Global Islamic Finance
June 2010

Principles of Islamic Finance



is necessary to specify the rent for the first period and the rent of the subsequent period of Ijara and this must be linked with a certain benchmark. Such benchmarks can have a ceiling and floor but should be based on a clear formula with the consent of the customer. 4. The leaser cannot increase the rental for any phase unilaterally. It can be mutually agreed in the agreeIn Islamic terms there is no restrictions of using Ijara ment that the rental will be increased by a specified as a banking product. But there are some conditions amount/proportion after specified intervals. which must be followed by the Product Development De- 5. All liabilities emerging from ownership are borne by partment of IFI while using simple Ijara as a product or the leaser. Thus, maintenance of the asset, other structuring any product containing Ijrah because without than routine operation expenses, during the lease keeping in view all these conditions, the product may beperiod is the responsibility of the bank, the owner come non Shariah Complaint. of the asset, as the benefit (rental) is linked to the responsibility. The lessee can be made liable to the In this article we will define Ijara, the basic rules of Ijara wear and tear that normally occurs to the asset durin Shariah and the most common applications of Ijara ing its use. Any harm caused by factors beyond the in IFI’s. control of the lessee shall be borne by the leaser. Takaful (insurance) expenses will be borne by the leaser and not by the lessee. 6. The lease period shall start when the asset is delivered to the lessee in working conDiminishing Musharakat/Ijarah Structure dition, not from the date of payment from the leaser to the supplier. Once it is delivered the Property/Asset lease period will start, no matter whether the lessee has started its use or not. 7. The lessee can be asked to pay any advance that will have to be adjusted from the Joint Purchace Customer (20% Bank(80% share) Baced on Shikat-al-milk. rental after it is due. Share) (Customer (Bank’ share) Bank takes title 8. If any harm is caused to the leased Share Customer agrees to repay assets by any misuse or negligence on the part principal by the buying over Increasing of the lessee, he will be liable to compensate time, the Bank’s share. ownership the leaser for the damage. Consequently the cusCustomer Bank 9. The leasing contract is terminated if tomer’s ownership interest Acquistion cost in the property increases the asset ceases to give the service for which installments to purand the Bank’s decreases it was rented. chace 80% share The customer leases 10. If the leased assets become damaged the Bank’s share, with during the period of the contract, the same can Rental periodic adjustments made Customer Bank’ Share be repaired to make the asset usable, the conto rental to reflect the fact Lease of reducing that a reducing bank share tract will remain valid. Bank’ share is being leased If the parties to the lease do not con11. travene the terms of the agreement, the lease On the other hand there are some institutions that innovate new products with combinations of other modes of Islamic Finance with Ijara for example structure of Diminishing Musharaka and Ijara Sukuk, which are structured with the combination of various...
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