Islamic Banking   

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Ijarah and Ijarah Muntahia Bittamleek

Ijarah is an operating lease whereby the bank will buy and lease out equipment required by the customer for an agreed rental fee. The agreement does not include a promise that the leased asset at the end of the lease term will be transferred to the lessee.

Ijarah is defined in Fiqh as a “possession of a usufruct or benefits for consideration in the Islamic Fiqh. This term is used to denote two things:

  • To employ the services of a person on wages given to him as consideration for hhis hired services.
  • It relates to the usufruct of assets and properties. Here it means “ To transfer the usufruct of a particular property to another person and exchange for a rent claim from him”.

Ijarah is divided into two kinds:

Operational Lease

According to this mode, the Islamic bank maintains a number of various assets to respond to the needs of different customers. These assets usually have a high degree of marketability. The bank lets these assets to any party so desirous to utilize for a term to be agreed upon. After the termination of the lease period the assets return to the bank, on its part the bank looks for a new lessee.

The distinguishing feature of this mode is that the assets remain the property of the Islamic bank to put them up for rent every time the Lease period terminates so as not to remain unutilized for long periods of time.

Under this mode the bank bears the risk of recession or diminishing demand for these assets.

The operation lease divides into:

  • Specific or determined lease: It is the lease of real property or other assets that one can point to.
  • Lease described on liability: It is the Lease of benefit determined by specifications agreed upon to be on liability such as a car or a ship, not particular but precisely described to forbid dispute.

Ijarah Muntohia Bitamleek

It is a lease whereby the bank will buy and lease out equipment required by the customer for an agreed rental fee. However, it differs from Ijarah in that such an arrangement provides an option for the customer to acquire the ownership at the end of a specified period.

The bank may also enter into a sale and leaseback agreement with the customer whereby the bank will purchase the asset from the customer and leaseback under Ijarah or Ijarah Muntohia Bittamleek arrangement.The accounting implications for the bank will remain the same as for Ijarah / Ijarah Muntohia Bittamleek transactions.

The option for the lessee to acquire the leased asset may be exercised during the tenor of the total lease period or at the end of the lease term as stipulated in the lease agreement.The purchase option is obligatory for the customer (lessee).

Ijarah Muntohia Bittamleek concludes with the legal title in the leased asset being passed
to the lessee. This includes the following types:

  • gift (transfer of legal title for no consideration)
  • transfer of legal title (sale) at the end of a lease for a token consideration or other
    amount as specified in the lease contract
  • transfer of legal title (sale) prior to the end of the lease term for a price that is
    equivalent to the remaining Ijarah instalments applicable under gradual transfer of legal title
    (sale) of the leased asset.

Ijarah and Ijarah Muntohia Bittamleek contracts have three major elements:

  • offer and acceptance
  • two parties: the bank as lessor (the owner of the leased asset) and the client as lessee (the party who reaps the services of the leased asset)
  • the object of the Ijarah contract, which includes the rental amount and the service (transferred to the lessee).
   

Modes of Financing

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