• Agreeing on the cost of the lease and the period of time for which it will last
• Clear terms in the contract
• Agreeing on purpose the lessee will use the property for, which they must stick to
• The lessor (owner of the leased property) agreeing to bear all the "liabilities emerging from the ownership", etc.
Ijara
Ijara is an Islamic mode of financing which means to give something on rent or providing services and goods temporarily for a wage. Literally, it means a contract for the hiring of persons or renting/leasing of the services or the usufruct of a property, generally for a fixed period and price. In hiring, the employer is called Musta’jir, while the employee is called Ajir.
Ijara need not necessarily lead to purchase in its normal operations. In conventional leasing an "operating lease" does not end in a change of ownership, nor does the type of Ijara known as al-Ijara tashghiliyah in Islamic financing.
In Islamic finance, al Ijara does lead to purchase (normally termed as Ijara wa Iqtina, or "rent and acquisition") and usually refers to a leasing contract of a property (such as land, plant, office automation, a motor vehicle), which is leased to a client for stream of rental and purchase payments, ending with a transfer of ownership to the lessee, and it follows Islamic regulations.
The rules of Ijara are so numerous in Islamic Finance and include:
There are three features of Ijara that distinguish it from conventional leasing:
• The lessor must own the asset being leased for the entire period of the lease
• No compound interest may be charged if the lessee delays or defaults on payment
• Use of the asset being leased must be specified in the contract
Types Of Ijara
Thumma al bai' (hire purchase)
• In this transaction (hire purchase or Lease-Sale or Financial Lease) the customer leases (hires) a good and agrees to purchase it, paying in instalments so that by the end of the lease he/she owns the good free and clear.
This involves two contracts:
1. An Ijara that outlines the terms for leasing or renting over a fixed period
2. A Bai that triggers a sale to be completed by the end of the term of the Ijara.
• An Ijara transaction involves two components; purchase agreement and a lease.
Ijara wa-iqtina (or Ijara Muntahia Bitamleek)
• Ijara wa-Iqtina (which means "lease and ownership") is also called al Ijara Muntahia Bitamleek ("lease that ends with ownership"). Like Ijara Thummal bay`, it may involve both a lease contract and a sale contract. However in an Ijara wa Iqtina contract the transfer of ownership occurs as soon as the lessee pays the purchase price of the asset — anytime during the leasing period.
• Another difference between Ijara Muntahia Bitamleek and Ijara Thummal bay` is that in Ijara Muntahia Bitamleek sale/ownership transfer is "an option given to the lessee". In Ijara Thummal bay` sale is part of the contract.
• An Islamically correct Ijara wa Iqtina contract "rests" on three conditions:
1. The lease and the transfer of ownership of the asset or the property should be recorded in separate documents.
2. The agreement to transfer of ownership should not be a pre-condition to the signing of the leasing contract.
3. The “promise” to transfer the ownership should be unilateral and should be binding only on the lessor.
• Ijara Muntahia Bitamleek may also be described as being:
1. Hibah (gift), where legal title is transferred to the lessee without any more payments, which is widely used by Islamic banks.
2. Or through sales.
Ijara Muntahia Bitamleek through sales may be of three types:
a) Where there is a gradual transfer of legal title of the leased property during the leasing "tenor"
b) Where the legal title is transferred at the end of lease tenor for "a token consideration"
c) Where ownership is transferred before the end of the lease tenor for a price equivalent to the remaining Ijara instalments (net of rental).
Ijara Mawsoofa bi al Dhimma
• In Ijara Mawsoofa bi al Dhimma (forward Ijara or literally known as lease described with responsibility) which is also transliterated Ijara Mawsufa bi al Thimma, the service or benefit being leased is well-defined, but the particular unit providing that service or benefit is not identified. Thus, if a unit providing the service or benefit is destroyed, the contract is not void.
• In contemporary Islamic finance, Ijara Mawsoofa bi al Dhimma is the leasing of something (such as a home, office, or factory) not yet produced or constructed. This means the Ijara Mawsoofa bi al Dhimma contract is combined with Istisna contract for construction of whatever it is that will provide the service or benefit. The financer finances its making, while the party begins leasing the asset after "taking delivery" of it.
• While forward sales normally do not comply with sharia, it is allowed using Ijara provided rent/lease payments do not begin until after the customer has taken delivery.
• Also required by sharia is that the asset be clearly specified, its rental rate be clearly set (although the rate may float based on the agreement of both parties).
Required documents for Ijara
The following are the documents integral to Ijara contract:
• All KYC documents as per the bank’s Operations Manual and the bank’s Lending Policy
• Application Form
• Business plan of the project (if applicable),
• Building Permit (if applicable),
• Bill of Quantity (if applicable),
• Deposit of Margin of Seriousness (as applicable),
• Ijara Contract with the Customer
• Istisna’ Contract with Contractor (if the project involves constructions)
• Istisna’ Wakalah Agreement (appointing the Customer to be an Agent to oversee the construction/production if construction is part of the project).
• Letter of offer
• Security documents as listed in the Bank’s Lending Policy for commercial lending or employer’s guarantee for salaried financing
