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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.
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.
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
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 (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).
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).
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 Education is a financing product offered to meet payments for education of the applicants or their dependants within or without the country.
The facility is offered to qualified applicants who have admissions to various learning institutions including universities and other Higher Learning Institutions whose courses do not contravene with Shariah requirements.
The product is based on the principles of Ijara under Ijaratul Manafi’ and so it is a contract wherein the bank, upon request by the customer, purchases the right to pursue a certain course (usufruct) at a learning institution and rents the same to the customer either for himself or for his children/dependents against deferred payments.
As Education Financing follows all principles of Ijara, therefore procedures, flowchart, and accounting entries will be the same as in Ijara.
All KYC documents as per the bank’s Operations Manual and the bank’s Lending Policy,
Admision letter from the education institution
Fee structure
Agreement in which the bank promises to sell education financing service and the client promises to buy the education financing service from the Bank at an agreed price
Letter of offer
Security documents as listed in the Bank’s Lending Policy for commercial lending or employer’s guarantee for salaried financing
Hajj and Umra Financing is a financing product offered to customers eligible of going to Makka to perform Hajj or Umra
The facility may also be extended to applicant who is requesting the facility for his dependants including his parents provided that the applicant meets the financing criteria of Hajj and Umra Financing
The facility is offered to applicants who have capacity and ability to go to Makka but they have limitation in cash; examples are employees with enough contributions at Pension Funds but they cannot claim it now due to retirement regulations or individuals with enough assets such as cars, houses etc. But they cannot generate enough cash at once to go for the adulation; hence provides this service while enabling them to pay by instalments in bullet payment in the future
The product is based on the principles of Ijara under Ijaratul Manafi’ and so it is a contract wherein the bank, upon request by the customer, purchases the right to pursue Hajj or Umra exaltation (usufruct) through Hajj agent and rents the same to the customer either for himself or for his dependents (third party) against deferred payments to be made by him.
As Hajj and Umra Financing follows all principles of Ijara, therefore procedures, flowchart, and accounting entries will be the same as in Ijara.
All KYC documents as per the bank’s Operations Manual and the bank’s Lending Policy
Statement/Declaration of aligibility of perfopming Hajj.
Hajj Service’s Proforma Invoice from Hajj institution in the name of the Bank or endored to its name
List of services offered by the Hajj institution
Agreement in which the bank promises to sell Hajj service and the client promises to buy the Hajj service from the Bank on an agreed ratio of profit added to the cost
Letter of offer
Security documents as listed in the Bank’s Lending Policy for commercial lending or employer’s guarantee for salaried financing
Declaration of Taking Delivery of goods
