Tools of Islamic Finance: (4) Ijarah (Leasing) - Kickoffall Info Hub

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Sunday, April 5, 2020

Tools of Islamic Finance: (4) Ijarah (Leasing)


Ijarah, (Arabic: الإجارة) a term of fiqh (Islamic jurisprudence, is referred to a contract for the hiring of persons or renting of the services or the usufruct of a property,  for a fixed period and price.
‘ijarah’ is analogous to the English term ‘leasing’; the lessor is called ‘mu’jir’, the lessee is called ‘musta’jir’ and the rent payable to the lessor is called ‘ujrah’.
Basic Rules of Ijara
  1. Leasing is a contract whereby the owner of something transfers its usufruct to another person for an agreed period, at an agreed consideration.
  2. The subject of the lease must have a valuable use. Therefore, things having no usufruct at all cannot be leased.
  3. It is necessary for a valid contract of the lease that the corpus of the leased property remains in the ownership of the seller and only its usufruct is transferred to the lessee.
  4. The period of the lease must be determined in clear terms.
  5. The lessee cannot use the leased asset for any purpose other than the purpose specified in the lease agreement.
  6. The lessee is liable to compensate the lessor for every harm to the leased asset caused by any misuse or negligence on the part of the lessee.

Types of Ijara:
Finance leasing (إجارة منتهية بتمليك )
A long-term lease over the expected life of the equipment, usually three years or more, after which the lessee owns the product.
The leasing company recovers the full cost of the equipment, plus charges, over the period of the lease.
Although lessee don't own the equipment during the lease time, the lessee is responsible for maintaining and insuring it.
Operating leasing
A short -term lease after which the leasing company will take the asset back at the end of the lease.
The leasing company is responsible for maintenance and insurance

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