Chapter 7 Al-Ijarah - The nature of Al-Ijarah is that lease is a contract by which the owner of land, PDF

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The nature of Al-Ijarah is that lease is a contract by which the owner of land, a building allows another person to use it for a specific time, usually in return for a rent. Al-Ijarah means a lease contract as well as a hire contract. Al-Ijarah, is also known as al-Kira’. It is like someone who is s...

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Chapter 7: Al-Ijarah Literally, ijārah is derived from the noun ‘al-ajr’ which means compensation, reward, consideration, return or counter value (al-‘iwad) against the use of an object. From a juristic (fiqh) definition, ijarah refers to a contract to utilize a lawful benefit against a consideration. In ijarah, the right to use the object is transferred to the hirer, not its ownership. Hence, ijarah is a sale of usufruct not of a physical entity. Technically, it means 'to give something on rent'. It is a contract where the financier (bank) buys and leases equipment or other assets to the business owner (customer) for a fee or more often called rental income. The duration of the lease as well as the fee must be set in advance and mutually agreed. The term 'Ijarah' is used for two different situations, firstly, when it relates to the usufructs of assets and properties and secondly, services of human beings. In general, Muslim scholars define ijarah as owning a specific benefit of an asset against a consideration. In particular, there are various definitions of ijarah cited by the Muslim scholars as the four schools of jurisprudence have given different explanations to the meaning of ijarah. For example, the Shafie view ijarah as a contract where the subject matter is the determined, legitimate, assignable and lawful usufruct of an object against a fixed consideration. Although the definitions given by the four schools vary in their wordings but they are actually unanimous in the substantial meaning of ijarah. All four schools of jurisprudence are in agreement that ijarah is a contract for utilising the usufructs (manfa‘ah) of a defined object against a determined consideration. The nature of Al-Ijarah is that lease is a contract by which the owner of land, a building allows another person to use it for a specific time, usually in return for a rent. Al-Ijarah means a lease contract as well as a hire contract. Al-Ijarah, is also known as al-Kira’. It is like someone who is selling to someone else a right to benefit or as a payment for services with a certain price to be paid for it. In the context of Islamic banking it is a lease contract under which the bank or financial institution leases equipment or a building to one of its clients against a fixed charge. The legitimacy of Islamic lease or Ijarah is derived from the verse of the Quran in which Allah says“And said one of them (the two women): “O my father! Hire him! Verily, the best of men for you to hire is the strong, the trustworthy.” (Al Quran 28:26). According to Hadith, it is also supported by the saying of the Prophet Muhammad (Peace be upon Him) that, “whoever hired a worker must inform him of his wages; And his saying: “give a worker his wages before his sweat (body odour) is dried”. Ijma’ also provides that “The ummah had came to a consensus during the time of companion on permissibility of Ujrah since the need of people for usufruct is similar to their need to physical good.” Differences of Opinion Pillars There are six main pillars of Al-Ijarah. The first pillar is Muajjir who is a person who give something for hire. It can be lessor, landlord or owner. The second pillar is Musta’jir. It refers to a person who takes on hire which includes lessee, tenant, renter etc. Ma’jur, which is a thing

given for rent is also important. The next pillar is Al-Manfaah. It means the benefit from a thing, which is usufruct and services. Besides, Ujrah is also one of the pillars. It refers to price or fee given for the payment of rent or lease. The last pillar is Sighah which consists of offer (Ijab) and acceptance (Qabul). Types of Ijarah The classification of Ijarah can be based on either subject matter of the leased asset or the contractual relationship. If it is based on the subject matter, there are three types of Ijarah, namely Ijarah ‘Ain, Ijarah ‘Amal and Ijarah Mawsufah fi al-Zimmah. Ijarah ‘Ain is to lease the usufruct from the specific goods or asset. It comprises all tangible assets such as property, transport, facilities, factories and etc. The second type is Ijarah ‘Amal which is to lease out the works or self-skills. Under this form of Ijarah, there are two types of workers. Firstly, an employee. He is a person or entity that work only for the interest of a particular employer or independent contractor. He does not have right to work for any other lessee during contract and the contract is called contract of service. Whereas the other type of worker is called independent contractor who offers services to the general public. The contract entered is called contract for service. Occupations under this form of Ijarah are consultant, lawyer, contractor and etc. The third type of Ijarah based on subject matter of the leased asset is Ijarah Mawsufah fi al-Zimmah. In this form of lease, the Ijarah contract is concluded between the parties even before the asset is delivered to lessee by lessor. However, an agreement is reached to make the described (according to accurate specifications) asset available on a specific future date, giving the lessor the opportunity to acquire or to produce it. Apart from the classification based on subject matter, Ijarah can also be categorised according to contractual relationship. The first type is operating lease which is originated from Ijarah ‘Ain. Traditionally, the only kind of Ijarah that was only operating lease, whereby one owns an asset or equipment and leases it to others for rental for a specified period. In other words, it is based on a short-term concept in rental agreement or contract nature. In this form of lease, the ownership of the leased assets will remain with the bank (lessor) at the end of the lease period. In operating lease, the bank may already own a property which it wants to lease it out. In other words, operating lease is not preceded by a promise to lease or the concept is not based on prior promise. Besides, under operating lease, asset acquisition is in full ownership of the lessor who is the legal and beneficial ownership. Lessor should be responsible to bear responsibility in administrative affairs and maintenance of asset while lessee is only responsible in the maintenance due to the usage and has to pay rent per agreed. Thus, risk of obsolescence on the asset is under the liability and responsibility of the lessor. The cancellation also lies on the part of the lessor. It is high risk in nature. The evolution of modern Islamic banking and finance has created another form of ijarah known as Ijarah Muntahia Bittamleek (IMB) or financial lease. It is also known as al-Ijarah Thumma alBay’, al-Ijarah wa al-Iqtina’ or al-Ijarah Muntahiyah bi al-Tamlik. Financial lease is defined as a form of transfer of ownership of usufructs of some assets, such as buildings or equipment, for a particular period in consideration for a defined rent which is usually higher than the normal

rental to encourage the lessor to transfer the leased assets to the lessee at the end of the lease period after the lessee has paid all instalments without delay. Such fees previously paid constitute part of the purchase price. Islamic bank uses and offers financial lease as intermediaries to obtain desires asset and to obtain cash money for various purposes. Subject matter of Al-Ijarah A subject matter of an ijārah contract refers to a usufruct or manfa‘ah derived from a specific object, thus, a usufruct will only exist when the object in which such usufruct is attached to, is in existence. Since Ijarah is the sale of usufruct, majority of jurist forbid Ijarah on trees and grapevines, since fruit are physical goods and Ijarah is the sale of usufruct and not physical goods. For example, in the case of renting a house, the house must physically exist, because the benefit of renting the house will not be obtained if there is no house in existence. It is also not permissible to conduct Ijarah on animal for its milk; ghee, wool or offspring; water in the river or well or canal since all these are goods, and not eligible to be under contract of Ijarah. The basic principle of Ijarah is that every item that could be utilized with its original substance and part consistently being conserved or preserved is allowed for Ijarah, and if not is illegal. Conditions of Al-Ijarah A valid ijarah contract must be formed from required pillars and satisfy several conditions attached thereof. There are four essential pillars for the formation of an Ijarah contract, namely property, usufruct, payment and sighah. With regards to property, the property must be belonged to the lessor. Besides, it is known to both parties and is specified. Next, the property can be acquired by the lessee for his use until the end of tenancy or lease. The property should be in a good condition possible for leasing. It is also important to note that it is the liability of the lessor to bear all liabilities arising from the ownership, for instance, repairing damages of the property in order to make it possible for leasing. A more specific example is that in a case of renting a house all taxes concerning the house insurance expenses, and other major maintenance expenses that are related to ownership risks must be borne by him. On the other hand, it is the liability of the lessee to ensure the property is in good condition, for example, the cleanliness and safety of the property. The liability of the lessee over the property is under the concept of trust (wadiah yadd amanah). However, in the case of damages due to his negligence or any misuse on part of the lessee, the lessee is liable to pay the compensation (dhaman). Furthermore, it is the lessee’s duty to bear any cost of ordinary routine maintenance, such as in case of renting a car, he shall pay for the petrol and engine oil. The lessee is not allowed to lease the property to another tenant and the second contract is considered as illegitimate. The sale of a lease property is legitimate. However, the lessee has a right to use the property until the lease contract has expired, where the property will then be submitted to the buyer. While for usufruct, the conditions to be satisfied is that the use of the service (usufruct) can be valued with money. Thus, a thing having no usufruct at all cannot be leased. The usufruct must

be valid according to Islamic commercial law. Moreover, the lessee should be able to make use of the property on lease. The usage of the property should be made clear in order to avoid any argument. In other words, it is necessary to make known the purpose for which the asset is rented. It must be free from ambiguity (jahala) and uncertainty (gharar). The usufruct does not entitle the lessee to own the property. The lessee is also not obliged to inform the lessor his intention for using the property, except in the case of possible destruction. The usufruct of property beyond its normal usage is considered as an act of intention. Another important pillar is the payment, which can also be known as consideration in a contract. Ijarah contract is executed between the contracting parties against a consideration which is known as rent. The first condition is that the amount of rent must be specified in order to avoid deceit and dispute in the future. If the payment is not in form of cash money, the goods in return must be specified its quantity, types and its characteristics. Not only that, the payment of rent can be made in advance. If the condition for payment does not prescribed to be paid in advance, the payment begins when usufruct started. The manner of paying the rent has to be agreed by both parties. It must be clearly specified whether the payment is to be made on daily, weekly or monthly basis. If the payment is made on the manners above, the payment should be made at the end of period unless otherwise stated on the agreement. In the event that the property cannot be used, the payment is not obliged upon the user. The forth pillar is the conditions for sighah. The general rules of contract have laid down some guidelines for perfecting a valid offer and acceptance. Firstly, an offer and acceptance must be expressed clearly to show the party’s intention. Such expressions may be indicated orally, or by writing, or signal etc. Secondly, a definite acceptance is made in response to a definite offer in the same session. Thirdly, acceptance must correspond exactly with an offer. For example, a person said, “I lease this house to you”, the other party must pronounce his consent by saying, “I accept the leased house” or “I accept”. Flow/Mechanism of Ijarah Transaction 1. A customer who needs certain asset visits the Islamic bank and promises to lease the asset. 2. The Islamic bank purchases the asset from the supplier and pays the full amount on the spot as per the quotation. 3. Both the parties agree on the terms and conditions of Ijarah and execute the lease contract against the predefined periodic lease rent for a specific lease period. 4. In a normal lease, after the completion of the lease period, the Lessee would return the asset to the Lessor. 5. In case of ‘Ijarah muntahia bittamleek’, the ownership of the leased asset is transferred to the customer at the end of the lease period in which case the rental paid by the customer includes the cost of the asset as well. Differences between Ijarah and Normal Sales

The duration of Ijarah contract is solely based on a predetermined time frame as part of the requirement of the contract. While for normal sales, it does not permit any time frame. Besides, Ijarah is a temporary contract with a specified time frame for its expiry and due time. On the other hand, normal sales is usually a permanent contract without any specified period of expiration. Pertaining to the ownership, there is no time of ownership in Ijarah but in normal sales, transfer of ownership occurs. Lastly, the subject matter of Ijarah contract is usufruct and services. Normal sales involves physical goods and property. Modern Application In terms of application of Ijarah in Islamic banking and finance, one of the products offered by Islamic banks is the Islamic hire-purchase or Al-Ijarah Thumma al-Bay’ (hereafter referred to as AITAB) facility which is designed to meet the current demand and avoid certain risks in the financing of consumer durables and motor vehicles. Most literatures refer AITAB to ijarah wa iqtina’ or al-ijarah al-muntahiya bi-tamlik. According to Wahbah al-Zuhayli (2002), AITAB refers to owning the benefit of certain assets for a specific period of time, by paying an agreed sum of rental, with an agreement that the owner will transfer the rented asset to the hirer at the end of the agreed period or during the period, provided all rental payments or instalments have been made in entirety. In theory, AITAB comprises an an ijarah contract (al-ijarah ‘ain) and a contract of sale (al-bay’). The former must be executed first then followed by the execution of the contract of sale at a nominal value agreed upon by both parties. Thus, each contract is independent and not combined in one agreement. Therefore, AITAB can be said as a contract of leasing with a promise to sell the asset. Like any other contracts, AITAB has to fulfill all conditions of a valid contract stipulated by the Shari‘ah. The contract should be executed by mutual agreement, responsibilities and benefits of both parties should be clearly spelt out, and the agreement should be for a known period and against a known price. In particular, AITAB has to adhere to both principles of leasing (ijārah) and sale (bay’) contract in respect of conditions imposed onto the contracting parties, offer and acceptance, consideration and subject matter of the contract. For instance, in the case of CIMB Islamic Bank Berhad v Tengku Kamarul Zaman, it combines a lease contract and sale contract in one trading document, but the contract of leasing and sale work separately: first, the contract of leasing will operate whereby the lessee will pay monthly rental to the lessor within a fixed period. Upon expiry of the leasing or rental period, the hirer has the option to enter into a second contract to purchase the goods from the owner at an agreedupon price. In the event, the purchase price will be determined according to the value of the goods, market condition, and necessary profit to the bank. Differences between AITAB and Hire Purchase The most obvious difference of hire purchase and AITAB is that hire purchase uses single contract covering both rental and sale aspects while AITAB consists of two separate contracts namely ijarah and al-bay’. The contracts terms are also different. Conventional hire purchase is considered as a loan to the customer and the bank charges interest on loan. AITAB is considers as a financing to the customer and the bank charges fixed profit on the cost of financing. In terms of

the sources, conventional hire purchase, there is no restriction or limitation. AITAB is stricter in finding sources which it can only rely on halal funds. Moreover, there is no acceptance letter required in conventional hire purchase. Nonetheless, the customer has to sign the Aqad letter to denote the offer and acceptance of transaction under AITAB. Lastly, conventional hire purchase is using conventional insurance while AITAB is using takaful as the insurance....