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Due to its widespread applications, Ijarah is among the most widely-used forms of Shariah-compliant contracts. Ijarah can be used to cover everything from employment contracts, to renting and leasing, and financing the purchase of assets.
In its basic form, however, ijarah – which gets its name from the Arabic word to rent – is simply the Islamic form of leasing and renting out the use of a property.
Taken at face value, the rules of ijarah in the context of renting, usufruct and leasing appear very similar to conventional leasing. Both can be applied to a variety of assets, from real estate to consumable goods.
Both involve the lessee paying a lease or rent over a set period of time to a lessor laid out in a contract. However, as with everything Shariah-compliant, there are some crucial differences.
As with any other form of Shariah-compliant tools, ijarah requires that the lease payment and the usage of the asset in question adhere to Shariah principles. This includes restricting the use of the property and asset to halal activities. Conventional leasing holds no such restrictions.
Furthermore, there must be no interest-bearing component to the lease agreement. In standard and conventional leasing contracts that automatically give ownership of the asset to the lessee at the end of the contract period,
it is permissible for the lessor to charge a lease interest expense on the use of the asset. That is why ownership of the asset is never outright included in the ijarah contract (more on that below).
Under ijarah, rent is charged only after the asset is delivered, as opposed to conventional leasing, where rent can be charged before the lessee receives access to the asset.
Furthermore, rent payments must remain at a fixed and agreed upon rate. If the lease agreement includes multiple phases, it is permitted to increase the lease rate at various phases, according to Islamic finance theorist Muhammad Taqi Usmani.
For example: A two-year ijarah can stipulate that the lease rate will increase in the second year.
What is forbidden, however, is charging a variable lease rate that rises throughout the leasing period, as this is considered a form of interest.
In ijarah, the lessor must bear the risk of asset ownership, including guaranteeing the quality of the asset and ensuring that it is functioning when delivering it to the lessee.
The lessor is also obliged to pay any costs associated with the purchase of the property such as custom duties and taxes, as well as any insurance (takaful) payments associated with it.
That said, the lease rate can be set to cover those costs and even profit from leasing it out, according to Usmani.
Meanwhile, Any damage to the property not done by the lessee through misuse or negligence is the sole liability of the lessor. This includes damage from disaster or structural damages not caused by the lessee.
Conventional lease agreements can include provisions that have the lessor pay charges such as insurance, as well as include liability clauses that hold them accountable for certain damages that do not result misuse or negligence.
Read more about: Comparing Conventional Insurance and Takaful "Islamic Insurance"
An ijarah cannot be terminated unilaterally without mutual consent. Such clauses can be found in a conventional lease agreement, which give the lessor the ability to unilaterally terminate an agreement.
In ijarah contracts, the use of the asset must be explicitly stated, according to Dr Faleel Jamaleldeen, Assistant Professor at Geneva School of Business and Economics. This isn’t a requirement in some conventional leasing contracts, which can include general use clauses.
In ijarah contracts, penalties are designed to encourage timely payment but not as a punitive measure for the lessee. As such ijarah penalties may include such things as grace periods that give the lessee flexibility.
Furthermore, it is also expressly forbidden for the lessor to profit and gain from penalty charges. Any penalties obtained by the lessor must be given to charity and not retained by them.
In order to prevent any lease interest expenses being charged by the lessor (as noted above), ijarah contracts forbid any provisions that automatically grant ownership to the lessee at the end of the lease period.
In ijarah, the lessor must own the property or asset being leased for the entire duration of the leasing period, as opposed to a conventional leasing agreement, where such agreements are common.
That said, there are mechanisms whereby the tenant can obtain ownership of the property at the end of a lease period through the use Ijarah thumma al bai (purchase ijarah) and Ijarah wa iqtina (lease and ownership).
These essentially require a secondary purchase or property handover agreement separate from the original lease agreement. We’ll dive further into these mechanisms when we look at how ijarah is used as a means of finance.
Read more about: All you need to know about modern islamic finance
Disclamer:
This post is for educational purposes only, and the Firm does not directly or indirectly provide these services.
