Fiqh for Financial Transaction:

Ijarah Contract

Dr. Mohammad Mahbubi Ali

International Institute of Advanced Islamic Studies (IAIS) Malaysia

UNAIR, 28 August 2021

Definition of Ijarah

• A lease contract that • A contract for hiring of

transfers the ownership services of a person for
of a usufruct of an asset a specified period in
to another person for a exchange for a specified
specified period in consideration.
exchange for a specified
consideration
• Ijarah - consideration
• I’arah – without consideration
• Qard - pinjaman

• Operating lease (ijarah tashghiliyah)

• Financing lease (ijarah tamwiliyah)

• Imbt (ijarah muntahiya bi tamlik) – sewa berakhir dg perpindahan

kepemilikan
• - Jual beli
• - hibah mu’allaqah (conditional gift)
• - Janji hibah
• Aitab – al ijarah thumma al-bay’ (sewa kemudian jual)
Types of Ijarah
Ijarah

Purpose Object

Orang
Operating Lease Financing Lease Asset (a’yan)
(askhash/khadamat)

IMBT Existence asset Future asset

AITAB IMFZ

IMIM
• IMFZ (ijarah mawsufah fi dzimmah) – to be
produced/constructed – Istisna’
• IMIM (ijarah al-mudhafah ilal mustaqbal) -
available but delivered in the future - Salam
Nature of Ijarah
The ijarah is a binding contract which shall not be terminated unilaterally by any of the
contracting parties

Transfer usufruct of a
particular asset for rental.

Hiring a person with

remuneration.
Components of Ijarah

Contracting Offer and

Parties Acceptance

Components
of
Ijarah

Asset and
Rental
Usufruct
Contracting Parties

Legal capacity
and/or legal
authority

Natural person
or legal entity
Offer and Acceptance

 An ijarah contract shall be entered into through an offer and

acceptance between the contracting parties.
 May be expressed orally, in writing or by any other method
recognised by Shariah.
 Terms or conditions of the ijarah contract that have been
mutually agreed by the contracting parties, which does not
contravene the Shariah principles, shall be binding on the
contracting parties.
Asset and Usufruct

Recognised by Shariah;
Valuable
In existence
Identifiable
Accessible
Deliverable
Not a debt-based asset
Non-perishable
Owned by the lessor
Permissible Forms of Leased Assets

Tangible assets

Intangible
assets
Defective Asset
 Any defect in the leased asset discovered after
entering into the ijarah contract shall entitle the lessee
to either (a) terminate the ijarah contract; or (b)
request for substitution or replacement of the leased
asset.
 Where the lessee is aware of any defects found on the
asset at the point of entering into the ijarah contract
and accepted the defects, the lessee shall not be
entitled to terminate the ijarah contract or request for
substitution or replacement of the leased asset.
Rental
Determined

Fixed amount,
via reference to
specific Agreed
benchmark or
formula

Rental

cash/kind,
advance on in No unilateral
arrears, lump increase but
sum or revisable
instalment

Timely and
promptly
Delivery of Leased Asset
Where the rental is paid in advance and the lessor fails to deliver the leased
asset to the lessee, the lessor shall refund the rental to the lessee.
In the event the lessor fails to deliver the usufruct of the leased asset to the
lessee on the agreed date, any rental paid by the lessee prior to the delivery
of the asset shall not be earned by the lessor until the asset is delivered.
In the case of failure to deliver the usufruct of the leased asset on the agreed
timeline, the contracting parties may opt for other arrangements, including−
(a) to reduce the rental on a pro-rated basis; or (b) to extend the lease
period by the equivalent period of the late delivery.
•

•
Rights and Liabilities

The rights and liabilities from the

ownership of the leased asset are
borne by the lessor

The rights and liabilities from the

usage of the leased assetshall be
assumed by the lessee.
Maintenance of the Leased Asset

The lessor may appoint the lessee to maintain the leased asset and/or to obtain
a takaful coverage for the leased asset.

Where the lessor appoints the lessee to maintain the leased asset and/or to
obtain the takaful coverage on its behalf, the lessee shall be entitled to
recover all costs incurred for such maintenance from the lessor .

The contracting parties may mutually agree on who will bear the cost of
maintenance and takaful coverage of the leased asset.
Liability for Loss, Damage or Impairment

The lessee shall be held liable for any loss, damage or impairment of the
leased asset.

All costs and expenses related to such restoration shall be borne by the
lessee.

During the restoration, the lessee shall remain liable to pay rental for such
period.

Where the loss, damage or impairment is due to force majeure, the lessor
shall be responsible for restoring the usufruct and bearing such cost.
Leased Period

Determined

Agreed

Variation based on mutual agreement

The period starts from the acccessability of the leased asset

Sub-Lease

Sub-lease • Unless expressly prohibited in the main ijarah contract, a lessee may
sub-lease the leased asset to a third party.

Period of Sub-lease • The period of a sub-lease shall not exceed the period of the main
ijarah contract.

• The rental under the sub-lease may be similar, higher or lower than

Rental Rate the rental agreed under the main ijarah contract.
• The rental in the sub-lease shall be mutually agreed between the
contracting parties in the sub-lease contract

Obligation of the • The lessee shall remain fully liable to the lessor under the main

Lessee ijarah contract.

Lease and Lease-Back

 A lessee may lease back the leased asset to the lessor

at a rental equal to, higher or lower than the rental
agreed in the initial ijarah contract.
 Both the initial ijarah and lease back contracts shall be
entered into separately and shall be independent of
each other.
 The lease back contract shall be for a duration not
exceeding the initial ijarah contract.
Forward Ijarah

Ijarah • The lessor transfers usufruct of an asset for a

mawsufah fi
specified duration in the future.
• The asset is made available at an agreed future date
based on agreed specification.
zimmah

Ijarah mudafah • The contracting parties agree at inception of the

contract that the lessor will transfer usufruct of an
identified asset for a specified duration at an agreed
ila mustaqbal date in the future
Forward Ijarah

Rental • Mutually agreed between the contracting parties

• Delivery on a specified date and for a specified duration as mutually

Delivery agreed.
• In case of failure to deliver: terminate the contract or continue the
ijarah with or without revision of terms.

Failure to Meet • In case of failure to meet agreed specifications:

• (a) Terminate the contract or
Specifications • (b) Continue the ijarah with or without revision of terms.
Arrangement of Ijarah with Other Concepts

• A person may sell his asset and subsequently lease the asset from the buyer
under an ijarah contract.
Bay’ (Sale) • The sale must be concluded first prior to entering into the ijarah contract.
• Documented in two separate and distinct contracts.
• No interconditionaly

• An ijarah contract which shall have the ultimate purpose of the lessee to own the
Ijarah Muntahiya bi leased asset.

tamlik • The transfer of ownership of the leased asset may be effected by way of sale,
conditional hibah or promise to hibah.

Wa’d upon Default or • At the inception of the ijarah contract, the lessor may request the lessee to
provide a binding promise to purchase the leased asset in the event of default or
Breach of Terms breach of term.

• Where the lessee fails to perform his promise, the lessor may:
Wa’d to Purchase the • Sell the asset to a third party
• The proceeds may be used to settle the promised purchase price of
Lease Asset the leased asset, rental due (if any) and costs related to liquidation.
• If the proceeds are inadequate, the lessor may claim from the lessee.
Arrangement of Ijarah with Other Concepts

• The contracting parties under an ijarah mawsufah fi zimmah contract

Istisna’ may enter into an istisna` contract.
• Executed separately.

Assurances • An ijarah contract may be arranged with assurances such as a kafalah,

a rahn, a hamish jiddiyah or an `urbun.

Ta`widh and/or
• The contracting parties may agree to include a clause in the ijarah
contract which stipulates imposition of late payment charges.
• Ta`widh may be recognised as an income to the lessor.

Gharamah • Gharamah shall not be recognised as an income to the lessor and

shall be channelled to the Baitulmal and/or other charitable bodies.
Dissolution (Fasakh)

Mutual agreement (iqalah)

Exercise option to terminate within agreed time (khiyar)

Exercise option to terminate the contract via ‘urbun.

Total destruction of the leased asset

Completion of Ijarah

• An ijarah contract shall complete upon expiry of the

lease period and receipt of all rental payments and any
other obligations by the lessor.
• Upon completion of the ijarah contract, the contracting
parties shall be free from any contractual obligation
related to the ijarah contract.
Modus Operandi: Operating Lease
Modus Operandi Financing Lease
Application of Ijarah in MM
SELLER

2
IFI
Buy Property
• Under Construction
3 • Sub Sale

MONTHLY • Principal Payment

1 Musharakah CO-OWNERSHIP
(Gradual Purchase)
INSTALLMENT • Profit (Rental)
Agreement

CUSTOMER

• Sales Contract
• Ijarah Contract
• Purchase Undertaking to buy back bank’s
ownership portion
• Musharakah mutanaqisah – diminishing
partnership (bank)
• Musharakah mutazayidah – increasing partnership
(customer)
Illustration of Ijarah khadamat
1. Acquire the education programme
University Bank ABC
2. Appoint university as the panel university

3. Approach the
university for
education 5. Enjoy the
program and fill coursework
education fin.
form
4. Submit docs for assessment and approval

Student
6. Make payment on instalment

Docs involved:
• Application form cum LO and STC
• Service hiring agreement between the bank and university
• Appointment agreement
• Service hiring contract between customer and the bank
Thank You