CHAPTER 7_ Ijara - Fundamentals of Islamic Finance and Banking.pdf

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CHAPTER 7 Ijara Learning outcomes Upon completion of this chapter, you should be able to: 1. Define Ijara in comparison with a conventional lease. 2. Describe the types of Ijara offered by modern Islamic banks. 3. Explain the Shariah rules and general principles that guide Ijara contracts and the documents related to Ijara. 4. Discuss the differences of Ijara from a conventional lease, a loan and diminishing Musharaka. INTRODUCTION TO IJARA The term Ijara is derived from the root word ‘ajr’, which means reward or wages for work done or services rendered. In the financial world, Ijara is a bi- lateral contract involving transfer of the use of an asset for an agreed period for a consideration. It involves two parties: the lessor or Muajir, who is the owner of the asset and the lessee or Mustajir, who uses the asset. The owner of the object temporarily transfers its usufruct to the lessee for the agreed period and the lessee should be able to derive benefit from it without con- suming it. The ownership of the leased asset remains with the lessor, along with all risks pertaining to ownership. The physical possession of the asset is held on trust by the lessee, who is not liable for any loss, destruction or re- duction in value of the asset, unless caused by misuse or intentional negli- gence by the lessee. In Islamic jurisprudence, the term Ijara is used for two different situations. One, as in the case of a conventional lease, is the transfer of the usage of an asset, while the other is where a person is employed for some service in ex- change for wages, like teachers, lawyers, and doctors. According to Islamic scholars, the Ijara contract consists of three main elements. Like all contracts Ijara also involves offer and acceptance – Ijab and Qabul. There are the con- tracting parties, the lessor and lessee; the subject matter of the contract, in- cluding the consideration or rent (called Ujrah) that the lessee pays for the right to use and derive benefit from an object owned by the lessor. The asset is called the Majur and the benefit derived from the asset is called Al Man- faah. It is important to note that the benefit from use of the asset is the sub- ject matter of the contract, not the asset itself, and this benefit is guaranteed by the contract. Ijara is very similar to a conventional lease. The majority of Islamic scholars consider Ijara as a Shariah-compliant financial instrument if the object in consideration has beneficial use and is Halal. Not every object or asset is suit- able for Ijara or leasing. It needs to be tangible, non-perishable, valuable, identifiable and quantifiable. For example, perishable items like food, fuel, etc. cannot be leased, neither can money be leased. IJARA IN ISLAMIC BANKS Ijara is a service-based contract, used significantly to meet short and me- dium-term financing needs, involving either rent or hire purchase of an asset based on an agreed rental fee and period. Islamic banks offer this product to retail and business customers and some common applications involve rental

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