In leasing the asset remains under the risk and

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In leasing, the asset remains under the risk and ownership of the lessor throughout the leasing period, because the ownership has not been transferred. Therefore, the lease period begins right from the time when the client has taken delivery. Ijarah can thus be effected for a future date. 13 Ijarah
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Ijarah Vs Conventional Financial Leasing 2. Expenses Consequent to Ownership All expenses incurred in acquisition of asset is borne by the lessor, e.g., taxes, freight, marine insurance, etc. A lessor can include all these expenses in his cost and can take them into consideration while fixing the rental. Any agreement to the contrary, as is found in the traditional financial leases, is not in conformity with Shari‘ah . 14 Ijarah
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Ijarah Vs Conventional Financial Leasing 3. Liability of the Parties In Case Of Loss to the Asset Lessee is responsible for any loss caused to the asset by his misuse or negligence. A lessee cannot be made liable to a loss caused by the factors beyond his control. The agreements of the traditional 'financial lease' generally do not differentiate between the two situations. 15 Ijarah
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Ijarah Vs Conventional Financial Leasing 4. Variable Rentals in Long Term Leases Two options: a. Condition that the rent shall be increased according to a specified proportion (e.g. 5%) after a specified period (like one year). b. Contract lease for a shorter period after which the parties can renew the lease at new terms and by mutual consent, with full liberty to each one of them to refuse the renewal, in which case the lessee is bound to vacate the leased property and return it back to the lessor. 16 Ijarah
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Ijarah Vs Conventional Financial Leasing 5. Use of Interest Based Benchmark for Rental Calculations Not Preferred. But there is no other choice. Therefore, in order to remove ambiguity, a floating rate based on a benchmark (KIBOR) with a floor and a ceiling is recommended. 17 Ijarah
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Ijarah Vs Conventional Financial Leasing 6. Termination of Lease If the lessee contravenes any term of the agreement, the lessor has a right to terminate the lease contract unilaterally. If there is no contravention on the part of the lessee, the lease cannot be terminated without mutual consent. In Finance Lease agreements, the lessor has been given an unrestricted power to terminate the lease unilaterally whenever he wishes and also demand remaining rents from lessee. This is against the principles of Shariah. The logical consequence of the termination of lease is that the asset should be taken back by the lessor. The lessee should be asked to pay the rent as due up to the date of termination. 18 Ijarah
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Ijarah Vs Conventional Financial Leasing 7. Insurance of the Assets Leased asset is insured under the Islamic mode of Takaful. It should be at the expense of the lessor and not at the expense of the lessee, as is generally provided in the agreements of the current 'financial leases'. 19 Ijarah
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Ijarah Vs Conventional Financial Leasing 8. The Residual Value of the Leased Asset At the maturity of the finance lease, the asset is normally transferred to lessee for a nominal residual value. (Security Deposit = Residual Value).
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