Foreign Exchange

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IJARAH ISSUES RELATEED TO IJARAH DM ISSUES
RELATED TO DM
By Abdul Samad AlHuda Centre of Islamic Banking
Economics (CIBE)
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What is Ijarah?

• Transferring of usufruct of an asset to another
  person for an agreed period, at an agreed
  consideration.

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Basic Rules of Ijarah

• Anything, which cannot be used without consuming,
  cannot be leased out. e.g. Money, wheat etc.
• Leasing is not originally a mode of financing but
  it is a sale transaction. So all basic elements
  of lawful sale transaction must be present.
• It is necessary for valid lease that the leased
  asset is fully identified by the parties.

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Basic Rules of Ijarah

• It is necessary for valid lease that the corpus
  of the leases property remains in the ownership
  of the lessor.
• The period of lease must be determined in clear
  terms.
• The lease period shall start from the date on
  which the leased asset has been delivered.

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Liabilities of Parties

• Lessors Responsibilities
• Since corpus of leased property remains in the
  ownership of the lessor therefore all liabilities
  of ownership are borne by lessor.
• Expenses
• As the lessor is the owner of the asset he is
  liable to pay all the expenses incurred in the
  process of its purchase and its import to the
  country of the lessor example expenses of
  shipment and customs duty etc.

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Lessee Responsibilities

• Being user of the lease asset lessee can be made
  liable to any normally occurring wear and tear.
• The lessee cannot use the leased asset for any
  purpose other then the purpose specified in the
  lease agreement.
• If no such purpose is not specified in the
  agreement, the lessee can use it for whatever
  purpose it is use in normal course.

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Lessee as Ameen

• The lessee is liable to compensate the lessor
  for every harm caused to the leased asset by his
  misuse or negligence.

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Rental

• The rental must be determined at the time of
  contract for the whole period of lease.
• It is permissible that different amount of rent
  are fixed for different phases provided that the
  amount of rent for each phase is specifically
  agreed upon at the time of affecting a lease.
• The lessor cannot increase the rent unilaterally
  and any agreement to this effect is vied.

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Rental

• A lease contract can have a condition that the
  rent shall be increased according to a specified
  proportion (e.g. 5) after a specified period
  (like one year).
• The rent or any part thereof may be payable in
  advance before the delivery of the asset to the
  lessee, but that amount so collected by the
  lessor shall remain with him as Amana and shall
  be adjusted towards the rent after its being due.

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In Case of Late Payment

• The lessor cannot charge an additional amount in
  case the lessee delays payment of the rent.
• Penalty of late payment is given to charity by
  lessee.

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Insurance of the Assets

• Legally, it is required for all leasing companies
  to insure the leased asset. Presently IMFI insure
  its leased assets. However our BoK Ijara policy
  clearly stated that BoK will use Conventional
  Insurance as long as Takaful is not available.

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Termination contractual

• Lease is binding contract.
• It can be terminated by mutual consent.
• The lessor may terminate it when the lessee
  doesnt pay the rent or fails to pay it on time
  or because of violation of any other term and
  condition of the agreement. Ø With total
  destruction of the leased asset
• Upon the expiry of term.
• Two parties may terminate it before it begins to
  run.

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Difference Between Murabaha and Ijarah
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Procedure of IMFI Ijarah

• Undertaking to Ijarah
• ?
• Agency Agreement
• ?
• Purchase
• ?
• Payment of Purchase Price
• ?
• Lease Agreement

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Expenses Related To Ownership
Issue In certain transaction of Ijarah, all expenses related to the ownership is borne by the customer. Solution All expenses other than expense related to normal wear and tear of the Ijarah asset should be borne by the IMFI and may be included into the list price of Ijarah assets.

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Recovery of Rental

Issue The IMFI start recovering the rental as soon as he disburses the amount to the supplier and before actually receiving the Ijarah asset by the customer. Solution The IMFI should recover rentals only after the delivery of vehicle. It is an unanimous opinion of all the Sharaih Scholars that it is not allowed to recover rentals before delivery.
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Increase in Price of Ijarah Asset
Issue When the price increases before Ijarah Agreement, customer pays the short fall without getting joint ownership. Solution In all such cases, IMFI should give the proportionate owner in the Ijarah asset.
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Covering Risks Under Takaful
Issue In Ijarah risks of the leased assets should be covered under Takaful arrangement rather than under conventional insurance policies. Solution As an Islamic financial Institution, the IMFI should obtain Takaful for its leased assets under Ijarah.
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Proportionate Takaful
Issue Incase of combined ownership model, customer solely pays the cost of Takaful. Solution Takaful cost should be borne by the partners in proportionate to their interest in the asset and not be solely borne by the customer.
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Sale and Lease Back
Issue We have noted that IMFI enter into the sale and lease back transaction for just fulfilling the liquidity requirement of the client. Solution For just liquidity requirement this transaction should not be allowed. Therefore, IMFI should consult Shariah Advisor in every case. This transaction should be allowed only for paying conventional debts.
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Sale and Lease Back
Issue The sale and lease back transaction without signing proper sale agreement with the customer before the execution of Ijarah agreement. Solution The IMFI should execute the proper sale agreement with the customer before entering into lease agreement. Otherwise the transaction becomes questionable in the eyes of Shariah.
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Sale and Lease Back
Issue The IMFI executes the sale agreement with the customer and makes payment to other conventional IMFI which makes Islamic finance doubtful in the eyes of public. Solution The IMFI should make a payment to the party with home it executes sale agreement.
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Diminishing Musharakah
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Diminishing Musharakah

• It is a form of partnership in which one of the
  partners promises to buy the equity share of the
  other partner gradually until the title to the
  equity is completed transferred to him.
• According to this concept a financer and his
  client participate either in a joint property or
  an equipment or in joint commercial enterprises.

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FEATURES OF DIMINISHING MUSHARAKAHIN
SHIRKAT-UL-MILK (JOINT OWNERSHIP)

• Two partners purchase any asset
  (machinery/property) and their intention is that
  one or both partners will use this asset or they
  rent out their share and one Shareek undertakes
  to purchase the share of other gradually.

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Rules of Diminishing Musharakah in
Shirkat-ul-Milk (Joint Ownership)

• 1. There will be an agreement of Shirkat ul Milk
  and it will be decided How much investment will
  be made by each partner?
• 2. Asset will be purchased and all partners will
  be owner of this asset as per ratio of his
  investment and all other rules of Shirkat-ul-Milk
  will be applicable.

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Rules of Diminishing Musharakah in
Shirkat-ul-Milk (Joint Ownership)

• 3. One Shareek can rent out his share to other
  partner or to a third party and Ijarah Agreement
  will be signed.
• 4. Within period of Ijarah, Shariah Ahkaam
  relating to Ijarah will be applicable.

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Uses of Diminishing Musharakah in IMFI

• Diminishing Musharakah usually being used in
  House Financing for these purposes
• Purchase of House
• Construction of House
• Renovation of House

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Procedure of DM

• D M Agreement (IMFI Client)
• ?
• Undertaking to Ijarah (from the client)
• ?
• Sale Agreement (Client owner of the house)
• ?
• Payment of Purchase Price (to the client)
• ?
• Lease Agreement (IMFI client)

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Procedure of Sale and Lease Back

• D M Agreement (IMFI Client)
• ?
• Undertaking to Ijarah (from the client)
• ?
• Sale Agreement (IMFI client)
• ?
• Payment of Purchase Price (to the client)
• ?
• Lease Agreement (IMFI client)

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Value of Units at Face Value
Issue In case of Diminishing Musharakah IMFI agrees to sell the units to the client at face value. Solution It is preferred that in all such transactions valuation should be done either on market value or any value agreed at the time of sale of unit.
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Covering Risks Under Takaful
Issue In DM risks of the leased assets should be covered under Takaful arrangement rather than under conventional insurance policies. Solution As an Islamic financial Institution, the MFI should obtain Takaful for its assets under DM.
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Proportionate Takaful
Issue Incase of combined ownership model, customer solely pays the cost of Takaful. Solution Takaful cost should be borne by the partners in proportionate to their interest in the asset and not be solely borne by the customer.
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Repair Maintenance
Issue In certain cases repair and maintenance cost is borne by the customer. Solution The IMFI should pay the charges of maintenance as per his share in DM assts.
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