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SALIENT FEATURES OF
ISLAMIC FINANCIAL LEASE
Dr. Muhammad Imran Usmani
Jamia Darululoom Karachi
Al Meezan Investment Bank Ltd.
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BASIC RULES OF LEASING
• Transferring of usufruct not ownership
To another person for an agreed price, at an agreed
consideration.
• Subject of lease
Valuable, Identified and Quantified
• Consumable things cannot be leased out
Anything which cannot be used without consuming
cannot be leased out; e.g., money, wheat etc.
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BASIC RULES OF LEASING
• All Liabilities of ownership are borne by
lessor
Since corpus of leased property remains in the
ownership of the seller.
• Period of lease
Must be determined in clear terms at the time of
contract
• Lease for specific purpose only
If no specific purpose is identified in the agreement,
then it can be used for any purpose for which it is
used in normal course
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BASIC RULES OF LEASING
• Lessee as Ameen
The lessee is liable to compensate the lessor for every harm to the
leased asset caused by any misuse or negligence. The leased asset
shall remain in the risk of the lessor throughout the lease period.
• Lease of jointly owned property
Is permitted and rentals shall be distributed between all the joint
owners according to the proportion of their respective shares in the
property.
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BASIC RULES OF LEASING
• Determination of Rental
The rental must be determined at the time of contract for the whole
period of lease.
It is permissible that different amounts of rent are fixed for different
phases during the lease period, provided that the amount of rent
for each phase is specifically agreed upon at the time of affecting a
lease.
The determination of rental on the basis of the aggregate cost
incurred in the purchase of the asset by the lessor, as normally
done in financial leases, is not against the rules of Shariah
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BASIC RULES OF LEASING
• Determination of Rental
The lessor cannot increase the rent unilaterally, and any
agreement to this effect is void.
The rent or any part thereof may be payable in advance before
the delivery of the asset to the lessee
The lease period shall commence from the date on which the
leased asset has been delivered to the lessee.
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LEASE AS A MODE OF
FINANCING
• Leasing is not originally a mode of financing
• Leasing should not be interest-based loan or
replacing interest with rent, rather it should
comply with all of the following conditions
of Islamic leasing:
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LEASE AS A MODE OF
FINANCING
1. The commencement of lease
Unlike the contract of sale, the agreement of Ijarah can be
effected for a future date. Hence, it is different from Murabaha.
2. Rent should be charged after the delivery of the
leased asset to the lessee
and not from the day the price has been paid. If the supplier has
delayed the delivery after receiving the full price, the lessee should
not be liable for the rent of the period of delay.
3. Different relations of the parties
There are two separate relations between the institution and the
client: one of an agent and the other of a lessee.
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4. Difference between Murabahah and leasing
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• A Murabahah attributed to a future date is invalid in Shariah. But
leasing can be attributed to a future date.
• A Murabaha can not be transacted on a future date as the sale
would be executed simultaneously after taking delivery from the
supplier and seller would never bear its risk which Shariah does
not permit . But in leasing it is permissible, because in leasing the
asset remains under the risk and ownership of the lessor
throughout the leasing period.
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LEASE AS A MODE OF
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5. Expenses consequent to ownership to the
lessor
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 for example expenses of freight and
customs duty etc.
6. Lessee as Ameen
The lessee is responsible for any loss caused to the asset by his
misuse or negligence. He can also be made liable to any
normally occurring wear and tear.
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7. Variable Rentals in Long Term Leases
In this case the lessor has two options:
• 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).
• He can contract lease for a shorter period after which the parties
can renew the lease at new terms and by mutual consent
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8. Penalty for late payment of Rent
The lessor cannot charge an additional amount in case the lessee
delays payment of the rent.
9. Penalty of late payment is given to charity by
lessee
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LEASE AS A MODE OF
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10. Termination of Lease
If the lessee contravenes any term of the agreement, the lessor has
a right to terminate the lease contract unilaterally. If not then it
can be terminated through mutual consent only. However, in
such a case he cannot charge rentals of remaining period.
11. Insurance of the assets
If the leased property 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
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LEASE AS A MODE OF
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12. The residual value of the leased asset
Through a mutual agreement of Lease, after the expiry of the lease
period, the corpus of the leased asset cannot be transferred to the
lessee, otherwise it becomes hire purchase.
It is a well-settled rule of Islamic jurisprudence that one transaction
cannot be tied up with another transaction so as to make the
former a pre-condition for the other.
However, the lessor may enter into a unilateral undertaking to sell
the leased asset to the lessee at the end of the lease period. This
undertaking will be binding on the lessor only.
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13. Ijarah Wa Iqtina
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The lessor may sign a separate promise to gift the leased asset to
the lessee at the end of the lease period, subject to his payment of
all amounts of rent. The validity of this arrangement is subject to
two basic conditions:
Firstly, the agreement of Ijarah itself should not be subjected to
signing this promise of sale or gift.
Secondly, the promise should be unilateral and binding on the
promisor only.
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14. Sub-Lease
If the leased asset is used differently by different users, the lessee
cannot sub-lease the leased asset except with the express
permission of the lessor.
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Conclusion
LEASING IS NOT VERY DIFFERENT FROM
CONVENTIONAL LEASE
Islamic Financial lease is very similar to conventional lease, however, it has
some differences which are:
1.
the rental rate decided at the time of the agreement cannot fluctuate
2.
expenses under Ijarah are as follows:
3.
•
Lessor- expenses relating to the corpus of the asset i.e.
insurance, accidental repairs etc. will be borne by the lessor
•
Lessee- actual operating/overhead expenses related to running
the asset will be borne by the lessee
two contracts into one contract is not permissible in Shariah
therefore, we cannot have the agreement of hire and purchase into
one agreement, only we can undertake/promise to purchase the leased
asset
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