Ijarah mudhafah ila mustaqbal is defined as an Ijarah (leasing) contract on an existing asset, in which both the contracting parties agree on the date the contract was executed that the usufruct of the asset will be delivered on an agreed date in the future.
Figure 1 illustrates the concept of Ijarah mudhafah ila mustaqbal, where on the 1st May 2011 an asset owner expresses his intention to rent his house and signs a one-year rental agreement with a lessor. The lease period commences on the 1st June 2011 and expires on the 31st May 2012.
The Shariah Advisory Council (SAC) of the Securities Commission Malaysia (SC) has agreed to accept the principle of Ijarah mudhafah ila mustaqbal as one of the concepts in the development of the Islamic capital market. The resolution is based on views of Islamic jurists and is subject to certain conditions – the lease period is clearly stated in the contract; and the lease period commences on a future date agreed upon by both the contracting parties (lessor and lessee).
Past Islamic jurists have different views of this concept. The majority from the Hanafi, Maliki and Hanbali schools of thought view Ijarah mudhafah ila mustaqbal as permissible. The opinion is based on a hadith which indicates the existence of this concept when Prophet Muhammad hired a man as his travel guide for a journey to Medina, which only began three days later.
Ijarah mudhafah ila mustaqbal is permissible as long as the conditions determined in the contract are in line with the tenets of Shariah and, more importantly, agreed to by both parties. The key to the permissibility lies in the ability of the asset owner to deliver the asset at the stipulated time. Do note that a contract can be executed even when the asset is still under lease by another party or has yet to be contracted out.
The Hanafis, however, regard this contract as unbinding (ghair mulzim) for either party. For as long as the lease period has yet to commence, either party could terminate the contract without having to obtain any consent from the other party. Once the duration of the lease starts, the owner of the asset can neither terminate the contract nor can he prevent the lessee from leasing the asset.
In contrast, the Shafi`i school of thought rejects Ijarah mudhafah ila mustaqbal. In its opinion, a lease must commence promptly upon execution of the contract. In other words, a contract is not permissible should there be a time lag between the date the execution of the contract and the commencement of the lease. An exception for the Shafi`is is permitting Ijarah mudhafah ila mustaqbal as an (immediate) extension from one lease period to another. The contracting parties (lessee and lessor) remain the same and the (extension) contract must be executed before the first lease expires.
To illustrate, a person leases a house for two years with the first lease contract between the 1st June 2010 and the 31st May 2011. The lease is extended on the 1st June 2011 and expires on the 31st May 2012. In this scenario, the situation is equivalent to leasing the asset for a period of two years in one contract. AAOIFI also permits Ijarah mudhafah ila mustaqbal as stated below:
“The duration of an Ijarah contract must be specified in the contract. The period of Ijarah should commence on the date of execution of the contract, unless the two parties agree on the specified future commencement date, resulting in the future Ijarah, that is, an Ijarah contract to be executed at the future date.”
Shariah scholars Wahbah Zuhaily and Abdul Sattar Abu Ghuddah also permit Ijarah mudhafah ila mustaqbal, supporting the classical views discussed above.
Treatment of rental payment in Ijarah mudhafah ila mustaqbal
Under Ijarah mudhafah ila mustaqbal, the lessee receives the benefit (of using the asset) in the future and not at the time the contract is executed. What are the views of Islamic jurists on the rental payment for this kind of contract?
The Hanafis and Hanbalis view that rental payment is made on the date as specified in the future but not at time of contract. Should the contract specify that rental is paid at the time the contract is executed, the contract is fasid (void).
Given that this type of Ijarah contract is uncommon, the Hanafis are of the opinion that the lessee does not have to pay the rental in advance when the contract is executed, even if the lessor or asset owner demands it, on grounds that the lessee has yet to enjoy the benefit of the rented asset. The asset owner does not have the right to request advanced rental payment; the lessee can start the payments once he receives the benefit of the asset as stipulated in the contract.
Also note that the Hanafis are silent from the perspective of how far the lessee agrees with the conditions set by the asset owner. We can surmise that the lessor has set the condition without prior reference to the lessee. Similarly, should the lessee disagree with the condition, the lessor does not have the right to demand advanced rental. The SAC has thus ruled that the method of rental payment depends on the agreement reached by both the lessor and lessee. In addition, the rental only commences on a stipulated date in the future, that is, when the lessor begins to reap the benefits of the asset. The rental payment is also based on the terms and conditions stipulated in the lease contract and based on what is customary.
According to the SAC, “what is customary” is to ensure that both contracting parties’ interests are protected; the asset owner is allowed to determine a certain amount of rental due be paid in advanced at the time the contract is executed to confirm the lessee’s commitment in leasing the asset on the stipulated date. In the event that the lessee wishes to rescind the contract before the lease period commences, whether or not the advanced rental is reinstated to the asset owner would depend on the terms and conditions in the contract.
Failure to deliver the leased asset on the stipulated date
Under the AAOIFI standards, failure of the lessor to deliver the asset to the lessee on the stipulated date in the ijarah contract means no rental would be due until the date of actual delivery. Rental should be reduced accordingly, or if both parties agree, the lease period can be extended by an equivalent period after its original expiry date.
Figure 2 shows that delivery of the asset in the Ijarah contract was delayed until the 1st August 2011. According to AAOIFI, between the 1st June 2011 and the 31st July 2011, the lessor or asset owner does not have the right of the rental. If the lessee has made the payment for rental on the 1st June 2011, the rental for the whole lease period (1st June 2011 to 31st May 2012) must be reduced accordingly or the lease period extended by an equivalent period after its original expiry date, for example, to the 31st July 2012.
The SAC has thus ruled that total amount of rent due during the lease period should be reduced accordingly or the lease period extended should the asset owner fail to deliver the asset to be leased on the date stipulated date in the contract and that the lessee has made an advanced payment of the rental.
Conclusion
The development of Islamic financial products is growing rapidly and witnessing numerous underlying Islamic contracts used in structuring financial products. Ijarah mudhafah ila mustaqbal is another type of lease contract that can be applied in financial products to facilitate the needs of the industry. Although it is not widely applied, this contract is seen to be one of the Islamic contracts used in innovating new Islamic financial products.
Amplifying this need for innovation, SC chairman Zarinah Anwar stated succinctly at an Islamic roundtable event not too long ago: “As the Islamic finance industry progresses, the range of products and services offered by Islamic financial institutions will continue to grow. In this industry, market participants need to ensure that they maintain an innovative approach in their design and that they satisfy the true purpose of the Shariah: that is, to do what is right and just.”
This article was published in the May 2011 issue of Islamic Finance Asia