The concept of Ijarah is a valuable tool in the development of many Islamic financial products and transactions. SOHAIL ZUBAIRI takes us on a journey through its history and explains its basic structure.
Ijarah derives legitimacy from the Holy Quran, the Sunnah, a consensus of the Ulema (scholars) community and the reasoning and logic in commercial transactions.
On the level of Quran, Allah, the Almighty, says: “Said one of them: “O my father, engage him on wages,” (Surah al-Qasas verse 26) and: “If you had wished, surely you could have exacted some recompense for it,” (Surah al-Kahf, verse 77).
The authority for the legitimacy of Ijarah in the Sunnah is the saying of the Prophet Mohammed that whoever hired a worker must inform him of his wage (Ibn Majah, Sunan Ibn Majah) and his saying: “Give a worker his wage before his sweat is dried” (al-Tabrani).
The legitimacy of Ijarah has generated consensus among the community of Muslim jurists. Ijarah is also acceptable by reasoning because it is a convenient means for people to acquire the right to use assets that they do not own, as not all people can afford to own tangible assets.
The legitimacy of Ijarah Muntahiya Bittamleek
Ijarah Muntahia Bittamleek is no different in its rules from an ordinary Ijarah, except that it is associated with a promise by the lessor to transfer ownership of the leased asset to the lessee at the end of the Ijarah term. The validity of this form of Ijarah is confirmed by the resolution of the International Islamic Fiqh Academy, which has explained the permissible forms of Ijarah Muntahiya Bittamleek.
Ijarah and hire purchase
It must be noted that the permissible Ijarah Muntahia Bittamleek is different from hire-purchase as it is commonly practiced by conventional banks in the following respect:
In hire-purchase, the terms and provisions of sale and leasing are applied to the subject matter at the same time, and the ownership of the subject matter is transferred to the lessee (buyer) once he pays the last instalment, without the need for a separate contract for the transfer of ownership.
In the permissible Ijarah Muntahia Bittamleek, on the other hand, the provisions governing Ijarah are applied to the leased asset until the end of the Ijarah term, after which the lessee obtains ownership of the asset through a separate sale and purchase agreement.
Definition
In simple terms, Ijarah provides the benefit of the use of an asset or an individual’s services.
For example, if Ahmed employs Badar for his services and pays a wage, Ahmed will be the Mustajir (employer) and Badar will be the Aajir (employee) while the transaction will be termed Ijarah (hiring) and the wage will be Ujrah.
Apply these terms to an asset, for example a car. In this case, the Aajir will be the owner of the car, the Mustajir will be the person who is currently using it, the amount paid by the Mustajir will be Ujrah and the whole transaction will be called Ijarah.
Comparison with Murabahah
To understand it more clearly, note that in the above transaction while the basic concept is similar to a sale (such as Murabahah) whereby an asset is transferred to another party for a monetary consideration, it is important to note that the Ijarah merely allows transfer of the usufruct (the right of use) to the Mustajir (lessee) whereas the corpus of the asset or its usufruct continues to remain with the Aajir (lessor).
On the contrary, in Murabahah the corpus and the usufruct both are transferred to the buyer at the time of concluding the transaction.
As such, it is often said that Ijarah is originally an ordinary business activity improvised to serve as a financing tool by Islamic financial institutions. It is widely used to finance aircrafts, marine vessels, real estate projects and for any other Shariah compliant funding need.
Sukuk Ijarah
Increasingly, the Ijarah structure has been effectively used for the issuance of Sukuk or Islamic bonds by large corporate entities in the Gulf region. Following is a brief overview of Sukuk Ijarah, or leasing Sukuk.
The trustee of the Sukuk certificates (working as an agent for and on behalf of the Sukuk investors) purchases the Shariah compliant asset from the obligor (the entity needing finance) using the proceeds raised from the Sukuk subscription, and leases the acquired asset to the obligor for a consideration of the rentals to be paid during the lease term.
The Sukukholders, through the trustee, jointly own the asset through a pro rata undivided ownership interest in the underlying assets and equally share the profits and losses attributable to the asset.
Following are the characteristics of a Sukuk Ijarah transaction:
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The underlying asset, or its usufruct, should be Shariah compliant and can be owned and leased.
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The rules of Ijarah shall apply in the relationship between the trustee and the obligor.
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The redemption of the Sukuk can be through a purchase undertaking to be procured from the obligor to be exercised by the trustee at face value.
Ijarah has also been used by fund managers to acquire a real estate asset either off-plan or readily available. The investors are distributed rental income during the fund’s tenure and upon completion of the fund’s tenure the asset is sold and the capital gain, if any, is distributed pro rata between the investors.
Ijarah has also been successfully used in hybrid structures for the purpose of large-scale project financing, whereby it is combined with Musharakah, Mudarabah or Istisnah. Without doubt, Islamic finance would be less fascinating without the concept of Ijarah.
Sohail Zubairi is CEO of Dar Al Sharia Legal & Financial Consultancy. He can be contacted at
[email protected]
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