After the exhaustive discussion on various uses of the Ijarah or Islamic leasing contract comprising 13 weekly articles, I will now focus on wrapping up the subject of Ijarah by attending to a few auxiliary points.
At the time of opening the Ijarah debate in article No 62, I had written the following passage:
“An Islamic bank may directly enter into an Ijarah contract with the customer if the leasing asset is readily available in its ownership and possession. However, it will not be possible for an Islamic bank to enter into an Ijarah contract in the case of absence of the asset purported to be leased. In such a situation, the Islamic bank may request the customer to provide a ‘promise to lease’ before it starts the acquisition of the asset required to be leased or enter into a forward lease contract with the customer.”
Today, I will try to make you understand what a forward lease contract is which is known as Ijarah Mawsufah Fi Dhimmah (IMFD) in Shariah terminology.
I have earlier explained that the Ijarah contract can be entered into over an immovable as well as movable asset. However, the Ijarah asset cannot be a commodity or anything which is consumable since it will not be able to meet the Shariah condition of remaining intact upon the completion of the Ijarah term. Examples of consumable items are electricity, petrol, food grain and other such items that get consumed. These can be traded under Murabahah or Salam but do not make a good candidate for Ijarah.
As such, any asset having the quality of remaining intact when the Ijarah term comes to an end can be made the subject matter of the lease contract. What about an asset which is non-existent? Can such an asset be made part of an Ijarah contract? Yes. You can enter into an Ijarah contract over an off-plan property which is currently non-existent but will be developed over an agreed period of time. Such a contract is classified as a forward lease or IMFD.
An everyday life example of the forward lease contract is when someone books a property with a developer upon the launch of the new project by paying a required booking amount or a downpayment from his or her own source but with an intention to seek an Islamic bank’s assistance for the stage payments. If such a customer approaches the Islamic bank for this purpose, he or she will be entertained by the bank under the forward lease product.
If you recall, I had written a full article No 65 on the genius of the tripartite agreement in Ijarah financing. But that was in the backdrop of readily available property. Can the tripartite agreement be used in the off-plan property too and if so how? The scholars have permitted the application of the tripartite agreement in the cases of an off-plan property too for the purpose of acquiring the title to such property by the Islamic bank or financial institution without which it will not be in a position to enter into the forward lease contract.
The complete mechanism elaborated in that article will apply mutatis mutandis in the case of the forward lease contract, thus saving me the effort to repeat it here.
Once the title to the off-plan property has been transferred from the customer to the developer and from the developer to the Islamic bank, the Islamic bank will enter into the forward lease contract with the customer whereby it will undertake to deliver the property to the customer upon getting the possession from the developer, and at the same time the customer will promise to start the payment of the lease rent to the Islamic bank.
I would like readers to comprehend the situation that the Islamic bank will continue to make payment directly to the developer during the construction period (which may well stretch from two to four years depending on the complexity of the project) but the customer will only commence the rental payment upon getting the delivery of the underlying property when the lease is actually triggered.
Compare it with the conventional mortgage lending for an off-plan property, the customer will start making interest payment from day one on the accumulated stage payment amount in the bank’s ledger against the property. The fairness of Islamic home financing for off-plan properties when compared to conventional mortgage is evident from this disparity.
A question arises that if the Islamic bank continues to make stage payment to the developer whereas the customer will only commence rental payment to the Islamic bank upon the completion and delivery of the property to him or her, who bears the cost of funds for such a gap?
Any guesses until we meet next week?
The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinions of the Dubai Islamic Economy Development Centre, nor the official policy or position of the government of the UAE or any of its entities. The purpose of this article is not to hurt any religious sentiments either consciously or even unwittingly.
Sohail Zubairi is the senior advisor with the Dubai Islamic Economy Development Centre. He can be contacted at [email protected]
Next week: We shall continue wrapping up the last few points on Ijarah.