2.3.3 EXCHANGE BASED CONTRACTS IJARAH

UMC090
SHARI'AH CONTRACTS FOR ISLAMIC

FINANCIAL INSTRUMENTS

EXCHANGE BASED CONTRACTS:

IJARAH

By: Dr. Wan Noor Hazlina Wan Jusoh

Learning Outcomes

At the end of this topic,
students should be able to:
To explain ijarah contract.

Contents

1. Introduction
2. Definition
3. Evidences
4 Pillars of Ijarah
5. Flow of Ijarah
6. Types of Ijarah
7. Opinions of Scholars
8. Modern Applications in Islamic Finance
9. Conclusion

1SECTION

Introduction

INTRODUCTION Ijarah is a unique contract used by
Islamic banks compared to other
contracts such as Murabahah,
Tawarruq, Bay Inah and other
contracts used for financing
products (Yusuf & Isa, 2021).

Ijarah (lease contract) is one of The distinctiveness of Ijarah
the essential financing contracts contract is that Islamic banks
offered by Islamic banking entirely own the asset of Ijarah
institutions to meet the demand of financing while the client is only
the clients. entitled to the usufruct of the
asset.

2SECTION

Definition

DEFINITION

The term ijarah originates from the Arabic verb ajara’
which denotes ‘rewarding’ or ‘recompensing’.
Literally: the reward given for service rendered
Technically:

An agreement between two parties, one being
the owner of the asset, who gives possession of
the assets for the use of the other party, the hirer,
on an agreed rental over a mutually agreed
period.

Transferring the usufruct of a particular property
to another person in exchange for a rent claimed
from him.
Thus, ijarah is akind of contract of financial
exchange.

3SECTION Evidences

EVIDENCE

The majority of jurists rule
that ijarah is permissible and
binding contract.
The evidence to that is
derived from the Qur'an, the
Sunnah, consensus (ijma')
and reasoning.

1) The Qur'an

i) Al-Talaq: 6
"...And if they suckle your (offspring), give
them their recompense..."
ii) Al-Qasas: 26-27:
"Said one the (demsels), 'O my (dear)
father! Engage him on wages truly the best
of men for thee to employ is the (man) who
is strog and trusty.' He said, 'I intended to
wed one of my daughters to thee, on
condition that thou serve me for eight
years; but if thou complete te years, it will
be (grace) from thee'"

2) The Sunnah

i) "He who hires a worker must inform him of
his wage" ('Abd al-Razzaq, hadith no:
15024)
ii) "Pay the hired worker his wage before his
sweat dries" (al-Bayhaqi, al-Sunan al-
Kubra, hadith no. 11439)
iii) Three people I shall be their enemy
during dooms day. Then he mentioned, 'A
man who hired a worker to carry out some
work for him, but did not give him his wage'
(al-Bukhari, hadith no. 2150)

3) Ijma'

Though it was narrated that 'Abd al-
Rahman ibn al'Asam has prohibited
ijarah due to gharar as it is a contract
on usufructs not yet available, jurists
refuted his argument. They indicated
that here, gharar shall be ignored
because the contract on usufructs is
not possible after the existence of
usufructs as they perish as time passes.
So, a contract for them should be
concluded before they become like
the salam contract on assets.

4) Reasoning

Ijarah is a means of facilitating the
standard of life by helping people
to get the usufructs of assets
which they do not own. The need
for usufructs is similar to the need
for assets, and consideration for
the needs of the people is a basic
principle in legalising a contract so
as to fulfil such needs and
requirements.

4SECTION

Pillars of Ijarah

Pillars of Contracting Offer &
Ijarah Parties Acceptance

Ijarah

Asset & Rental
Usufruct

5SECTION

Flow of Ijarah

FLOW OF IJARAH 1.Customer identifies and
approaches vendor of the asset
Vendor that he needs & collects all the
relevant information.
Customer a Bank
b 2. Customer approaches the bank
for an ijarah of the asset and
promises to take the asset on
lease from the bank upon bank's
purchase of it.

3.Bank purchases the asset and
makes the payment on a cash
basis.

4. Vendors transfers ownership of
the asset to the bank.

5.The bank leases the asset to the
customer by transferring
possession and right of use of the
asset.

6.The customer pays ijarah rentals
over lease (ijarah) period.

7.At the end of the lease term, (a)
the asset reverts to the bank if it is
an operating lease, or (b) the legal
ownership is transferred to the
customer if it is a finance lease.

6SECTION

Types of Ijarah

TYPES OF IJARAH

Types of Ijarah

Ijarah based on Ijarah based on Ijarah based on Ijarah based on Ijarah based on
the subject specification of the time the the bindingness the contractual
matter subject matter of the contract
Tangible contract becomes relationship
Asset effective Operating
Labour lease
A particular Immediately Binding Finance
source of effective lease
lease
benefit
A liability or Lease at a Non-
a pledge to future date binding
be fulfilled

Lease subjected to
fulfilment of

certain conditions

7SECTION

Opinions of Scholars

OPINIONS OF SCHOLARS

COMBINATION OF
CONTRACTS

Muslim jurists ruled that it is not permissible
to tie one transaction with another so as to
make the former a precondition to the
other.
However, they allow the combination of
more than one contract in one transaction
without imposing one contract as a
condition on the other.
Thus, the lessor may also enter into a
unilateral undertaking to sell the leased
asset to the lessee at the end of the lease
period.
This undertaking shall be binding on the
lessor only.

8SECTION

Modern Applications
in Islamic Finance

MODERN APPLICATIONS IN ISLAMIC FINANCE

Ijarah has been used to construct numerous
financing product offered by the bank in Malaysia:

Simple Ijarah

Ijarah rental swaps Ijarah thumma al-bay'

Ijarah Sukuk Ijarah al muntahiyah
Islamic credit card bi al-tamlik

Education financing

Musharakah
mutanaqisah

al-Ijarah Thumma al-Bay'

customer

Source: Al-Mubarak & Badri, 2015

al-Ijarah al-Muntahiyah bi 1.Customer finds a vendor and
al-Tamlik identifies a lorry that he wishes to
rent.
Vendor
2.The customer approaches the
Customer Bank bank. They both enter into an
agreement where the bank
promise to purchase the lorry and
the customer promises to rent the
lorry from the bank thereafter.

3.The bank purchases the lorrry from
the vendor in accordance with the
order of the customer.

4. Ownership is transferred to the
bank.

5.The bank lease the lorry to the
customer for a specified period of
time at a rental as agreed among
the parties.

6.The customer pays monthly lease
rentals to the bank.

7.At the end of lease period, the
customer receives the title of lorry
as a form of hibah (gift). Ownership
of the lorry is transferred to the
customer in a separate contract.

9SECTION

Conclusion

CONCLUSION

Ijarah financing is one most essential
products that Islamic banks offer to their
clients.
Ijarah financing has a positive and
significant effect on Islamic banks' net
profit margin, reflecting that Ijarah
financing is an asset creation tool that
banks prefer, particularly for generating
income.
Today, Islamic hire-purchase is viewed as
one of project financing and technical
assistance.
This facility can be used to finance many
activities, which include those in trade and
commerce, industry, agriculture and
fisheries, housing and personal advances
other than those for business purposes and
housing.

10SECTION

References

REFERENCES Al-Mubarak, Tawfique & Badri, Ahmad. (2015). Maqasid in
Risk Management : An Analysis of Ijarah Contract with
Special Reference to Malaysia. Islam and Civilisational
Renewal. 6. 76-91. 10.12816/0009898.
Bank Negara Malaysia. (2018), Ijarah,
https://www.bnm.gov.my/documents/20124/938039/PD+I
jarah+28062018_Final.pdf/479fc345-c628-8996-25f0-
8d1fe06aa700?t=1592245815724
ISRA., (2020). Islamic Financial System: Principles &
Operations (2nd Ed.), Kuala Lumpur: International Shari’ah
Research Academy for Islamic Finance.
Yusuf, M. S., & Isa, M. Y. (2021). The Impact of Ijarah/
Lease FIinancing on Malaysian Islamic Bank Performance.
International Journal of Islamic Business, 6(1), 49-58.

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