Slide 1

Ijarah {Islamic Leasing}

Work Division (Outline)My topics are;Banks we visitedAssets includes in IjarahDefinition of IjarahProcess of IjarahOwais Majeeds topic is;Basic Rules of IjarahHafiz M. Usmans topic is; Requirements of Car Ijarah

Work Division (Outline)Shahid Munirs topics are;Cars offered by Meezan BankKey features of car IjarahTakaful instead of insuranceM.Umer Farooqs topics are;Application ProcedureTerms and conditionsProcessing & Valuation chargesBasic features of IjarahZubair Khalids topic is; Difference b/w Ijarah & Lease.

Banks We Visited Burj Bank (Gujranwala)Bank Alfalah Limited (Gujranwala)Meezan Bank (Gujranwala)The Bank of Khyber (Gujranwala)Faysal Bank Limited (Gujranwala)Islamic Bank (Kamonke)Meezan Bank (Kamonke)Meezan Bank (Daska)The Bank of Khyber (Daska)

Ijarah {Islamic Leasing}

Ijarah {Islamic Leasing}Definition of IjarahLiterally means:To give something on rent.

It is defined as;to transfer the usage of a non-consumable asset by the owner (the lessor) to another person (the lessee) for an agreed period, at an agreed price (rent).

Process of Ijarah

CUSTOMER

Payment of Purchase PriceMECHANICS

ISLAMICBANKThe Bank makes payment to the vendorThe Bank purchases the item required for leasing and receives title of ownership from the vendorThe customer approaches the Bank with the request for financing and enters into a promise to lease agreement.

Transfer of Title

VENDOR

.

.

Agreement-1

Ijarah

8IJARAH AND IJARAH MUNTAHIA BITTAMLEEKThe customer approaches the Bank with the request for financingThe client approaches the Bank showing interest in purchase of the commodity. He will present full description and detailed specification including the source of supply.

The Bank will run a credit valuation, the same way its done in conventional banking.

If the customer is a good risk, then the Murabaha margin (i.e. Banks profit on the market-up price) for him will have to be decided. The margin will be quoted, most probably as a per annum flat rate based on the total cost of acquiring the commodity by the Bank including the price and all related expenses.

If the customer agrees, he will be asked to sign a pledge agreement, committing him to buy such commodity once it is under the possession of the Bank. As part of the Murabaha transaction, the client will asked to present some securities to the Bank at the time of signing the pledge. These securities could be in the form of cash or any other liquid asset, equivalent to about 5% to 10% of the value of the deal.

The Bank purchases the item and makes payment to the vendorThe Bank will contact the vendor of the commodity specified by the customer and make arrangements for the acquisition. The Bank will make the required payment to the vendor for receipt of the commodity.

The Bank receives title of ownership from the vendorThe Bank is only able to execute the Murabah deal when the commoditys ownership is completely transferred over to the Bank from the vendor.

The customer makes payment up-front or on a deferred basisThe customer will either pay the Bank the whole amount of the Murabaha contract (including a mark-up) up-front of make payments on a deferred basis.

The Bank transfers the title over to the customer upon paymentThe Bank will transfer the ownership title of the commodity to the customer once the payment is received from the customer.

Payment of Rental Fees

CUSTOMER

Transfer of Title

Payment of Purchase PriceMECHANICS

ISLAMICBANKThe customer makes periodic rental payments as per the contractThe Bank leases the asset to the customer after performance of lease agreement.

Transfer of Title

VENDORAt the end of the tenure customer can purchase the asset from the bank with the help of separate Sale agreement.

.

.

Agreement-2

Ijarah as a mode of financing

9The customer approaches the Bank with the request for financingThe client approaches the Bank showing interest in purchase of the commodity. He will present full description and detailed specification including the source of supply.

The Bank will run a credit valuation, the same way its done in conventional banking.

If the customer is a good risk, then the Murabaha margin (i.e. Banks profit on the market-up price) for him will have to be decided. The margin will be quoted, most probably as a per annum flat rate based on the total cost of acquiring the commodity by the Bank including the price and all related expenses.

If the customer agrees, he will be asked to sign a pledge agreement, committing him to buy such commodity once it is under the possession of the Bank. As part of the Murabaha transaction, the client will asked to present some securities to the Bank at the time of signing the pledge. These securities could be in the form of cash or any other liquid asset, equivalent to about 5% to 10% of the value of the deal.

The Bank purchases the item and makes payment to the vendorThe Bank will contact the vendor of the commodity specified by the customer and make arrangements for the acquisition. The Bank will make the required payment to the vendor for receipt of the commodity.

The Bank receives title of ownership from the vendorThe Bank is only able to execute the Murabah deal when the commoditys ownership is completely transferred over to the Bank from the vendor.

The customer makes payment up-front or on a deferred basisThe customer will either pay the Bank the whole amount of the Murabaha contract (including a mark-up) up-front of make payments on a deferred basis.

The Bank transfers the title over to the customer upon paymentThe Bank will transfer the ownership title of the commodity to the customer once the payment is received from the customer. IJARAH AND IJARAH MUNTAHIA BITTAMLEEK

10Explanation:

The contract is invalid because fuel cannot be rented out because it cannot maintain its corpus when it is used.Case:The Islamic Bank has entered into a Ijarah contract with M/s Pak Petroleum Ltd. to supply fuel worth Rs. 5 Million for five years. The rent has been fixed to be Rs. 10,000 /= per month. Is this Ijarah contract valid?

11Explanation:

Since the subject matter is not in usable form, therefore, the rental may start after it is in useable form i.e. after 31st March 2008.Case:The Islamic Bank has rented out a building to M/s Basheer Sons on January 01, 2008. The building is under renovation which would finish within three months. The Ijarah Agreement has been signed and bank is charging the rent from the date of signing the Ijarah Agreement.

Basic Rules of Ijarah

Basic Rules of IjarahSubject of lease (Islamic)(Should be valuable, identified and quantified)All consumable things cannot be leased out.(For example money, wheat etc.)All liabilities of ownership is borne by lessorPeriod of lease known to both parties

Basic Rules of IjarahLease for specific purpose(The lessee cannot use the leased asset for any purpose other than the purpose specified in the lease agreement.)Ijarah payments cannot be assigned to third party.In case late paymentSelf Imposed Penalty Charity Account

Basic Rules of IjarahLessee as Ameen(The lessee is liable to compensate the lessor for every harm to the leased asset caused by any misuse or negligence)Determination of RentalMust be determined Variable Rentals in Long Term LeasesLessor has right to changeBoth parties known the rent

ACE Group

Basic Rules of IjarahIjarah payments would be stopped if asset is out of order.Rent should be charged after the delivery of the leased assetNo hidden registration / tax related expenses and feesNo hidden takaful (Insurance) payment

Basic Rules of Ijarah Processing feeTakaful (Insurance) 4.25%In case of Accident (4 lac coverage)Customer as an agent can not appointed

Car Ijarah Requirement

You can enjoy the benefits of CarIjarahif you:

Are a salaried individual/ self-employed professional/businessman

Have a net take home income exceeding three times your monthly rental

You can enjoy the benefits of CarIjarahif you:

Havetwo years working / professional / business experience

Are working with your present employer for at leastsix months (for salaried individuals)

DOCUMENTS REQUIREDIf you meet the requirements and wish to apply for Car Ijarah, simply fill out an application form and bring the following documents to your nearest Meezan Bank branch.

Application form duly filled and signed by the applicantCopy of CNICOne recent passport sized photographAny paid utility bill (Electric/Gas/Water) received at the residential address

DOCUMENTS REQUIRED

Original or certified copy of Recent Pay slip (for Salaried Individuals only)Last Six Month Bank StatementSpecimen signature card duly signed & stamped by the bankCopy of Rent Agreement (if applicable)

DOCUMENTS REQUIRED

Car offering by Meezan bank

Car offering by Meezan bankSuzukiHondaToyotaHyundaiMitsubishiMaster - Commercial

Suzuki Product offering by Meezan BankMehran VX Non-MetallicMehran VXR Non-MetallicSwift DX STDCultus VXRi Non-MetallicLiana 1.3 RXILiana 1.3 RXI CNGAPV 1.5 GLX M/TJimny JLSX M/TJimny JLDX M/T

Cargo VANBolan VX NonMetallicRavi Pickup STD Non-MetallicSwift ATSwift DLXWagonR VXWagonR VXLWagonR VXR

Key Features of Car IjarahLow monthly rentalRental paid after delivery, not in advanceFastest processing and deliveryTracker option availableMinimum security deposit as low as 10%*All new, used, local, imported and luxury vehicles can be financed

* Conditions apply

Takafulinstead of InsuranceLegally (in accordance to Pakistans Law and Regulations), it is required for all leasing entities to insure the leased assets. As such, Meezan Bank insures its leased assets. Meezan Bank insured its assets through Takaful only, which is the Islamic product for insurance.

To apply for Meezan Banks Car Ijarah, fill out a customer application form (available at anyBranch), attach the required documents and get your financing approved in a 1-2 working days.Application Procedure

Terms and conditionsThe customer shall be responsible for selecting the vehicle.

The customer shall provide Security Deposit before disbursement of Ijarah facility. In case of used (already registered) vehicles, the customer shall get the vehicle transferred in the Banks name prior to signing of Lease Agreement.

Bank Processing Charges are non-refundable.

Terms and conditionsPlease do not give cash to any employee or representative of Meezan Bank Limited for any charges or services or for any other purpose. All payments must be made via crossed cheques/payorders drawn in favour of Meezan Bank Limited.

MBL reserves the right to reject any application without assigning any reason.

In case the applicants cheque for Application Processing And Documentation charges or Security Deposit is dishonoured, MBL reserves the right to reject the application.

Terms and conditionsYou will be required to pay Processing And Documentation charges upfront before disbursement.

In case your application is approved, you will be required to pay the amount of Security Deposit before disbursement of facility.

Processing & vehicle valuation chargesCost of VehicleChargesAmount (PKR)Less than 1.00 million (999,999/-)Processing4,000/-Greater than 1.00 millionProcessing5,000/-

Domestic Vehicles - New

Processing & vehicle valuation chargesDomestic Vehicles - Used / ImportedCost of VehicleChargesAmount (PKR)Less than 1.00 million (999,999/-)Processing3,000/-Valuation1,500/-Total4,500/-Between 1.00 million & 1.5 millionProcessing4,000/-Valuation1,500/-Total5,500/-Note:Valuation changes for vehicle greater than 1.5 million will be charged at actual. Processing charges will remain unchanged.

Processing & vehicle valuation chargesCommercial Vehicles - NewOut Station Verification ChargesCost of VehicleChargesAmount (PKR)Less than 1.00 million (999,999/-)Processing4,000/-

Cost of VehicleChargesAmount (PKR)Less than 1.00 million (999,999/-)Processing4,000/-

Basic Features - NormalIjarah(Indus)ParametersDetailsAsset (vehicle)All variants of IndusOwnershipOwnership lays with Meezan Bank limitedPeriod of facility3, 4 & 5 yearsPeriodicityPre-determined monthly rentalsAdvance Rent / Security depositMinimum 20% of cost of the vehicleMaximum 50% of the cost of the vehicleProcessing chargesRs. 4,000/-Takaful provisioning4.25% with trackerTrackerFree Tracker (no installation & monitoring charges) to be installed in all vehicles.Free Accidental Death CoverageUpto Rs. 400,000/-Mode of paymentThrough post dated cheques

Basic Features - SuzukiParametersDetailsAsset (vehicle)For Residual Value Ijarah: Suzuki Mehran, Cultus, Swift, Bolan and Wagon-ROwnershipOwnership lays with MBLPeriod of facility3, 4 & 5 yearsPeriodicityPre-determined monthly rentalsAdvance Rent / Security depositMinimum 10% of cost of the vehicleMaximum 70% of the cost of the vehicleResidual value (RV)3 Year 5% to 55%4 Year 5% to 50%5 Year 5% to50%Processing chargesRs. 3,000/-Free Accidental Death CoverageUpto Rs. 400,000/-Mode of paymentThrough post dated cheques / debit instruction

CALCULATION

40Difference Between Conventional Leasing and Ijarah

41Leasing/Ijarah ContractConventional Leasing Car IjarahThere are two types of contracts, Financial lease and loan for car financing. Both these contracts contain conditions that are contravenes with the Islamic Shariah. Financing lease contains conditions of hire purchase, which is not permissible by Shariah. Car financing or loan agreement contains conditions of interest. Interest is considered Riba by Shariah The Ijarah contract does not contain any condition that makes the contract void under Shariah perspective.

42Rights & Liabilities of Lessor and LesseeConventional Leasing Car IjarahIn Conventional Leasing Products, the Customer is responsible for all kinds of losses or damages to the Leased asset, irrespective of the circumstances.

If the insurance company does not compensate the entire outstanding amount in case of total loss, the customer is liable to pay the balance. All risks pertaining to ownership are borne by Lessor. Customer only bears usage-related risks

Lessor bears the risk of Insurance claim settlement.

43Rentals recovery in case of theft and lossConventional Leasing Car IjarahIf the Leased Asset is stolen or completely destroyed, the conventional leasing company or Bank would continue charging the lease rent till the settlement of the Insurance claim Under the Islamic Ijarah, rent is consideration for usage of the leased asset, and if the asset has been stolen, destroyed or temporarily out of order and not in use of Customer, the concept of rental becomes void. In such situations rental is not charged from the lessee.

44Penalty for late paymentConventional Leasing Car IjarahIn most contemporary financial leases, an extra monetary amount is charged if rent is not paid on time. This extra amount is the considered Riba and is Haram.

This amount is taken by the leasing institution into their income. Under Ijarah, the Lessee may be asked to undertake that if he fails to pay rent on its due date, he will pay a certain amount to a charity Fund, which will be administered through the Islamic Bank.

For this purpose the bank maintains a charity fund where such amounts may be credited and disbursed for charitable purposes.

45Insurance premiumConventional Leasing Car IjarahInsurance is independent of the lease contract. The insurance expense of the asset is directly borne by the lessee

Takaful / Insurance should be at the expense of the Lessor and not at the expense of the lessee. The Lessor may increase the lease rent to recover any costs incurred by him in connection with the asset. However, as a matter of principal, the cost should be paid for by the Lessor.

46Registration ChargesConventional Leasing Car IjarahLessee is responsible for the Registration of Leased Vehicle.The Leased Asset(vehicle) is registered in the name of the Bank and registration charges are paid by the Bank (Lessor).

The Lessor may increase the lease rent to recover any costs incurred by him in connection with the asset

47

Purchase of assetConventional Leasing Car IjarahUnder conventional leasing contracts, the vehicle is automatically transferred in the name of the customer upon completion of the lease period, whether or not he wants to purchase it. There is not such clause in the Ijarah Agreement that Leased Asset will automatically transfer to Lessee.

Separate sale agreement is required to execute sale transaction at the end of lease term.

48Commencement of RentalsConventional Leasing Car IjarahIn case of Booking of Leased Asset, recovery of Lease installment commence after the payment of cost of Asset to manufacturer/dealer.In case of Car Ijarah, the recovery of rentals is associated with delivery of Leased Asset.

Rental recovery should not be commenced before the delivery of Asset.

49Signing of Lease ContractConventional Leasing Car IjarahLease Agreement can be signed by the Lessee and any time even if the Leased Asset is not owned by the Customer.In case of Ijarah, the Ijarah Agreement can not be signed by the Lessor and Lessee unless:

Asset has come in to existenceAssets is in the ownership of the LessorLessor has taken possession of the Asset

50Termination before deliveryConventional Leasing Car IjarahThe customer will suffer loss of interest paid during the booking period because installment commence immediately after payment of cost of asset to the Manufacturer/Dealer.The loss of customer is only limited to actual loss, if any, suffered by the Lessor on sale of asset in the open market.

Since the customer has not paid any rental during the booking period, no other cash loss is expected under Ijarah.

51Explanation:

This clause is making selling of the leased asset contingent upon the Ijarah agreement; therefore, the contract would be invalid.Ijarah contract contains a clause that the asset would be sold to the lessee after the lease period if he makes the rental payments on time.Case:

52Explanation:

The lease is valid since the rents have been fixed at the beginning of the Ijarah period.

The bank leases a machinery to Mr. B for 5 years. The rent for the first year is fixed as Rs. 20,000/- per month and it is agreed that the rent of every subsequent year shall be 10% more than the previous one.

Case: