Part 2- Elaboration of the Selected Shari’ah Contract

Ijarah is simply known as leasing in Islamic banking. Financing consumer goods,

equipment and vehicles, and home are some functions of Ijarah contract adopted by

Islamic banking. According to Khir, Gupta and Shanmugam (2008), Ijarah derives from

Islamic fiqh (jurisprudence), which means to give something on a rental basis or wages.

Originated from the root word ajara, it provides meaning of recompensing, compensating

or rewarding (ISRA, 2012). Under Ijarah contract, no sale of physical entity is incurred,

but usufruct (benefits) instead. Usufruct is transferred from owners of something to a

third party for an agreed period, at an agreed consideration.

In terms of subject matter, Ijarah contract can be divided into two types: Ijarah ‘Ayn and

Ijarah ‘Amal (Khir, Gupta and Shanmugam, 2008; ISRA, 2012; Deloitte, n.d.). In Ijarah

‘Ayn, tangible assets like properties, factories, transport facilities and others can be hired

to get the usufruct, but not ownership of assets. Ijarah ‘Ayn is a contract between lessor

(mujir) and lessee (mustajir). Rent price is the consideration of this contact, which is

known as ujrah. This makes Ijarah contract to be distinctive from conventional lease,

which normally requires the client to return interest instead of rental fee. Lessee hires the

assets from lessor for an agreed period and agreed consideration, and would need to

return the assets upon expiry of contract. Lessor retains the ownership of assets, having

said that, the risk of ownership is also by the side of lessor. Therefore, Ijarah ‘Ayn is a

true leasing. On the contrary, Ijarah ‘Amal accentuates the services by employee, instead

of tangible assets. It is a contract between employer (mustajir) and employee (ajir).

Wages paid to employee are the consideration for this contract, which is known as ujrah.

Employer is required to pay employee wages at a fixed contractual period, for example,

monthly. Ijarah ‘Amal is considered as employment.

In terms of contractual relationship, Ijarah contract can be classified into two types as

well: operational lease and financing lease (Khir, Gupta and Shanmugam, 2008). For

operational lease, it does not conclude in a transfer of the leased assets to the lessee, even

upon the expiry of the contract. It is more suitable for expensive assets like aircraft and

heavy-duty industrial equipment. For financing lease, it offers the lessee an option to own

the asset at the end of the lease period either by gift or a sale at a specified consideration.

It is widely used in real estate, machinery and equipment. The contract used in this Ijarah

is known as al-Ijarah Thumma al-Bay’ (AITAB).

Under Ijarah contract, there are several conditions need to be conformed, which are

agreed by most of the Muslim scholars (Deloitte, n.d.; The Contract of Ijarah, n.d.):

1) Contracting Parties

Two parties should involve in the Ijarah contract: lessor (lease offeror) and lessee

(lease accepter). Both parties must possess full legal capacity and sound mind to

enter this contract. Voluntary and free from coercion must be present at both

parties before entering the contract.

Lessor must have full legal ownership of the object before entering the contract.

He or she retains the ownership of assets after the conclusion of the Ijarah

contract. Lessor must respect lessee’s right to enjoy using the leased assets

throughout the leasing period. Lessor bears all liabilities incurred from the

ownership.

Lessee must take good care of the leased assets, and cannot use it in a harmful

way. Otherwise, lessee is in full responsibility for repairing the assets, or

indemnifying the lessor. The lessee can only use the leased assets according to the

prescribed purposes in contract.

2) Offer and Acceptance

Offer and acceptance must be displayed clearly by both parties, through oral,

written, gestures and others.

Offer and acceptance must be made in the same session.

Offer must be corresponded exactly with acceptance.

3) Subject Matter

Must be valuable, quantifiable and physically present.

Usufruct from using an object is the subject matter of Ijarah contract.

Only physically-present object could provide usufruct to parties involved.

4) Considerations

Rent is the main consideration in Ijarah contract.

Amount of the rent must be specified clearly in the contract.

It should be certain and known to both parties.

The rent money has to be legal in Shari’ah.

Both parties must agree on the methods of paying the rent, date of paying the rent,

and manner of paying the rent.