gif Principles of Islamic Finance
Sale and lease back structure
Bank paid the price of assets
and executes sale transaction with customer
Bank lease back the assets to the client and executes Ijara agreement
.
IFI/Bank IFI/Bank Sale
Client sale the assets/unit of assets to bank
Lease Bank lease
back the asset to the client
1 cannot be terminated unilaterally. In case of termi-
nation, the lessee will be liable to pay rent up to the date of termination and handing over the asset to the leaser. He shall not be liable to pay the rent for the remaining period. 2. For valid Ijarah, ownership must remain with the leaser who should also bear the ownership related risks and expenses. 3. Any express or implied bilateral agreement that the title of the asset will pass on to the lessee at the end of the lease period is not in accordance with the Shariah principles.
Application of Ijara in Islamic Banking:
Ijara Muntahia Bittamleek:
It is a common Ijara which is used in auto financing, machinery financing etc. It is a simple transaction not a complicated one. However IFI’s should be very careful whilst documenting this transaction.
Ijara in Diminishing Musharaka:
Even though this is a form of Musharkah, Ijara is the basic part of this transaction most of the time. Accord- ing to this concept, a financier and his client participate either in the joint ownership of a property or equipment. The share of the financier is further divided into a num- ber of units and it is understood that the client will pur- chase the units of the share of the financier one by one periodically, and the client will also pay the rent of the shares of the financier. This increases his own share un- til all the units of the financier are purchased by him so as to make him the sole owner of the property.
Conditions if Diminishing Musharaka:
The IFI’s do this transaction with the combination of three transactions i.e. Shirkat/Musharaka, Ijara and sale transaction. Though this transaction is allowed by the Shariah scholar it is a very complicated transaction and all three transactions must be unconditional and separate from each other and shall not be stipulated with each other.
1 It must be ensured that the client did not sign a .
sale agreement with the buyer before approaching to the bank. 2. IFI shall bare all risk of his portion in Musharaka assets. 3. IFI shall bare the cost of Takaful/Insurance accord- ing to his proportion in Musharaka assets.
30 GlobalIslamic Finance June 2010
Vendor
Payment of Ijara Assets Price
Client Client
Sale and Lease Back:
This is an arrangement in which one party sells a prop- erty/unit/leasable asset to a buyer (IFI) and the buyer im- mediately leases the property back to the seller.
In this case the Ijara contract should not be executed un- less the sale transaction has completed and IFI acquired the asset. (Most of the Sha- riah scholars allow this trans- action only where the client wants to avoid interest based financing).
Some conditions for sale and lease back transac- tions:
The following conditions must be followed in Sale and Lease back Transaction:
1 The IBB officer shall personally visit all those units/ .
assets which the client intend to sell to the bank, and ensure the following:
• Assets are leasable • In case of Installed Machinery it must be ensured that they are appropriately installed • Presently in workable condition.
2. The IBB shall execute the sale agreement with the customer. All invoices received from the client shall be attached with sale agreement unconditionally.
3. The IBB shall make a payment to the party after execution of the sale agreement. 4. After sale agreement all risk and rewards shall be borne by the Institutions. 5. Then IBB and client shall enter into Ijarah Agree- ment.
6. The IBB shall obtain Takaful for its leased assets under Ijarah.
7 The IBB shall sign the Ijarah Rental Schedule and all Appendixes. gif
.
Structure of Ijara Muntahia Bittamleek
Transfer of title to bank
Title will transfer to the customer at the end of ijara, with Hiba sale Transaction.
Islamic
Banks
Ijarah Installment
Customer
(Lessee)
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