An Ijarah contract allows you to lease the asset which is owned by the Bank (lessor) in return for a rental payment over a specified Ijarah period. At the end of the lease, the Bank promises to transfer the title of the property to the customer, provided all payments have been made in accordance with the agreed terms and conditions.
An Ijarah Contract is executed for an asset owned by the lessor or the right to use owned by the sub-lessor.
Customers can request the Bank to acquire assets or to acquire the right to use of an existing asset which the customer wishes to take on for lease.
Master Ijarah Agreement covering general terms and conditions regarding Ijarah Transactions is signed between the Bank and the Customer.
Bank may require the customer to execute Promise to Lease Document and to pay a sum of money to the Institution to ensure the seriousness in accepting the lease on the asset and the subsequent obligations, provided no amount is to be deducted from this sum except in proportion to the actual damage suffered by the Bank in case the customer does not fulfil his promise.
Bank Acquire the Asset or its right to use before leasing it to the customer.
The lessee can sub-lease the asset unless restricted by the Lessor (owner).
Ijarah can be executed on described but not yet owned assets, provided specifications are met.
Joint acquisition of assets with customers is allowed, with rental proportional to ownership share.
The lease contract is a binding contract and cannot be terminated or altered without the mutual consent of both the parties.
The duration of Ijarah Contract, Fixed Rent, Variable Rent, rental of first period must be specified in the Ijarah Contract.
The rental payments start when the lessee begins benefiting from the asset.
Earnest money (A’rboun) can be taken and treated as an advance rental payment.
The leased asset must be capable of being used while preserving the asset.
The lessee must use the leased asset in a suitable manner or in conformity with common practice and comply with conditions which are acceptable in Shari’ah.
The Lessee must also avoid causing damage to the leased asset by misuse through misconduct or negligence.
The lessor is responsible for major maintenance of the asset.
The lessee should carry out operating or periodical (ordinary) maintenance of the asset.
The lessor may take out permissible Islamic insurance for the Asset, and such insurance expenses must be borne by the lessor.
Lease Rentals can be in cash, in kind (goods), or benefit (services), and must be specified in the Ijarah contract.
The lessor’s entitlement to the rental runs from the time when the lessee starts to benefit from the asset or once the lessor makes the right to use of the asset available to the lessee.
The rental may be paid entirely in advance or in instalments as per the duration of Ijarah contract.
Rentals are determined through a certain benchmark (Such benchmark is based on a clear formula which is not subject to dispute).
The benchmark is subject to a ceiling, on both maximum and minimum levels
The future rentals can be amended by the agreement of both the parties.
The rentals of any previous periods which have not yet been paid become a debt owed to the lessor by the lessee, and therefore cannot be increased.
The Ijarah contract can be terminated by mutual consent or specific conditions like Selling the Ijarah Asset to the Lessee or to the third party, force majeure or total destruction of Leased Asset or there is a defect in the leased asset that materially impairs its use.
The lease does not terminate with the death of either party but can be terminated by heirs if necessary.
Ownership transfer methods must be in a separate document from the Ijarah contract document. One of the following methods can be used to transfer the ownership:
By means of a promise to sell for a token or other consideration, or by accelerating the payment of the remaining amount of rental, or by paying the market value of the leased property.
A promise to give it as a gift (for no consideration).
A promise to give it as a gift, contingent upon the payment of the remaining instalments.
In all these cases, the separate document is executed for the transfer of ownership from the Bank to the customer (Sale Purchase Agreement and Promise Document).
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