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Ijarah

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MBA FINANCE
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  Definition  of ijarah .  A trype of contract in Islamic finance. Islamic financial institutions use ijarah  contracts either as a lessor or a lessee. Some jurists define ijarah  as ownership of the right to the benefit of using an asset for a period in return for a consideration.  Types of Ijarah In terms of its modus operandi, ijarah can be classified as operating ijarah and financial ijarah:  Operating ijarah (ijarah tashgheeliah):  Conventionally, operating ijarah used to be the one and only type of ijarah. According to operating ijarah, an owner of a property leases it to others for a specified period. The ownership of the leased property remains with the owner at the end of the lease tenor. For example, an Islamic bank could have some properties/assets on its books for lease. These properties/assets will remain on the bank’s books at the end of ijarah. Typically, this operating lease is not preceded by a promise by the owner to sell it to the lessor. Financial ijarah (ijarah muntahia bittamleek):  This is a modern form of ijarah that has been created following the evolution of Islamic banking and finance. It constitutes a form of ijarah in which ownership is transferred  to the lessee at the end of a specific period. According to the method of ownership transfer, this particular type of ijarah can be classified into four different types: 1.   Ijarah muntahia bittamleek through hibah (gift) : where legal title is transferred to the lessee without any more payments. The financial lease that is associated with hibah-type transfer is widely used by Islamic banks. The hibah (gift) can be either ordinary (unconditional) or conditional. Ordinary hibah is not embedded with a condition of payment of all rental installments, while conditional hibah contains such a condition, which makes it legally more enforceable (once the lessor pays the last installment, the lessor is legally bound to automatically transfer the property title). 2.   Ijarah muntahia bittamleek through ba i (sale) : in this type of ijarah, the lease agreement is executed with an understanding that the lessor will sell the property to the lessee at the end of ijarah tenor. This sale-based transfer can take a number of forms: a.   Ijarah muntahia bittamleek through transfer of legal title at the end of lease tenor for a token consideration. b.   Ijarah muntahia bittamleek through transfer of legal title prior to the end of lease tenor for a price that is equivalent to the remaining ijarah installments (net of rental). c.   Ijarah muntahia bittamleek through gradual transfer of legal title of the leased property.
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