Like murabahah, Ijarah was not originally a mode of financing. It is simply a transaction meant to transfer the usufruct of a property from one person to another for an agreed period against an agreed consideration. However, certain financial institutions have adopted leasing as a mode of financing instead of long term lending on the basis of interest. This kind of lease is generally known as the ‘financial lease’ as distinguished from the ‘operating lease’ and many basic features of actual leasing transaction have been dispensed with therein.
When interest-free financial institutions were established in the near past, they found that leasing is a recognized mode of finance throughout the world.
On the other hand, they realized that leasing is a lawful transaction according to Shariah and it can be used as an interest-free mode of financing. Therefore, leasing has been adopted by the Islamic financial institutions, but very few of them paid attention to the fact that the ‘financial lease’ has a number of characteristics more similar to interest than to the actual lease transaction. That is why they started using the same model agreements of leasing as were in vogue among the conventional financial institutions without any modification, while a number of their provisions were not in conformity with Shariah.
As mentioned earlier, leasing is not a mode of financing in its origin. However, the transaction may be used for financing, subject to certain conditions. It is not sufficient for this purpose to substitute the name of ‘interest’ by the name of ‘rent’ and replace the name of ‘mortgage’ by the name of ‘leased asset’. There must be a substantial difference between leasing and an interest-bearing loan. That will be possible only by following all the Islamic rules of leasing, some of which have been mentioned in the first part of this chapter.
To be more specific, some basic differences between the contemporary financial leasing and the actual leasing allowed by the Shariah are indicated below.
The Commencement of Lease
Unlike the contract of sale, the agreement of ijarah can be effected for a future date. Thus, while a forward sale is not allowed in Shariah, an ‘ijarah’ for a future date is allowed, on the condition that the rent will be payable only after the leased asset is delivered to the lessee.
In most cases of the ‘financial lease’ the lessor i.e. the financial institution purchases the asset through the lessee himself. The lessee purchases the asset on behalf of the lessor who pays its price to the supplier, either directly or through the lessee.
In some lease agreements, the lease commences on the very day on which the price is paid by the lessor, irrespective of whether the lessee has effected payment to the supplier and taken delivery of the asset or not. It may mean that the lessee's liability for the rent starts before the lessee takes delivery of the asset. This is not allowed in Shariah, because it amounts to charging rent on the money given to the customer which is nothing but interest, pure and simple.
The correct way, according to Shariah, is that the rent be charged after the lessee has taken delivery of the asset, and not from the day the price has been paid. If the supplier has delayed the delivery after receiving the full price, the lessee should not be liable for the rent of the period of delay.
Head Lease
Another concept developed in the modern leasing business is that of ‘head-leasing.’ In this arrangement a lessee sub-leases the property to a number of sub-lessees. Then, he invites others to participate in his business by making them share the rentals received by his sub-lessees.
For making them participate in receiving rentals, he charges a specified amount from them. This arrangement is not in accordance with the principles of Shariah. The reason is obvious. The lessee does not own the property. He is entitled to benefit from its usufruct only. That usufruct he has passed on to his sub-lessees by contracting a sub-lease with them. Now he does not own anything, neither the corpus of the property, nor its usufruct. What he has is the right to receive rent only.
Therefore, he assigns a part of this right to other persons. It is already explained in detail that this right cannot be traded in, because it amounts to selling a receivable debt at a discount which is one of the forms of riba prohibited by the Holy Qur’an and Sunnah. Therefore, this concept is not acceptable.
These are some basic features of the ‘financial lease’ which are not in conformity with the dictates of Shariah. While using the lease as an Islamic mode of finance, these shortcomings must be avoided.
The list of the possible shortcomings in the lease agreement is not restricted to what has been mentioned above, but only the basic errors found in different agreements have been pointed out, and the basic principles of Islamic leasing have been summarized. An Islamic lease agreement must conform to all of them.
Insurance of the Assets
If the leased property is insured under the Islamic mode of takaful, it should be at the expense of the lessor and not at the expense of the lessee, as is generally provided in the agreements of the current ‘financial leases’.
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