Introduction

The word Ijarah is a legal term of Islamic Jurisprudence.
The lexical meanings of the word is to let something to some one on rent.
The Shariah meanings of the word is to hire particular services of a person or usufruct of an asset.

The above mentioned definition shows that Ijarah, in Islamic Jurisprudence, is of two kinds:

1. The kind in which a person's services are hired, as the appointment of a servant etc. This is called in Arabic as Ijarah al-Ashkhas while it is named in English as Employment.

2. The kind in which the usufruct of a particular thing is hired in lieu of its fixed rent. It is called in Arabic as Ijarah al-'Ayan and this is called in English as Leasing.

Both the two kinds of Ijarah have been remained in vogue and are practiced since the time immemorial. And the practice is continued up to date. This is the last kind which is being used in Islamic Banks as a mode of finance.

       Basic Principles of Leasing

Before describing the, process of leasing (Ijarah) in Islamic banks in details, it appears to be appropriate to explain here the necessary Shariah principles of Ijarah, so that the forthcoming discussion will be comprehensible.

The following terms are normally used in a contract of Ijarah:

(a) Mujir (lessor): A person or an Institution who provides an asset on Ijarah (lease).

b) Mustajir (lessee): A person or an institution to whom an assest on Ijarah (lease) is provided.

c) Subject of lease (Ijarah): An asset which has be provided on Ijarah.

d) 'Iwadh (compensation): Rent which is payable in Ijarah (lease).

e) Muddat Ijarah: Lease Period

       Ijarah as a Mode of Finance

Basically Ijarah is not a mode of financing. Initially this is a way of getting the right of utilization of usufruct of an asset. It is an old kind of agreement and the people have been utilizing other's properties, on the basis of rent, since time immemorial.
In the first stance, with the thriving of the banking system, the Banks started to adopt leasing as a mode of finance. The conventional banks have been using it as a way of finance. But as the method which was used by the conventional banks was defected from Shariah point of view, the Islamic banks adopted it after necessary modifications and rectifications and after rendering the system to be in consonance with Shariah.
To fully understand the working of lease, as a mode of finance in Islamic Banks, depends on the comprehension of the system in conventional Banks. Therefore it appears appropriate to discuss in the first instance the prevalent system in the conventional Banks and highlight its background and the defects therein from the Shariah point of view. After that we shall Insha Allah proceed towards the detailed discussion about Ijarah which is widespread in Islamic Banks.

       Mechanism of Ijarah

Ijarah in Islamic Bank is not a simple agreement. The transaction, in fact, is a combination of several agreements which come into force phase-wise. But as all other agreements are supposed to serve the purpose of Ijarah the whole process named as Ijarah.

This type of Ijarah takes a practical shape, when for example; a person having insufficient money or having the money invested somewhere else, wants to purchase some type of machinery or car etc. he approaches the bank for getting the required asset on Ijarah. The bank contacts the relevant company for the booking of the car, in case the client wants booking of a new car. The bank get the car booked in its name and the bank pays the price. After the delivery of the car the bank hands over the car to the client in accordance to the Shariah rules and regulations. In case of the availability of the required car in the market the bank purchases it and hands it over to client simultaneously. Some time the bank purchases the car from the client and hands over to him on Ijarah. After the termination of the lease period the bank enters into a fresh agreement and sells the car to the client or transfers him by way of gift. In case the client does not show his inclination towards the car after the termination of lease period the bank refunds him the security deposit and sells the car in the market.
This process of Ijarah is based on several phases. It is appropriate to examine these phases in the first instance, then Ijarah should be explained In details.

The Ijarah, which is in practice in the banks, is of two kinds:
1. Corporate Ijarah
2. Consumer Ijarah
The forthcoming details,in fact, relates to corporate Ijarah, but, however, there is no big difference in the methodology of consumer's Ijarah except a few administrative differences which will be discussed later.

       Basic Rules

Rental of Lease
► The rental must be determined at the time of contract.
► It is permissible that different amount of rent are fixed for different phases of rental period.
► It is permissible to tie up the rental amount with a variable benchmark,the ceiling and floor should be determined.
► Rental will be charged when the Leased asset is handed over to the lessee and not from the day the price has been paid.
► The lessor cannot increase the rent unilaterally, and any agreement to this effect is void.

Period of lease
► Period of lease must be determined in clear terms at the time of contract
Lease for specific purpose only
► If no specific purpose is identified in the agreement, then it can be used for any purpose for which it is used in normal course

Responsibility of lessor
► As the owner of the leased asset lessor bears and assumes the full risk of the corpus of the leased asset. If the asset is destroyed during the lease period, the lessor will suffer the loss.
► Similarly, if the leased asset looses its usufruct without any misuse or negligence on the part of the lessee, the lessor can not claim the rent.
► Lessor is liable to pay all the expenses incurred in the process of its purchase and its import to the country of the lessor,i.g:freight, custom duty and clearing charges
► Taxes related to ownership and registration charges of car will be borne by the lessor, including agent fee if any.
► Insurance of leased asset is responsibility of lessor. But he can appoint the lessee as an agent to arrange insurance on behalf of him.

Responsibility of Lessee
► The lessee is liable to compensate the lessor for every harm to the leased asset caused by any misuse or negligence.
► Taxes related to use of asset will be borne by the lessee.
► He is liable to the wear and tear which normally occurs during its use

Determination of Rental
► It is permissible that different amounts of rent are fixed for different phases during the lease period, provided that the amount of rent for each phase is specifically agreed upon at the time of affecting a lease.
► The determination of rental on the basis of the aggregate cost incurred in the purchase of the asset by the lessor, as normally done in financial leases, is not against the rules of Shariah.
► The lessor cannot increase the rent unilaterally, and any agreement to this effect is void.
► The rent or any part thereof may be payable in advance before the delivery of the asset to the lessee.
► The lease period shall commence from the date on which the leased asset has been delivered to the lessee.