Al Ijarah Sukuk
The Basic Principles of Ijara wa Iqtina
In an ijara wa iqtina contract, the lessee approaches a bank or any other financial institution with a request to lease a particular asset or property. With this understanding in place, the lessor buys that asset or that particular piece of property and enters into a leasing contract with the lessee that specifies the amount and interval of the rental payments to be made by the latter. The right of ownership of the asset remains with the lessor and so is the obligation to bear the risks associated with the ownership rights. The lessee makes the first rental payment on the day he receives the asset or the right to use the property specified in the contract. In these respects, the ijara wa iqtina is not much different from other forms of ijara contracts.
The ijara contract is an unique financial arrangement where both lease and sale may come into play—the transfer of the right of ownership of the asset from the lessor to the lessee at the end of the leasing period. However, these two agreements should be independent of one another and executed at different phases of the ijara contract.
According to the tenets laid down by the Sharia, the transfer of the right of ownership in an ijara leasing contract may also take the form of gifting, but only after the lessee has made all the rental payments. When an ijara contract assumes this form, it is known as the ijara wa iqtina.
However, at this point in time, it should be made clear that the validity of an ijara wa iqtina contract rests on these three conditions:
The lease and the transfer of ownership of the asset or the property should be recorded in separate documents. The leasing and the transfer of ownership contracts should be independent of each other. In other words, the “promise” of transfer of ownership should not be a pre-condition to the signing of the leasing contract. The “promise” to transfer the ownership should be unilateral and should be binding only on the lessor.
In this context, it is worth mentioning that during the tenure of the ijara wa iqtina contract, the purchase price of the asset can be amortized and the lessee’s equity can be protected simultaneously. This is possible because the ijara wa iqtina contract allows a transfer of ownership anytime during the leasing period if the lessee pays the purchase price of the asset.
Benefits of Ijara wa Iqtina
The widespread prevalence of ijara wa iqtina is easy to understand if you consider the myriad benefits of this mode of Islamic financial agreement, for both the lessor and the lessee. Here are some of the benefits of this contract: The ijara wa iqtina contract allows small, medium, and large-scale business owners to enjoy the benefits of using an asset or a piece of property without having to buy it. This is especially helpful to cash-strapped business owners who do not have the funds to buy a piece of equipment or machinery for their production purposes and yet would like to use it to reap its benefits. The specific features of an ijara wa iqtina contract especially appeal to business owners who presently have the need for a piece of expensive equipment but do not wish to buy it because it has a poor resale value.
The option of being able to transfer the ownership of an asset is also beneficial for the lessor, because it means that it is not saddled with the responsibility of owning an asset at the end of the leasing period.
The lessor gets to realize the entire purchase price of the asset; that is, the lessor also benefits from entering into the ijara wa iqtina contract.
The simplicity and transparency of the financial transactions and the benefits to be realized by both the lessor and the lessee are the reasons why the ijara wa iqtina contract is one of the most favored amongst all forms of ijara.
Olmec LTD has no formal relationship with IJara CDC or any of its subsidiaries and quotes the above summary of Islamic finance because Ijara CDC gives the most accurate description.