Comparison between Ijara leasing and conventional lease

Ijara and conventional lease both are types of leasing and are two similar concepts. However there are some specific prohibitions which render conventional lease to be forbidden under Shariah. After comprehensive review of the collected article and analysis of literature the findings are as follows:

  • Ownership:

Ijara: "Muajjir" (lessor) is the owner of the leased property.

Conventional Lease: In conventional leasing the creditor institution (banks, leasing companies etc.) retains the ownership of the asset throughout the term of the contracts.

  • Risk bearer:

Ijara: As Ijara is an asset based contract, and lessor or muajjir has the ownership of the asset, therefore all the ownership related rights and liabilities lie with the muajjir and mustajir is responsible for all the usage related rights and liabilities. Any loss or harm caused by factors beyond the control of the "Mustajir" lessee shall be borne by the "Muajjir".

Conventional lease: The lessor assumes and manages the risk of the asset.

  • Profit:

Ijara: In Ijara the profit is the rent for use of property/machinery.

Conventional lease: In conventional lease the profit is for money invested in the property/machinery.

  • Valuable use:

Ijara: Asset to be leased should have valuable use.

Conventional lease: Asset to be leased must have a valuable use; things having no usufruct cannot be leased.

  • Penalty of Late Payment of rent:

Ijara: The bank or financial institution is not allowed to charge the customer an additional amount in case of delays in payment of the rentals since it is considered Riba (Interest). Therefore, in the case of delay lessee has to pay a penalty as it is clearly defined in the agreement and Leasing Company cannot consider as a revenue since it has to be transferred to charity as this is clear instruction of the Islamic scholars.

Conventional lease:
Conventional leasing companies charge a certain amount of penalty for late payment and benefit as a revenue.

  • Insurance of the asset:

Ijara: Asset is insured through Takaful (Islamic product of insurance).

Conventional lease: In conventional lease the asset is insured through insurance companies.

  • Financing for:

Ijara: It provides financing for tangible assets such as property, machinery, vehicles etc.

Conventional lease: It also provides financing for tangible assets.

  • Time period:

Ijara: Ijara is commonly used for long and medium term fixed asset financing, project financing and for retail products such as homes, commercial real estate and automobiles.

Conventional lease: Conventional leasing is also applicable to long and medium term assets like vehicles, houses and land.

  • Commitment of lessee:

Ijara: Basic rule for Ijara financing is that the leased asset be used productively and in ways permitted by Islamic law.

Conventional lease: It does not require any such commitment.

  • Valuation up on completion of leased period:

Conventional Lease: The asset must have secondary value after the expiry of the primary lease term.

Ijara: A leased asset must have a value upon completion of the agreed leased period.

  • Premature termination of lease contract:

Ijara: If any term of the agreement is violated by lessee then the lessor has the right to terminate the Ijara contract unilaterally. However, if no term is violated then the Ijara cannot be terminated without mutual consent.

Conventional Lease: Lease can be terminated in the event that the lessee fails to meet his obligations, notably the obligation to pay rent. The lessor must then instigate legal proceedings involving the bringing of a claim, where equipment is concerned. Lessee cannot terminate lease if contract does not contain cancellation clause.

  • Service charges:

Ijara: Islamic bank charge fee or service charge for the services they provide such as underwriting, letters of credits, letters of warranties, remittances and correspondence services etc.(It is pertinent to indicate in this regard that no charge can be taken against financial guarantees per se. Only management or agency charges can be taken).

Conventional lease: Conventional bank also take services charges from its customers.

  • Upgrading:

Ijara: Ijara do not offer any up-gradation options but for such undertakings new Ijara contracts have to be negotiated.

Conventional lease: The lessor can upgrade the asset as new equipment becomes available in the market after paying some additional cost.

  • Change in rental:

Ijara: The lessor cannot increase the rent unilaterally, and any agreement to this effect is void.

Conventional lease: In conventional leasing the market interest rates are passed on to lessee especially if these are upwards.

  • Payment in advance:

Ijara: The rent or any part thereof may be payable in advance before the delivery of the asset to the lessee, but the amount so collected by the lessor shall remain with him as 'on account' payment and shall be adjusted towards the rent after its being due.

Conventional Lease: similar situation prevails in conventional leasing.

Conventional Lease: The loss or any other damage to asset is lessee’s responsibility.

  • Effect of premature termination:

Ijara: From the time of termination, the lessee is not obliged for rental payment.

Conventional Lease: On termination of lease contract, all obligations that are still executor on both sides are discharged.

  • Sale and lease back as one transaction:

Ijara: Sale and lease back are allowed, but only as two separate transactions.

Conventional Lease: This transaction involves the sale of the property by one company to another which in turn leases the same property back to the original seller.

  • Determinant of rent:

Ijara: Rent is determined by market given forces. In practice, the market rate of interest is used to determine the rental rate, although this is not explicitly stated.

Conventional Lease: Lessors consider market related forces while scheduling lease payments. The market rate of interest provides a basis for lease determination.

  • Equivalent to a sale:

Ijara: Leasing differs from sale in the way that it does not transfer the corpus or ownership of the property, which remains with the transferor.

Conventional Lease: A manufacturer or dealer does not recognize any selling profit on entering into an operating lease because it is not the equivalent of a sale.

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