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A lease is defined as granting permission to another party to use an asset or property owned by one party for a certain period of time for an agreed fee. Islamic financial institutions usually use a type of Ijara Muntahiya Bittamlik (ending ownership of property), according to which, the Lessor buys a specific asset as directed by the Lessee and leases it to the Lessee, and upon completion of all agreed lease rentals, the lessor transfers the asset or property as a gift or by selling the asset against a certain amount After which the lessee becomes the owner of that asset
What is a Murabaha?
This is a trade transaction wherein the seller sells and delivers a certain product to the buyer disclosing the cost and own profit (i.e. markup). In doing so, the seller informs the buyer of the purchase price and overhead profit (margin/marcup) of the product before selling the product. Islamic financial institutions through this transaction provide for the sale of the asset on an instalment payment basis.
What is a Ribo?
“Riba” is an Arabic word meaning “increase”, “exceed” or “add” according to the Shariah definition, and it refers to the receipt by the financier of any excess/additional payments without any compensation (i.e. without any service or without assuming the risks associated with the financed transaction). Due to the presence of exploitative elements in this transaction, and because there is a situation where the property of the other party can be unfairly appropriated, it is prohibited in Islamic jurisprudence.
What is the difference between a traditional leasing and an Ijara?
Criteria
Ijara
Lease
Risk sharing
Yes
No
Rental start
From the date asset becomes in usable condition
Payment from the date of transfer of property to the supplier
Charging a penalty
Yes, it is donated to charity and should not be considered as a bank’s income
Yes, it turns out like income
Disposition of property
Yes, after all rentals have been made the property would be transferred by the owner via sale/purchase contract or as a gift
The property automatically transfers to the lessee.
(the legislation also specifies the possibility of return and sale under a separate contract)
Property upon request of Islamic law - Shariah
Yes
No
Are there any discounts on future payments for early repayment of payments under the Ijara and Murabaha?
It is at the discretion of the Islamic finance institution to grant a discount for early payment of property under Ijara and Murabaha contracts. It is prohibited to negotiate a discount in the contract.
When does the Murabaha payment schedule begin?
Payment under Murabaha is made after the sale of the property to the client, within the time limits as agreed with the client.
Is it possible to transfer the leased property into a sub-lease?
Leased property may be transferred to a sub-lease only upon authorization of the owner.
Is it permissible for an Islamic institution offering Ijara and Murabaha services to receive a lump-sum commission for services rendered?
According to Shariah standards developed by the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI), an Islamic financial institution is not allowed to charge a lump sum fee (commission) for the services provided under Ijara and Murabaha contracts, but is allowed to charge the customer to cover its actual expenses incurred directly within these transactions.
Is it possible for an institution offering Ijara and Murabaha services, based on a payment schedule, to receive a 1-month payment in advance, that is, a prepayment?
An Islamic financial institution may demand an advance on Ijara and Murabaha from clients. This advance may also be equal to the amount of payment for 1 month or several months.
Can Islam provide for the fine imposition on a client for late payments under the Ijara/Murabaha contracts? If it can be applied, what source of Shariah can be the basis?
A fine cannot be imposed from Shariah point of view. However, the Lessee/Murabaha providing enterprise shall be required to undertake to pay charity which it has specified or which both parties have agreed upon in case of late payment (the said charity shall be used for charitable purposes which are not contrary to the Islamic injunctions). Consequently, such money received also cannot be used by the Lessor/Murabaha Provider to fulfill its financial obligations (such as taxes, some fines, utility payments or any other payments) to the state or any other third party. But, if Lessor/Murabaha Provider has incurred any increased costs (e.g. legal fees, costs related to contacting lawyers) in applying the late payment amount to a client who has not paid on time, such direct costs can be recovered from the amount paid.
How is the Murabaha trade different from the usual trade of purchase and sale?
Murabaha is the special type of trade in which the seller openly informs the buyer of the purchase price of the goods and the costs incurred and the mark-up (profit) imposed on it. If the seller does not report the cost price and markup of the goods, it is not Murabaha, but an ordinary trade transaction.
Should Ijara and Murabaha transactions be financed from sources that are allowed under Shariah?
Also, because the activities of an Islamic financial institution are organized according to the Shariah provisions, all the transactions of such institution (passive and active transactions) shall be based on the Shariah provisions. Consequently, the sources of funding for the Ijara and Murabaha transactions shall also be Shariah Compliant
Is it compulsory to use Islamic Insurance – Takaful when insuring Leased/received property in Murabaha? How does Takaful work?
Yes. If there is an insurance system - Takaful. Takaful is an Arabic word that means "mutual guarantee". It should be noted that there is Takaful insurance in Uzbekistan, as the double insurance provided for by the legislation of Uzbekistan, carried out by citizens and organizations by pooling certain funds allows to apply in practice the Takaful system.
At whose expense are repairs and other related expenses if the property leased on the basis of Ijarah Muntahiya Bit-Tamlik contract becomes technically defective?
In case the property is damaged (through no fault of the client) during the lease period, the Lessor (financial institution) is responsible for it, as he is the owner of the leased asset. It also bears the costs of capital repairs and insurance of the leased asset as the owner of the asset. At the same time, the Lessor may appoint the client as its representative to carry out (on behalf of the Lessor) and, with the consent of the client, include such a clause in the contract.
Is it allowable to take as a pledge in Islam?
t is allowed to lend or finance against security in Islam. In case of non-payment on such lend or financing, it is envisaged to recover the debt by selling such pledge. It fact, our Prophet Muhammad SAW, after pledging his shield as collateral to a Jew, contracted a debt.
Is it not riba to use interest in calculating the interest for the property provided on the basis of the Ijara/murobaha contract, that is, is this method of calculation not contrary to the requirements of Sharia?
The dictionary meaning of the word riba is "growth". In Shariah, it means a surcharge (increment/interest) imposed on loan, even if it is low. When calculating the surcharge under the Ijara and Murabaha contracts, the surcharge is charged against asset and not against loan.
Can the Murabaha object itself be pledged?
Property acquired based on the Murabaha may be provided as a pledged (its ownership document) by agreement with the Islamic financial institution and the client. div>
