IJARAH or Lease Financing Definition | Benefits and Conditions to Apply

IJARAH or lease financing is a lease of property with a promise of sale for the benefit of the lessee. This is a relatively recent financing technique involving three main players:

• The supplier (manufacturer or seller) of the good
• The lesser (in this case the bank that buys the property to rent it to its client)
• The tenant who rents the property by reserving the option to acquire it definitively at the end of the lease

From the foregoing definition of IJARAH or lease financing, it comes to know that the right of ownership of the property accrues to the Bank throughout the period of the contract, while the right of enjoyment rests with the tenant. At the end of the contract, three cases may arise in lease financing or IJARAH:

• The customer is obliged to acquire the property (lease-sale contract).
• The customer has the choice to acquire or return the property (leasing contract).
• The customer opts for a second lease of the property (renewal of the leasing contract)

Benefits of IJARAH or Lease Financing

Leasing is a relatively recent technique for financing investment (furniture and real estate). As such, it can be categorized as a form of long- and medium-term credit. Compliance with Shari a principles makes it a privileged formula used by Islamic Banks to finance investment in their relationships. The second advantage of this method of financing relates to the strength of the guarantee provided to the Bank as a legal owner of the leased asset.

For the economic operators, the advantages of leasing are multiple. On the one hand, it allows them to renovate their outdated or obsolete equipment and thus benefit from the latest technological developments. On the other hand, Advantage of avoiding long-term or medium-term fixed assets of part of their resources in the case of a self-financed acquisition or even financed by an investment loan.

Indeed, the annual expenses, within the framework of a financing are limited to the rents due during the period, which is very appreciated by the companies which have difficulty balancing their financial situation.

Firms that opt ​​for this type of financing can benefit from the positive difference between the amount of annual rents and the amount of depreciation that they should have recorded on their own funds if the property had been subject to an acquisition.

Finally, the margin of maneuver left to use,

Conditions to Apply in Business for Lease Financing | IJARAH

1. The object of the lease (the use of the leased property) must be known and accepted by both parties.
2. The lease must be for durable goods, i.e. non-destructible as a result of enjoyment or use.
3. The leased property as well as the accessories necessary for its use must be given to the user in a state to be used for the use for which the property is intended.
4. The duration of the lease, the period of payment, the amount of the rent and the periodicity must be determined and known at the conclusion of the leasing contract.
5. The rent may be paid in advance, in advance or in installments according to the agreement of the parties.
6. The two parties may agree upon a revision of the rent, the duration of the lease and any other terms of the contract.
7. The destruction or degradation of the leased asset of an act beyond the control of the user shall be the responsibility of the user only if it is established and the necessary measures have not been taken to conserve the leased object. Well with the care of a good father of family.
8. Unless otherwise agreed, it shall be the Bank’s responsibility to perform any maintenance and repair work required to maintain the leased asset in a state of use for its intended use. Likewise, it bears all rental charges prior to the lease. The user maintains the use of the leased property, as well as all the rental expenses incurred from the date of rental.

The leased asset may be subleased, unless otherwise agreed. Similarly, the Bank may lease property acquired from its own seller, provided that the sale is real and not fictitious (Lease back).