Video: How Does The Ijara Method Work?

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In our previous post where we interviewed Brother Shoeb M.Sharieff he went at great lengths to explain to us how Ijarah Loans work.  Below is a video on a recap and visual of how IjarahLoans works. #halalfinancing @amuslima1 #halalmortgage.  Insha Allah this will be of benefit to you.

 

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Ijarahusa.com has done an excellent job of detailing what Ijarah is and all the different terminology that is honestly very confusing! Please visit their site: {Source: http://www.ijarausa.com/islamic-finance/}

Download an explanation of Ijara in Arabic

Download an explanation of Ijara in French

IJARA / IJARAH – Lease To Own 

The term Ijara literally means rent, the Sharia process is known as Ijara-wa-Iqtina , rent with an acquisition or rent to own. The process of Ijara can be used for equipment as well as property.  This islamic finance process is very simple.  A single asset Trust is created whereby the Trust purchases the property, and then leases the property to the customer.  A portion of each monthly payment goes towards ownership, until the customer owns 100%.

The basic difference between a Sharia Ijarah-wal-iqtinah Islamic loan process and a conventional lease is the Ijarah process obligates the Trust (seller) to sell the property to you under a Promise to Purchase. While the same contract entitles the customer to purchase the property, the customer is not obligated to do so.

HOW THE PURCHASE PRICE OF THE IJARA TRANSACTION DETERMINED

The purchase price agreed to in the Promise to Purchase is equal to the original purchase price less the down payment made by the customer plus $1.00.  For example, if the value of the property is $200,000 and the customer makes a $40,000 down payment, the initial amount the customer has to pay the investor for 100% ownership is $160,001.  As the customer makes more payments, this amount reduces, until the final ownership payment of $1.00 is reached.

HOW THE MONTHLY IJARA RENT PAYMENTS CALCULATED

The initial Ijara islamic finance amount financed by the customer earns profit for the investor through monthly rental payments.  Traditional amortization calculations are utilized to determine the exact monthly payment.  The mathematical formulas are acceptable as there are no Sharia issues with these calculations.  The major difference between a traditional mortgage amortization and an Ijara transaction is that the Ijarah transaction is based upon a reverse amortization calculation.

THE BASIS OF USING A PERCENTAGE

While it may appear contrary to the Sharia, it is acceptable to describe the profit on an Islamic finance transaction as a percentage.  The following example highlights the acceptability of quoting the profit as a percentage in an Ijara transaction:

  1. Suppose you have a $100,000 in cash.
  2. You purchase a home and pay cash for the home.
  3. You rent the home to a tenant for $500 per month
  4. At the end of the year you have collected $500 x 12 or $6,000 in rent
  5. That $6,000 in rent is a 6% return on your $100,000 investment

Is that 6% Rent or Riba?  well it is clearly it is Rent since it is based upon a business transaction. Now let’s look at a traditional mortgage interest transaction:

  1. Starting with the same $100,000 cash.
  2. You give someone the money.
  3. They proceed to purchase the same home with those funds.
  4. They pay you the same $500 per month, or 6% a year for use of the money.
  5. This is basically rent on money

In this case is the 6% Riba? Yes, as it is rent on money.  The first example was rent on property.  From a Sharia perspective it is acceptable to describe the profit on an Islamic Ijara transaction as a percentage.  It’s also a requirement under the Truth in Lending Act/Consumer Protection Act; any profit earned on a residential real estate finance transaction should be described as a percentage so a customer can clearly understand what the overall cost of the financial transaction  is.

TENANT OR HOMEOWNER?

In an Ijara islamic finance transaction, you are technically a tenant. You sign a lease obligating you to a rent payment over a period of time.  However, unlike a typical rental property lease, you are responsible for all the maintenance of the property, and you have all the other rights and duties of a homeowner.  You can sell the property anytime you wish, remodel, decorate, landscape, sublet, or basically utilize the property for any legal purpose it is zoned for.  The only exception may be if you engage in an activity that may adversely affect the property’s value, like demolishing a garage without rebuilding it.  For all practical purposes your role is the same as a homeowner, because once you have fulfilled your obligations under the lease or promise to purchase, you become the owner of the property.

SHARING OF A GAIN OR LOSS

One of the basic Sharia compliance principles is there should be a sharing of either a gain or loss in any islamic finance transaction.  The Ijara transaction is structured in such a way 100% of the gain is rightfully the customers.  Under the Shariah, the gain or loss is shared by the parties in a transaction according to their percentages of ownership.  The Ijara transaction abides by this principle, in that at the time of realization of the gain or loss, there is only one owner of the property, and that is the customer.  From a procedural perspective, at the time of sale:

 

  1. The Trust will transfer the title of the property to the customer,
  2. The customer will then transfer the title to the new buyer,
  3. The new buyer will then settle the transaction according to the agreement with the customer,
  4. And then the customer will settle with the trust according to the agreement between the customer and the trust (the Ijara documents)

 

These procedural steps create a situation where the customer holds 100% title, albeit for a short period of time, and is the beneficiary of the difference between the two agreements; that is the sale to the new buyer, and the original promise to purchase agreement with the trust.  Find out more about Ijara Contracts  or Forward Dated Ijara Contracts.  There are links to  Other Islamic Finance Topics

 

  1. Aqd
  2. Bayu-al-amanah
  3. Bai-Al-Inah
  4. Bay al-kali bil kali
  5. Bai’ bithaman ajil
  6. Bai’ muajjal
  7. Bay Al-Mudaf
  8. Bai al Dayn , Bai Salam
  9. Gharar subtopic: Different Types of Gharar
  10. Hawala
  11. History of Islamic Banking
  12. History of Islamic Finance
  13. Istisna
  14. Mudarabah
  15. Musawamah
  16. Suftajah
  17. Tawliyah
  18. What is a Trust
  19. What are Sharia Compliant Mortgages
  20. Qard Hassan
  21. Sukuk Al-Ijara
  22. Benefits of Ijara for Lessee
  23. Conditions for Ijara Contract to be Valid
  24. Comparison between Ijara and conventional operating lease
  25. How Ijara Financing Works
  26. Ijara and Renting
  27. Ijara Financing : Its Salient Features
  28. Ijara as a Financial Lease
  29. Ijara – Benefits to Financial Institutions
  30. Ijara – Benefits to Airline Industry
  31. Ijara – Benefits to Agricultural Industry
  32. Ijara – Benefits to Multinational Organizations
  33. Ijara – Benefits to Industrial Sector
  34. Ijara – Benefits to Businesses
  35. Ijara – Benefits to Real Estate Sector
  36. Ijara – Beneftis to Individuals
  37. Ijara as an Operating Lease
  38. Ijarah Muntahia-bi-tamleek
  39. Ijara Thumma al bai
  40. Ijara wa Iqtina
  41. Ijarah with Diminishing Musharakah
  42. Practical Applications of Ijara

To review the origination of this content please visit: http://www.ijarausa.com/islamic-finance/

Or you may contact:

Shoeb M.Sharieff : shoeb@ijaraloans.com

Insha Allah these series may be of benefit to you.

Jazakallahir.

 

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