IJARA / IJARAH - LEASE TO OWN
The term Ijara lterally means acquisition or rent to own. The process is known Ijara-Wa-Iqtinah.
It can be applied to equipment as well as property. The process is very simple; a single Assets Trust is created, the Trust purchases the property, and then leases the property to the customer. With each monthly payment, a portion of that payment goes towards ownership, until customer owns 100%.
The difference between a Sharia Ijara-Waq-Iqtinah process and a conventional lease is that, the Ijara process obligates the Trust (seller) to owner of the property (you) under a Promise to Purchase,while the same continuation entitles the customer to purchase the property.
HOW THE PURCHASE PRICE OF AN IJARA TRANSACTION IS DETERMINED
The purchase price that is agreed to in the promise to purchase is equal to the original purchase price less the down payment made by the customer, plus the profit. For example, if the value of the property is $200,000.00 and the customer makes a down payment $40,000.00, then the initial amount the customer has to pay the investor for 100% ownership is $160,000.00. As the customer ownership increases, this amount reduces, until the final ownership payment of $1.00
HOW THE MONTHLY IJARA PAYMENTS ARE CALCULATED
The intial Ijara amount is financed by the lender and earns profit through monthly payments. Traditional amortization calculations are utilized to determine the exact monthly payments. The mathematical calculations are acceptable as there are no sharia issues with mathematical calculations. The major difference between a traditional mortgage and Ijara transaction is that Ijara transaction is based upon a reverse amortization calculation and the regular mortgage is not.
THE BASIS OF USING A PERCENTAGE
While it may appear contrary to the Sharia, it is in fact acceptable to describe the profit on an Islamic transaction as percentage. The following example should clear up any confusion regarding the acceptability of quoting the profit as a percentage in Ijara transaction:
1. Suppose you have $100,000.00 in cash.
2. You purchase a home and pay cash for the home.
3. You rent the home to tenant for $500.00 per month.
4. At the end of year you have collected $500.00 multiplied by 12 months or $6000.00 in rent.
5. That $6000.00 in rent isthe return on your $100,000.00 investment.
Is that 6% Rent or Riba? It is clearly rent, as it based upon a purchase transaction.
Now look at a traditional mortgage interest transaction.
1. Sarting with the same $100,000.00 cash.
2. You gave someone the money.
3. They proceeded to purchase the same home with those funds.
4. They pay you the same $500.00 per month, or 6% a year for the use of money.
5. This is basically rent on money.
In this case is this 6% Riba? Yes, it is a rent on money. The first example was rent on property. So it should be clear from the Sharia perspective it is acceptable to describe the profit on an Ijara Islamic transaction as percentage. Furthermore, it is also a requirement of the Truth in Lending Act. A Protection Act, that any profit earned on a residential real estate finance transaction should be described as a percentage so that a customer can clearly understand what the overall cost of the finance transaction is.
TENANT OR HOME OWNER
In a Ijara transaction, you are technically a tenant. You sign a lease that obligates you to make rent payments. Over a period of time however, unlike a typical rental property lease, you are responsible for maintenance of the property, also you have all the rights and obligations of an Homeowner. You can sell the property any time you wish, you can remodel, decorate, landscape, sublet or basically utilize the property for any legal purpose that it is zoned for. The only exception is if you engage any activities that may adversely effect the value of the property you are prohibited. For all practical purposes your role is the same as an homeowner, once you fulfil your obligations under the lease or promise to purchase, you become the owner of the property.
SHARING OF GAIN OR LOSS
One of the basic Sharia compliance principles is that there should be sharing of either the gain or loss of a finance transaction. The Ijara transaction is structured in such a way that 100% of the gain is rightfully the customers.
Under the Sharia, the gain or loss is shared by the parties in a transaction according their percentage of ownership. Tha Ijara transactions abide by this principle that at the time of realization of the gain or loss, as there is only one owner of the property, that is the customer, from a procedural prospective, at the time of resale:
1. 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 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 the title, albeit a short time, but by doing so entitles the customer to be 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. Therefore the profit goes to the customer, you.
