This financing is based on the principle of Al-ljarah. By definition, Al-ljarah is a contract where the benefits/use of an asset is transferred by the owner (lessor) to the lessee at an agreed price/rental amount for an agreed period of time or Ijarah period. During the period the Ownership of the assets remains with PIM.
The rules of Ijarah, in the sense of leasing, are very much analogous to the rules of sale, because in both cases something is transferred to another person for a valuable consideration. The only difference between Ijarah and sale is that in the latter case the corpus of the property is transferred to the purchaser, while in the case of Ijarah, the corpus of the property remains in the ownership of the transferor, but only its usufruct i.e. the right to use it, is transferred to the lessee.
Basic Rules of Ijarah/ (Islamic Leasing)
- Ijarah/(Islamic Leasing) is a contract whereby the owner of something transfers its usufruct to another person for an agreed period, at an agreed consideration.
- The subject of Ijarah must have a valuable use. Therefore, things having no usufruct at all cannot be given on Ijarah.
- It is necessary for a valid contract of Ijarah that the corpus of the Ijarah property remains in the ownership of the seller, and only its usufruct is transferred to the lessee. Thus, anything which cannot be used without consuming cannot be given on Ijarah basis. Therefore, the Ijarah facility cannot be affected in respect of money, eatables, fuel and ammunition etc. because their use is not possible unless they are consumed. If anything of this nature is given on Ijarah basis , it will be deemed to be a loan and all the rules concerning the transaction of loan shall accordingly apply. Any rent charged on this invalid Ijarah transaction shall be an interest charged on a loan.
- As the corpus of the Ijarah Assets remains in the ownership of the lessor, all the liabilities emerging from the ownership shall be borne by the lessor, but the liabilities referable to the use of the property shall be borne by the lessee.
- The period of Ijarah must be determined in clear terms.
- Lessees cannot use the Ijarah asset for any purpose other than the purpose specified in the Ijarah agreement. If no such purpose is specified in the agreement, the lessee can use it for whatever purpose it is used in the normal course. However if he wishes to use it for an abnormal purpose, he cannot do so unless the lessor allows him in express terms.
- The lessee is liable to compensate the lessor for every harm to the Ijarah asset caused by any misuse or negligence on the part of the lessee.
- The Ijarah asset shall remain in the risk of the lessor throughout the Ijarah period in the sense that any harm or loss caused by the factors beyond the control of the lessee shall be borne by the lessor.
- A property jointly owned by two or more persons can be given on Ijarah basis, and the rental shall be distributed between all the joint owners according to the proportion of their respective shares in the property.
- A joint owner of an Asset can given on Ijarah basis his proportionate share to his co-sharer only, and not to any other person.
- It is necessary for a valid Ijarah that the Ijarah asset is fully identified by the parties.
PIM will provides customers with short to medium term financing by way of Ijarah/leasing and finally acquiring items such as:
- Plant and machinery
- Computers and information technology equipment
- Motor vehicles and heavy machinery
- Other fixed assets
Sale & Lease Back
In this case, the customer will first sell the asset to the PIM which constitutes the financing amount, with the understanding that the PIM will given on Ijarah it back to the customer. This is also known as Sale and Lease back transaction. However the PIM will not sell the assets back to Customer within twelve months.