Financial Instruments 81
the sense of both hire and lease. In general, it refers to the lease of tangible
assets such as property and merchandise, but it is also meant to denote the
hiring of personal services for a fee. Renting an asset also comes under the con-
tract. In such cases, the asset is leased for a much shorter period than its actual
useful life, which also means that the asset can be rented to multiple users over
its life.
Compared to the conventional form of fi nancing, which is generally in the
form of debt, leasing results in fi nancing against a particular asset. In a sense,
it combines fi nancing and collateral, because the ownership of the asset serves
as collateral and security against any future loss. The title to the ownership of
the asset remains with the lessor who, in the case of default, can repossess the
equipment. In addition, the fi nancing is not dependent on the capital base of
the lessee but depends on their creditworthiness to service the rental cash - fl ow
payments.
While the function of the ijarah resembles that of the conventional lease
agreement, there are some differences between the two. With the ijarah,
the leasing agency must own the leased object for the duration of the lease.
Another difference is the absence of compound interest that may be charged
under conventional leases in the event of default or delay in the installment
payments. Similarities with conventional leasing make this contract attrac-
tive to conventional investors and borrowers as well.
Features and Conditions
■ (^) The Lessor’s Responsibilities: The lessor must be the owner of the asset
to be leased. It is the responsibility of the lessor/owner to maintain the
property leased, so that it continues to generate benefi t for the lessee.
The lessor is expected to protect the property by arranging for adequate
insurance against any loss or damage to the asset. The lessor/owner is
responsible for certain costs and liabilities arising from leasing, such as
damage to the asset, payment of any insurance premium costs and basic
maintenance. While the cost must be borne by the lessor/owner, for the
sake of effi ciency, the lessor/owner may authorize the lessee to adminis-
ter it on his/her behalf.
■ (^) All terms of the ijarah contract should be stipulated in detail. These
terms include the asset being leased, the rental amount, the payment
schedule and the purpose for which the asset may be used.
■ (^) The leased asset should be treated as a trust in the hands of the lessee.
■ (^) The contract is intended for the utilization of the asset and not for its
consumption. Therefore, the contract specifi es that the object leased
must not be perishable or consumable.
■ (^) In case of any default by the lessee in making rental payment, the lessor is
entitled to revoke the contract and claim the contract price for the remain-
ing period.^2 The lessor/owner may claim compensation for any damage
caused to the leased assets as a result of negligence on the part of the
lessee.