In Islamic Laws of finance, renting a property was allowed, although this process is subject to certain conditions which must be met by the lessee and the leaser. In Arabic, the term “renting” is synonymous with Ijarah, which has been defined by Allama Kasani as:
“The literal meaning of Ijarah is the sale of benefit.”
Technically, Ijarah may be of two types. We shall only describe the type here which relates to our subject. According to “An Introduction to Islamic Finance”, it relates to the usufructs (A legal right to use and derive profit from property belonging to someone else provided that the property itself was not injured in any way) of assets and properties, which were transferred to other persons in return for a stipulated rent.
Thus, Ijarah differs from the sale in that the corpus of the property was not transferred; only the usufruct was transferred to the lessee.
What are the major Islamic rules regarding lease?
There are certain Islamic Laws and rules regarding the lease, some prominent ones we will outline below:
È Only non-consumable items can be rented or leased. For instance, food and currency cannot be leased out because they are consumable. Usable goods like property, fertile land can be leased, and this was further proven from the Hadith of the Holy Prophet (PBUH):
The beloved Prophet (PBUH) said, “Whoever has land should cultivate it himself or give it to his (Muslim) brother gratis; otherwise keep it uncultivated.” (Bukhari, Book #39, Hadith #533). In other terms, things which do not have a usufruct cannot be leased at all.
È The rented property may decrease in value, and depreciate over time. Therefore, part of the rent may be allocated as depreciation allowance.
È concerning taxes which apply on the property, there are two situations: The taxes which apply on the leased property’s corpus will be payable by the owner of the corpus. The taxes which were applied due to usage of usufruct such as water, gas and electricity bills must be borne by the lessee.
È According to Islamic Laws on lease, the contract of the lease must be drawn up for a stipulated period. Also, the property must be carefully identified by both of the properties. This is to avoid any anomaly.
È The rental term should be clear and lucid at the time of drawing the contract. For instance, if I rent out a house for $15,000 for 10 years with a stipulation that after every 2 years, the rent will be increased by 15% of the original value, the transaction is valid.
È If any misuse on the part of the lessee harms the object leased, then the lessee was held responsible for it. If it was harmed anyway without the lessee being involved, then the owner is responsible for it. For instance, I lease 10 acres to a person. If he wantonly harms it, he will have to pay the charges. If it was harmed, however, by heavy downpour, or a storm or something else, then the leaser will have to admit the charges.
È The lease contract cannot be affected unilaterally by the leaser.
È Also Islamic Laws on lease state that the land (agricultural) cannot be leased. However, it can be leased only for gold and silver (i.e. money). (See Abu Dawud Book #22, Hadith #3387)
What are the common modes of leasing identified by Islamic Laws?
Considering the Modern Islamic banking System, there are two common modes of leasing:
1- Lease Purchase Scheme
2- Hire Purchase Scheme (for details, see Islamic Economics By A.H. Dar)
We will explain these two below:
1. Lease Purchase Scheme: Under this scheme, currently followed by the Bank of Malaysia and Al-Baraka with minor modifications, an asset was leased out to the tenant for a fixed rent, the value of which is divided among the investors for that asset. This was done for a stipulated time. After that time, the lessee is (not necessarily) required to purchase the asset, in which case the rent value which he has paid, was deducted from the price of the asset.
2. Hire Purchase Scheme: Based on much more the same mode as Lease Purchase, the way Hire purchase is by Bai’ (purchase) following Ijarah (lease). For instance, if one wants to buy a car through a bank, one applies to the bank. The bank buys the car from a seller, who transfers the ownership to the bank. Now the person acquires that car from the bank for a fixed period at lease. After that period, you purchase the car from bank at a stipulated price fixed in the lease contract. Thus, we learn that while leasing or renting is valid in Islamic finance, it is subject to certain rules, the most important of which is the process to be completely interest free. The Glorious Qur’an clearly tells us:
“O you who believe! Be afraid of Allah and give up what remains from Riba if you are believers.” (2:278)
only then will Allah Almighty bless our deeds, charitable and otherwise. May Allah guide us to follow Islam in our lives. Amen!
And Indeed Only Allah Almighty Knows Best!
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