Ijara (rent, hire) is a concept  containing  contracts either movable and immovable property hiring or work and service  agreements. The thing which will be hired must be legal according to islamic law. A participating bank can provide all kinds of hiring and service finance which are suitable for principles of interest-free banking. (education, health and so on.). Here, most important point is that the enterprise must hire or buy things or services which the customer want to buy or hire, in advance.

Hiring contract (leasing)  which expires by law transfer of property is  a new contract type made with a small amount of price by the method of “selling or hiring contract + donation (grant) contract ;in the end of hire contract + time.

Leasing is defined in financial hiring act as: ”on the demand and choise of a tenant, for a leasor, to give a tenant the ownership of a property which he/she has bought or obtained from third person by any means on the condition of getting all kinds of profit and not canceling  for a definite period, in return of hire”.(1) In the nineth article of this act , it has been made a sign that sides could be agreed on law transfer of ownership of property mentioned in the hiring contract by the statement  of “ sides can decide on tenant can have the right of buying the property, in the end of contract period”. Therefore, leasing is a financial method that the right of usage of a property is given to the tenant in return for hire value defined, as the ownership of property belongs  to the leasing company; and the tenant could have ownership with the defined value determined in the contract.

Leasing takes an important role in increasing productivity and profitableness by the way that firms hire properties instead of buying, and firms use their running capitals to provide other expenses. (2).

Leasing is done like this: Tenant  wants participating bank to buy a  property  he/she desired to buy and to give himself/herself  it in return for very much higher  hire value than normal. Bank investigates the customer and makes  the customer use the property with hire values in definite periods by not giving its ownership to him/her. In the end of hire, bank either donates or sells it to the customers for a symbolic value.

Fundamental of this application is that in case of selling a property , in cash or on credit,  the ownership passes to the customer. If the property was sold on credit, the customer would  have  to pay for the installments. But this case has a risk factor for the seller. The ownership has passed to the customer, but the price has not been paid, yet. To remove this risk, there has been a need to improve a financial method to provide the ownership will stay on the seller until the whole price has been paid. For today, leasing/financial hiring is being seen a method to compensate this need.

By: Mehmet Odabaşı (Member of advisery Council in Kuveyt  Türk)

Source: Education Notes of Kuveyt Türk interest-free Banking Principles.


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