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The RF Legal Foundation on Leasing

Leasing is allowed according to the revelations found in the Qur'aan, the Sunnah (way of life and the tradition) of Prophet Muhammad[1] (pp), and the unanimous opinion of the eminent RF scholars.

In the Qur'aan:

43:32 Is it they who would portion out the Mercy of thy Lord? It is We Who portion out between them their livelihood in the life of this world: and We raise some of them above others in ranks, so that some may command work from others [through renting their services]. But the Mercy of thy Lord is better than the [wealth] which they amass.

2:233 If ye decide on [renting the services of] a foster-mother for your offspring, there is no blame on you, provided ye pay [the mother] what ye offered, on equitable terms. But fear God and know that He sees well what ye do.

28:26 Said one of the [damsels]: “О my [dear] father! Engage him [rent the services of Prophet Moses] on wages: truly the best of men for thee to employ is the [man] who is strong and trusty.” 28:27 He said: “I intend to wed one of these my daughters to thee, on condition that thou serve me for eight years; but if thou complete ten years, it will be [grace] from thee. But I intend not to place thee under a difficulty: thou wilt find me, indeed, if God wills, one of the righteous.”

Process

■ At the request of the client, the RF finance institution would purchase the item registers its title in the institution's name and lease it back to the client for a predefined term.

The item purchase has two titles: the title of ownership (called, in the Shari'aa law, Milk ul Raqabaah) and the right to use it (called, in the Shari'aa law, Haq Ul Manfa'aa).

■ The RF financial institution, in its capacity as a lessor, would own title to the asset and in turn would lease the right for its use to the lessee, who would proceed to use the item according to the terms of the mutually agreed-upon leasing contract. The client pays a monthly or periodic lease payment at a market rate that is defined by applying the RF Marking-to-Market Discipline discussed earlier and has been agreed upon between the RF finance institution (lessor) and the client (lessee).

The fundamental issue that must be clearly addressed here is the rate at which the asset is leased. In many cases, the “Islamic” banking officer would quote the interest rate of the day as an agreed-upon lease rate. This approach presents a serious problem with the RF discipline. That is why this book advocates that the lease rate used must correspond to the actual live market lease rate as researched by both parties. This is done by asking market practitioners and by live research of market leasing rates of similar items. These appraisals of live market lease rates of similar items must be fully documented and must be part of the leasing contract and necessary documents to complete the RF financing file. These and other issues will be discussed in greater detail in Chapter 11.

In this context, there are two types of riba-based leasing available in the market:

1. Rental or lease (ijarah): This finance method, used globally, offers the pure leasing of assets. The asset is leased for a specific period of time and then returned to the title holder at the end of the lease period. These leases are similar to leasing an automobile for two or three years, then returning it to the owner. However, it is important to stress that in today's leasing practices, the monthly lease payment is based on a projected value of the item at the end of the lease term (like the projected value of a car, say, after three years). This practice is not acceptable by the Judeo-Christian- Islamic Shari'aa law because no one can project the future market price of an item; only God knows the future. That is why the price at the end of the lease has to be marked to the active live market at that time by applying the RF Marking-to-Market Discipline. In addition, the difference between the projected value of the item — sale price — at the end of the lease is subtracted from the purchase value at the beginning of the lease. The net is amortized at a defined rental rate of money (interest rate), which renders the transaction a riba transaction.

2. Lease-to-Own (ijarah-wa-imtilak or ijarah-wa-iqtinaa): In this method of leasing, the user and title owner agree to a monthly payment that consists of two parts. One part has to do with the gradual purchase of the property by the lessee from the lessor, and the other part has to do with the rental of either the money, as in the riba-based financial leases, or the rental of the actual asset at the prevailing market rate, as in RF leasing where the RF Marking-to-Market Discipline is applied.

This model will be discussed in detail in Chapter 11, and a real case application will be presented in Chapter 14.

  • [1] Prophet Muhammad (pp) was reported to have said, “Give the person you hire his/her wages before the sweat that they invested on the job dries up,” meaning to pay them as soon as possible (related by Ibn Majah).
 
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