Amanah Islamic Finance Australia Pty Ltd.’s (Amanah) home financing product uses the Islamic principle of Ijarah. The concept of Ijarah is a well-established principle in Islamic jurisprudence which has been adapted by Islamic financial institutions, in a modern context, as a permissible mode of Sharia compliant finance. By way of example, it has been used to facilitate home finance by Islamic banks in the Middle East, Malaysia, Pakistan and South Africa.
The authoritative reference material that supports the analysis in this product information report is based on the Ijarah standards of the Accounting and Auditing Organization of Islamic Financial Institutions (AAOIFI) where our Sharia advisers have held positions as senior Sharia scholars their board.
This home financing product is based on the Islamic principle of Ijarah.
The concept of Ijarah is a well-established principle in Islamic jurisprudence.
The principal documentation that underpins the home financing arrangement manifests this intention of the parties by outlining the constituent elements which create a valid Ijarah for the purposes of Sharia.
Justice (ret.) Mufti Muhammed Taqi Usmani provides a useful background to the use of Ijarah as a permissible mode of Islamic financing. In his text at page 109, he notes the following:
The financier appoints the customer as its wakeel to purchase the property for it and the customer holds the financier’s interest in the property as the custody agent with the financier holding a mortgage in the property to protect its interest.
The financier provides the financing to enable the use of the property for which the customer will make rental payments which comprise the amount that was applied to the purchase property and the financier's profit.
If the customer makes all payments and fulfils its obligations under ijarah then the Financier must sell its interest in the property for a nominal amount.
If the customer defaults under the Ijarah then it must purchase the financier's interest in the property for an amount equal to amounts outstanding under the
We now discuss the basic rules governing Ijarah as enumerated in the Islamic Fiqh and how they apply to this product.
Unlike the contract of sale, the agreement of Ijarah can be effected for a future date. Thus, while a forward sale is not allowed in Sharia, an ‘Ijarah’ for a future date is allowed, on the condition that the rent will be payable only after the asset is delivered to the Customer. The correct way, according to Sharia, is that the rent be charged after the Customer has taken delivery of the asset, and not from the day the price has been paid.
Under the Amanah’s Ijarah Financing contract the first payment is due one month after settlement date which is the date that the Financier advanced money which was applied to the purchase of the property. Practically, this means that the first payment is due one month after the Customer obtains use of the property. This is in accordance with Sharia.
From a Sharia perspective, in the first instance, the client is a Wakeel (the Sharia equivalent of an agent) of the institution to purchase the asset on the latter’s behalf. At this stage, the relation between the parties is nothing more than the relation of a Wakeel and his Muwakel.
In Amanah’s product, the Financier appoints the Customer as its Wakeel under a Wakala agreement and the Customer, initially, acquires the Property on behalf of the Financier as purchasing and custody agent, (and mortgages it to the Financier) who will thereby acquire a beneficial interest in the Financed Property.
This is acceptable in Sharia.
The second stage begins from the date when the client takes delivery from the supplier. At this stage, the relation of Mustajir and Ajir comes to play its role.
The Amanah Ijarah Financing Agreement documents the intention of the parties that the Financier provides the financing to enable the Customer to obtain the use of the Property in a manner that is consistent with the principles of the Sharia under the concept of Ijarah for which the Customer will make rental payments which comprise the amount that was applied to the purchase of the Financed Property and our profit which is the amount calculated using the rental rate.
According to Sharia, the Financier is regarded as the owner of the asset, and he has purchased it, through his Wakeel, from the vendor. Accordingly, the Sharia would the financier liable to pay all the expenses incurred in the process of its purchase. However, he can, of course, include all these expenses in his cost and can take them into consideration while fixing the rentals.
In the Amanah Wakalah agreement, the Financier represents, and the Customer acknowledges, that the rental payments are set at a level which allows the Customer to also pay all amounts in respect of the property. In addition, under its obligations associated with the mortgage the Customer agrees to keep any mortgaged property in good repair and to pay all rates, taxes, and other expenses in relation to the property.
This is in accordance with Sharia.
It is the practice in Australia for Financiers to require that the financed property be insured. These requirements exist across the world including, in Islamic banks such as at Meezan Bank in Pakistan where Takaful (an Islamically permissible form of insurance) is used.
Takaful is not available in Australia. We overcome this problem by including a term in the Wakalah Agreement which states that the Customer is purchasing the insurance on behalf of the Financier, and the Financier has adjusted the payments to include the insurance premium. This acknowledgement in relation to premium payment is expressly recognised and evidenced as a key term of the Wakalah.
From a Sharia perspective, the Amanah contracts have been drafted such that the Financier is considered as the one purchasing, and enjoying the benefit of the insurance. In these circumstances, the insurance is permissible under Sharia.
There are strict Sharia requirements on the permissibility of applying penalties for late payments. The Sharia position as outlined by Sheikh Mufti Taqi Usmani in his book can be summarised as follows:
In some agreements, a penalty is imposed on the lessee in case if he delays the payment of rent after the due date. This penalty, if meant to add to the income of the lessor, is not warranted by the Sharia. The reason is that the rent after it becomes due, is a debt payable by the lessee and is subject to all the rules prescribed for a debt. A monetary charge from a debtor for his late payment is exactly the riba prohibited by the Holy Qur’an. Therefore, the lessor cannot charge an additional amount in case the lessee delays payment of the rent.
It is the practice of many conventional banks and financial institutions to include in their penalty rates the opportunity cost of the Customer’s default e.g. The Lender would have used that interest income (which the Customer has not paid) to on-lend to another customer and this default fee is effectively getting the Customer to compensate it for those lost profits.
Any default payment that takes this into account is not permissible.
Under the Amanah Ijarah contract, the Financier makes an express contractual representation to the Customer that the default rate of rental and default fees have been set at a level to include the actual costs of administering the Customer’s default. This includes enforcement expenses and internal resources (e.g. staff costs) required in connection with managing the default by the Customer. This approach is permissible from a Sharia perspective.
The Ijarah Financing Agreement is accompanied by a Wa’ad or “sale undertaking”. The combination of Ijarah and Wa’ad makes a simple Ijarah into a financing arrangement and this approach is widely accepted in Sharia and practised by many Islamic banks.
Under the Wa’ad, the Financier undertakes that if the Customer makes all payments in accordance with the Ijarah Financing Agreement then it will sell the Financier’s interest in the property for a nominal amount (currently $635 which is the current cost of a discharge).
The Ijarah Financing Agreement is also accompanied by a “purchase undertaking” (or Wa’ad) from the Customer. If a Customer terminates early, the Financier will exercise this Wa’ad where the Customer promises to pay the Financier an amount equal to the balance outstanding and immediately purchase Financer’s interest.
From a Sharia perspective, the Customer does not get an incremental share of equity in an Ijarah arrangement. However, as noted in 2.1.9 above, if a Customer terminates early, he must purchase the Financier’s interest in the property for an amount equal to the outstanding balance owing. The “outstanding balance owing” broadly means rental owing, discharge fees and taxes less all payments already made.
To demonstrate how this may work, a Customer may wish to sell the property (with the Financier’s consent) and use the proceeds to pay all “outstanding balances owing” in accordance with the Wa’ad. Practically, the only “outstanding balance owing” comprises the discharge fees, taxes and the remainder of the amount that was applied to purchase the property.
By way of example,
Under principles of Sharia a contract must relate to a single identifiable transaction.
In adapting Ijarah as a mode of financing, Islamic financial institutions need to ensure that multiple contracts are executed e.g. Wakalah, Ijarah and the dual Wa’ad.
The consensus of opinion from Sharia scholars, in this regard, is that so long as there is no contingency between each of the constituent documents (e.g. Each agreement is capable of standing on its own) then this is permissible.
The fact that each contract is signed at the same time is irrelevant. The test is whether each separately identifiable transaction can stand on its own.
The fact that legal title to the property remains with the Customer is irrelevant in considering whether a valid Ijarah relationship exists for the purpose of Sharia.
At first this may seem counterintuitive to the way a conventional lease arrangement may operate. However, as noted in the discussion above, the Sharia will look at the rights and obligations under the terms of the contract to determine whether the relationship between Financier and Customer constitutes a valid Ijarah.
Equally, this rationale also applies to the Wakala and Wa’ad.
Finance up to
$2 million
House and Land package with fixed price building contract
Competitive rates Equity cash \ debt consolidation
Finance up to
$1.5 million
Max amount - unlimited
Max amount - unlimited
Max - $1.5million
At Amanah we have a dedicated wealth management arm called Amanah Superannuation and Investments, which offers full financial planning services. Our offering is built around the following principles:
You will have a dedicated adviser who evaluates your investment options. We will work with you to find the right investment option that meets your individual needs. Most super funds use a standard template when investing on behalf of their clients. At Amanah, we invest directly with the underlying equity so you can get full transparency of exactly what you are investing in.
In fact, you have likely never discussed your investment needs with your current super fund if it is your employer’s standard fund. Super should be viewed as a long-term investment. We work with our clients to position them for sustainable returns via our many investment options. We employ several Sharia-compliant filters conforming to the AAOIFI standard to guarantee the compliance of all our products with Sharia principles.
