The elegance of the tripartite agreement in Ijarah financing

In-Depth Analysis

The need for a tripartite agreement arises when the customer approaches an Islamic bank after having made a downpayment and entered into a sale and purchase agreement (SPA) with the seller of the asset. As per Shariah principles, by virtue of the SPA, the ownership of the asset gets transferred to the buyer under the SPA forthwith, irrespective of the fact whether the payment has been made by the buyer in full or part. As such, when the buyer under the SPA requests the Islamic bank to finance the asset through leasing, the Islamic bank must first purchase the asset from the seller in order to become the owner to enable it to lease the asset to the customer. However, the seller is unable to sell the asset to the Islamic bank since he has already sold it to the bank's customer under the SPA. How to solve this tricky situation? The jurists say Shariah provides the most logical and fair solution to all problems, including money and finance. The author remembers exactly the same situation arose in 2005/06 when the Islamic home financing transactions had just started to be offered by the Islamic financial institutions in the UAE. The matter was submitted to the Shariah board of the Islamic bank where the author was working at the time and to his surprise, the appropriate Shariah guidance came out the very next day. The scholars guided that in order for the Islamic bank to lease the property to the customer, it ought to be the owner of the property first. In order to do so, the Islamic bank must enter into a tripartite agreement with the parties under the SPA — the seller and buyer of the property. That is the reason it was called the tripartite agreement, between three parties viz. the Islamic bank, the seller of the property and the buyer under the SPA. The key features of the tripartite agreement include: (a) the SPA signed between the seller and buyer shall stand terminated forthwith upon the signing of the tripartite agreement by the three parties; (b) with the termination of the SPA, as per Shariah principles the ownership shall get retransferred to the SPA seller (original owner); (c) the Islamic bank shall replace the customer as the SPA buyer and all rights and liabilities of the owner shall get transferred to the Islamic bank under the SPA signed earlier; (d) all terms and conditions of the original SPA will come alive for the Islamic bank as the new buyer; (e) at the time of signing, the ownership of the downpayment made by the customer under the SPA shall also get transferred to the Islamic bank, which shall deduct the downpayment amount from the total selling price and apply the lease rent on the adjusted amount and not on the total purchase price of the property. Although originally the tripartite agreement was devised to facilitate Ijarah financing for ready properties, it was subsequently used extensively in financing off-plan (under construction) properties as well. The tripartite agreement solution worked perfectly at that time as well as until today when it is applied by Islamic banks and financial institutions from the UAE.