What is a forward lease contract?

In-Depth Analysis

After the exhaustive discussion on various uses of the Ijarah or Islamic leasing contract comprising 13 weekly articles, the focus now shifts to wrapping up the subject by attending to a few auxiliary points. At the time of opening the Ijarah debate in article No 62, the author had written: 'An Islamic bank may directly enter into an Ijarah contract with the customer if the leasing asset is readily available in its ownership and possession. However, it will not be possible for an Islamic bank to enter into an Ijarah contract in the case of absence of the asset purported to be leased. In such a situation, the Islamic bank may request the customer to provide a promise to lease before it starts the acquisition of the asset required to be leased or enter into a forward lease contract with the customer.' Today the explanation covers what a forward lease contract is, which is known as Ijarah Mawsufah Fi Dhimmah (IMFD) in Shariah terminology. The Ijarah contract can be entered into over an immovable as well as movable asset. However, the Ijarah asset cannot be a commodity or anything which is consumable since it will not be able to meet the Shariah condition of remaining intact upon the completion of the Ijarah term. Examples of consumable items are electricity, petrol, food grain and other such items that get consumed. These can be traded under Murabahah or Salam but do not make a good candidate for Ijarah. As such, any asset having the quality of remaining intact when the Ijarah term comes to an end can be made the subject matter of the lease contract. What about an asset which is non-existent? Can such an asset be made part of an Ijarah contract? Yes. You can enter into an Ijarah contract over an off-plan property which is currently non-existent but will be developed over an agreed period of time. Such a contract is classified as a forward lease or IMFD. An everyday life example of the forward lease contract is when someone books a property with a developer upon the launch of the new project by paying a required booking amount or a downpayment from his or her own source but with an intention to seek an Islamic bank's assistance for the stage payments. If such a customer approaches the Islamic bank for this purpose, he or she will be entertained by the bank under the forward lease product. The tripartite agreement mechanism from article No 65 applies mutatis mutandis in the case of the forward lease contract. Once the title to the off-plan property has been transferred from the customer to the developer and from the developer to the Islamic bank, the Islamic bank will enter into the forward lease contract with the customer whereby it will undertake to deliver the property to the customer upon getting the possession from the developer, and at the same time the customer will promise to start the payment of the lease rent to the Islamic bank. The customer will only commence the rental payment upon getting the delivery of the underlying property when the lease is actually triggered. Compare it with the conventional mortgage lending for an off-plan property: the customer will start making interest payment from day one on the accumulated stage payment amount in the bank's ledger against the property. The fairness of Islamic home financing for off-plan properties when compared to conventional mortgage is evident from this disparity.