An ordinary lease contract vs. a forward lease contract in Islamic finance: key differences

In-Depth Analysis

In the long debate on this very important Islamic financing tool named Ijarah contract, all aspects have been covered including the impact of the total loss of the leased asset where the lease gets terminated immediately irrespective of whether it was the lessee's negligence toward utilizing the leased asset or the lessor's fault in not carrying out (or procuring to carry out) the major maintenance of the leased asset or a force majeure event or an act of God. What about the total loss of the leased asset occurring in a forward lease contract where, first of all, the lease does not get commenced forthwith, but only upon the completion and delivery of the asset? Does the same rule apply in a forward lease contract? For those who think 'yes,' the lease gets terminated immediately upon the leased asset getting totally destroyed under a forward lease contract — the author would advise 'think again.' The lease in terms of a forward lease contract does not get terminated upon the total destruction of the leased asset. When a forward lease contract is signed between the parties, the asset purported to be leased does not exist but is merely 'described' or 'specified' at best in the schedule attached to the forward lease contract. For example, a forward lease contract is entered into by an Islamic bank with a customer for a two-bedroom hall apartment on the 15th floor of a new project just launched by a developer. Since the apartment is nonexistent at this stage, it cannot be 'identified' — in the manner that it is categorized in the case of a readily property under an ordinary lease contract. The lease of an identified ready asset is called Ijarah Ain in Shariah terms which means 'this particular asset which can be seen, touched, felt, visited and acquired — then and there.' Explaining this important point further, Shariah scholars use the term 'the one and the only' asset. They further explain by way of the chassis and engine numbers of a car which are unique to it, or the manufacturer's serial number on an aircraft which is dedicated to only one inimitable airplane. On the other hand, the lease of a nonexistent property in terms of a forward lease contract is termed as Ijarah Mawsufah Fi Dhimmah or lease of an asset whose characteristics can only be 'described' since it is nonexistent at the time of signing the forward lease contract. The asset under a forward lease contract is therefore not considered 'unique' or inimitable under Shariah since it has not come into being as yet. As such, if that is the case, an asset which gets totally destroyed under a forward lease contract can be replaced by the lessor with the asset having the same description. This is the Shariah reason that the lease under a forward lease contract does not get terminated upon the destruction of the leased asset. In fact, the Shariah principles regard it as the lessee's right over the lessor under a forward lease contract to replace the destroyed asset with one having the same description. However, Shariah principles provide flexibility that if the lessor is unable to produce the alternate asset with similar specifications, the lessor shall request the lessee to either accept another asset with different specifications or agree to terminate the forward lease contract.