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Fatwa CenterConditions for validity of 'lease ending in ownership' contract
Question
Assalamo aleikumIm planning to open a new shop in sha Allah, and then I have to buy some machines for my shop. And the machines that I want to buy are very expensive ( over 20,000 dollars pr. Machine )The company that I'm planning to buy the machines from offer me that I can buy them trough a leasing company.So i sent an email to the leasing company to know how their leasing agreement works, and they answered: "Leasing is done as following, that we as a finance company buy the equipment from the supplier, and thus we take over the ownership of the equipment. At the same time there will be signed a leasing agreement between us and the customer, in the way that the customer will have the rights to use the equipment in the agreed period, in the condition that the customer have to pay leasing fee in the same period.It is also possible to pre-arrange a residual value/rest value, that will correspond the price/sum that the equipment will be sold for at the end - if we agree on for example 5% of the purchase price (total price) of the equipment, then the customer have to pay off 95% of the amount on the agreed period, and at the end the customer have the obligation to pay the remaining amount (that will correspond to 5% in this case)"Is it halal to do an agreement like that? The leasing company will take a higher price for the machines of course if i choose to lease trough them. Do this agreement works in the same way like by paying the amount in instalments to the leasing company, having in mind that the leasing company actually "bought" the equipment from the supplier so they got the ownership?Jazakom Allah kheir
Answer
All perfect praise be to Allaah, The Lord of the Worlds. I testify that there is none worthy of worship except Allaah, and that Muhammad, sallallaahu ‘alayhi wa sallam, is His slave and Messenger.
There are certain requirements for the permissibility of the "lease ending in ownership" contract. If they are met, the contract is permissible according to the Sharee‘ah; otherwise, it is forbidden.
The Islamic Fiqh Academy (IFA) of the Organization of the Islamic Conference (OIC) underlined in its resolution the requirements for the permissibility of such a transaction (lease ending in ownership contract) as follows:
1. The presence of two contracts that are totally separate and independent with respect to the time of their conclusion and in which the sale contract succeeds the lease contract, or the presence of a promise that would enable the lessee to become the owner at the end of the contract period. In this connection "Option and Promise" stand on equal footing with regard to their legal determination.
2. The lease should be actual and not just a cover for the sale contract.
3. The owner is liable for the leased property and not the lessee. Therefore, owner incurs any damage that is not caused by misuse or negligence by the lessee. The lessee does not incur anything if the property has become useless.
4. If the contract includes insurance of the property, the insurance must be provided according to Islamic and not commercial methods and at the expense of the owner alone and not the lessee.
5. The laws pertaining to leasing contracts apply to the lease ending in ownership contract for the duration of the lease, and the laws pertaining to sale apply when the item's ownership is transferred to the lessee.
6. The cost of non-operational maintenance is incurred by the owner, not the lessee, throughout the lease period.”
Since the leasing company sets the sale price in the leasing contract and obliges the customer to pay it before the end of the leasing period, the leasing contract in this case is used as a cover for the sale contract and it is not an actual leasing transaction; hence, such a "lease ending with ownership" transaction is forbidden.
Allaah Knows best.
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