The Residual Value of Leased Assets

The following question and answer by Sheikh Yusuf Talal DeLorenzo attendees of the Dow Jones University Courses on Islamic Investement.Question:: I read that Islamic Banks usually make transfer of ownership just an option to sell at the end of a lease. Does this mean that during the commencement of the contract, Islamic Banks retain the ownership indefinitely and include an option to sell only if they feel it is rewarding?What if during the commencement of the contract the Islamic bank is certain that it is investing in equipement for a period of 5 years and will definitely sell it at the end of this term, in which case it takes on the shape of a Contract in Suspense. But it merely calls it an OPTION TO SELL instead of DEFFERED SALE although the latter is certainly the only intention by the bank at the time of entering into the contract. Is this not in contravention with the Shariah conditions of contracts?Answer: Evidently, you are asking about the ultimate disposition (the residual value) of assets that are leased out in an ijarah contract. The operative principle in the matter is that Islamic law prohibits the conmingling of two separate transactions under a single contract. Likewise, the Shari`ah specifies that the asset will be the property of the lessor when the lease period comes to an end. Thus, when Islamic banks enter into ijarah contracts with their clients, they will not include a clause to the effect that the assets will be sold or gifted to the lessee. Instead, they will unilaterally promise to enter into a contract with the lessee at a later date. Such a promise, according to the classical jurists, is binding only on the party that makes it. Thus, the option in the matter is left to the lessee; if the lessee so chooses, he may enter into a contract withthe bank for the sale or gift of the asset. If, on the other hand, he chooses not to, then that is his prerogative.