Dr. Monzer Kahf, Scholar in Islamic Economics & Financial Expert, states the following:
1. “Leasing in Shari’ah is the sale of the use (technically called usufruct) of an asset that over-lives the period of the lease. Its basic conditions are the same as in contracting in general: legal competence of the two parties’ knowledge of the of the obligations of the contractors, and lack of any condition that contradicts the nature of the contract. Leasing is thus very amenable contract and can be used as a financing mode.
One of the implications of leasing, in both Islamic and Western laws is that the lessor is required to deliver the leased asset (car or equipment) to the lessee and to always maintain it in usable state. This means that insurance is the lessor ‘s responsibility. Thus the majority’s view is that in a Shari’ah compatible lease, insurance and major maintenance must be on the lessor.
Consequently, a lease that put these on the lessee, as the case of most financial leases in Europe and America, is not Shari’ah compatible.
I argue that major maintenance, i.e., that is related to the main function of the car or equipment is insurable. And the insurance premium is either itself known from the time the lease agreement in done for the whole period of the lease or the service of insurance is well known and definable at the time of the contract. This means that you can charge insurance and maintenance insurance, or at least the service, i.e., the insurance coverage to the lessee, because any obligation that is well known and definable at the time of the lease contract can be made part of the rent. There is a great convenience in charging insurance on cars and equipment to lessee because both insurance and maintenance and their costs are highly affected by the operator, especially in cars.
In my opinion, this means that most leases made in the West, called usually financial leases may very well be permissible in the Shari`ah. However, no one can give an opinion on any lease contract without reading it and looking at all its clauses. What I mentioned is the principle only.
2. In leases of Islamic banks, the leased asset is usually either given as a gift at the end of the lease or sold at a price determined then between the two parties, while in most leases in Europe and America the price of selling the car after the end of the lease is predetermined in the lease itself.
3. Muslims in Algeria are required to establish banks to the extent that fulfills their needs. There is one small Islamic bank now in Algeria and many others are needed. Riba-based lending and borrowing are prohibited in the Shari’ah.”