The curious case of Qatar Court versus Ijarah Financing
Financial Services Focus
Hani Al NaddafPartner, Head of Litigation - Qatar,
Ranwal GhanghroAssociate,Banking & Finance
Ijarah is a form of Sharia compliant financing used by an Islamic bank to finance the acquisition of an asset for its customer, and then lease that asset to the customer for use.
The Ijarah arrangement would typically comprise of various agreements between the Islamic bank and the customer including, amongst others:
One: a lease contract whereby the Islamic bank leases an asset to its customer for a certain period of time and the customer agrees to pay fixed rental payments and variable rental payments that correspond to the repayment of the principal financing amount and the profit component of the financed amount. There is no “interest” or “ribah” charged under this structure as such payments are not allowed under the principles of Sharia.
Two: a promise to donate whereby the Islamic bank undertakes to transfer the asset to the customer at the end of the lease period if all payments (i.e. the rent/instalments) are made by the customer in a timely manner.
In a case before the Court of Cassation, the facts were that a customer and a bank entered into an Ijarah facility, whereby:
the bank purchased two immovable properties from the customer and the sale was recorded with the Real Estate Registration Department in Qatar, meaning that the title to the immovable properties was transferred to the bank;
the bank leased the two immovable properties to the customer under a lease contract;
the customer was obligated to pay the bank rental payments (in instalments) which comprised of: (i) fixed rental payments; and (ii) variable rental payments; and
at the end of the lease period and upon payment by the customer of all amounts in relation to the Ijarah facility, the bank agreed to gift the two immovable properties back to the customer.
A seller cannot sell a property and reserve the right to repurchase the same property. Such a contract would be considered void under the laws of Qatar.
The issue arose when the customer defaulted in the payment of the agreed rental payments and consequently the bank attempted to sell the two immovable properties to third parties without obtaining a court order in order to recover the amounts that were due and payable under the lease contract.
The customer objected to the bank’s approach and filed a civil action against the bank requiring it to transfer the title of the two immovable properties back to the customer. The customer argued that the agreements under (a) to (d) above were structured in a Sharia compliant manner but the Ijarah transaction in reality is a financing transaction and that the transfer of the two immovable properties to the Islamic bank was to secure the repayment obligation of the customer to the bank.
The Court of First Instance in Qatar ruled in favour of the bank and dismissed the action by the customer who then filed an appeal before the Court of Appeal.
The Court of Appeal dismissed the appeal and upheld the judgment by the Court of First Instance. The matter was brought before the Court of Cassation.
The Court of Cassation overturned the Court of Appeal judgment and based its judgment on Article 474 of Law No. 22 of 2004 (the Civil Code) which states that:
“If the seller maintains the right to recover the sold thing, the contract shall be null.”
The Court of Cassation explained that Article 474 of the Civil Code prevents a seller to reserve the right to repurchase the property it has sold to the purchaser. Such a contract would be considered void under the laws of Qatar.
The Court of Cassation further stated that the right to repurchase the property does not necessarily have to be part of the same contract under which the property was sold. In relation to the issue of whether a property has been properly sold, the Court of Cassation held that it must consider the intention of the parties at the time that the contract was entered into and therefore the transaction as a whole must be considered even though the parties entered into separate contracts.
The fact that (i) the two immovable properties were sold by the customer to the bank; (ii) then subsequently leased by the bank to the customer and (iii) a promise to gift was issued by the bank to donate the two immovable properties to the customer in case all payments had been made under the lease contract, indicated to the Court of Cassation that the bank never intended to purchase the properties and the transfer of title was intended to be a mortgage over those two immovable properties to secure the repayment obligation of the customer. Therefore, the Court of Cassation concluded that transaction falls under the provision of Article 474 and hence the sale contract is null and void.
It is important to note that the Court of Cassation looked beyond the actual transaction documents and considered the transaction to be a financing transaction rather than an actual sale, purchase and leasing transaction. Accordingly, the Court of Cassation indicated that the bank was not a true owner of the two immovable properties and therefore should not be able to unilaterally sell those properties to third parties.
As a result, the Court of Cassation determined that the Court of Appeal had not properly decided the case and had misapplied the law. The Court of Cassation vacated the Court of Appeal’s decision and referred the case back to the Court of Appeal for a fresh decision. An updated order (if any) of the Court of Appeal is not yet available as far as we are aware.
This ruling constitutes a landmark judgment for Islamic banks in Qatar. Whilst it is given that Ijarah is a structure used to provide financing by Islamic bank to its customers on terms compliant with Sharia principles, however, in view of the decision of the Court of Cassation, there is a risk that a court in Qatar may consider an Ijarah transaction to be void if it is not properly structured from a Qatar law perspective. Having said that, there is a degree of comfort that the courts in Qatar would look through the overall Ijarah structure and consider the transaction as a financing arrangement between the bank and the customer.
At Al Tamimi & Company, we have the expertise and vast experience to assist our clients to consider various Ijarah financing structuring options that are compliant with the legal and regulatory requirements in Qatar. If you have any questions or need assistance with structuring an Ijarah transaction, or generally Sharia compliant transactions, please reach out to our team in Qatar.
For further information,please contact Hani Al Naddaf and Ranwal Ghanghro.
Published in March 2025
