Ijara

Ijara (also known as an 'Islamic Lease') is a core concept in Islamic finance that functions as a leasing, renting, or hiring agreement. Under the principles of Sharia (Islamic law), earning money from money itself through interest (Riba) is forbidden. Ijara provides a Sharia-compliant alternative to conventional lending for acquiring the use of an asset. In its simplest form, one party (the lessor) purchases an asset and then leases it to another party (the lessee) for a predetermined rental fee and lease period. Crucially, the payment is for the usufruct—the right to use and benefit from the asset—not as interest on a loan. Ownership of the asset remains with the lessor, who also bears the major risks associated with that ownership. This structure ensures the transaction is based on a tangible, productive asset rather than a pure exchange of money for more money.

Think of renting a car for a weekend trip. You go to a rental company (the lessor), which owns a fleet of cars (the assets). You (the lessee) agree to pay a set fee to use a specific car for two days. You aren't borrowing money to buy the car; you're simply paying for the right to use it. The rental company retains full ownership and is responsible if the engine unexpectedly explodes (a major ownership risk). You, on the other hand, are responsible for filling it with gas and keeping it clean (routine maintenance). This is the essence of an Ijara contract. The rental fee is a straightforward payment for a service (the use of the car), with no interest involved. It’s a transaction grounded in the real-world utility of a physical asset.

An Ijara contract is not just a handshake deal; it has specific rules to ensure it remains Sharia-compliant.

• Asset-Backed: The agreement must be tied to a specific, tangible, and valuable asset, such as real estate, machinery,