Ijarah
Ijarah is an Islamic lease: the owner of an asset transfers the right to use it for an agreed period in return for rent, while keeping ownership and the risks that come with ownership.
Also called: ijara · Islamic lease · ijarah muntahia bittamleek · lease ending in ownership
The lessor earns rent because it owns the asset and bears the risks of owning it, which is what separates rent from interest. Responsibility is split accordingly: the lessor typically bears structural maintenance, total loss and takaful or insurance of the asset, while the lessee bears ordinary running costs and loss caused by its own misuse.
In finance the common form is ijarah muntahia bittamleek, a lease ending in ownership, where the lessor promises to transfer the asset to the lessee at the end of the term by gift or sale for a nominal or agreed price. Rent for later periods may be linked to a benchmark if that is agreed at the outset. Ijarah is used for equipment, vehicles, aircraft and property, and leased assets are a common basis for sukuk.
In practice
An ijarah in which the lessee carries every risk of the asset — including destruction through no fault of its own — and the lessor merely collects payments is not treated as a genuine lease.
Example
A logistics firm leases a US$60,000 truck from its Islamic bank for five years at US$1,200 a month, with the bank promising to transfer title at the end. If the truck is destroyed in a flood, the bank, as owner, bears the loss and the rent stops.
Commonly confused with
| Term | How it differs |
|---|---|
| Finance lease | A conventional finance lease often transfers substantially all risks to the lessee. An ijarah keeps ownership risk with the lessor, even where the end result is the same transfer of title. |
See also
- SukukSukuk are certificates representing undivided ownership interests in assets, usufructs, services or ventures, with returns paid from what those underlying interests generate. "Islamic bond" is useful shorthand but not an accurate legal description.
- Musharakah MutanaqisahMusharakah mutanaqisah is a diminishing partnership: a financier and a customer co-own an asset, the customer pays rent for using the financier's share and gradually buys that share until it owns the asset outright.
- MurabahaMurabaha is a sale in which the seller discloses its cost and the agreed profit to the buyer. Islamic banks use it to finance purchases by buying an asset and reselling it to the customer on deferred terms.
- Wa'dWa'd is a unilateral promise by one party to do something in the future, such as buy or sell an asset. Islamic finance uses binding promises in hedging and financing where a bilateral forward contract would not be permitted.