Ijara / Ijarah — lease to own Islamic finance
The term ijara literally means rent. Under the Sharia the process is known as ijara-wa-iqtina — rent with an acquisition, or rent to own — and it works for equipment as well as property.
How the structure works
The purchase price agreed to in the Promise to Purchase is equal to the original purchase price less the down payment made by the customer, plus $1.00.
The initial ijara amount financed earns profit for the investor through monthly rental payments. Traditional amortization calculations determine the exact payment, and there are no Sharia issues with those calculations.
The major difference from a traditional mortgage amortization is that the ijarah transaction is based upon a reverse amortization calculation. While it may appear contrary to the Sharia, it is acceptable to describe the profit on an Islamic finance transaction as a percentage.
Rent on property, or rent on money?
The two examples below use the same cash and the same monthly figure. What separates them is what the money is rented against.
- Suppose you have $100,000 in cash.
- You purchase a home and pay cash for the home.
- You rent the home to a tenant for $250 per month.
- At the end of the year you have collected $250 × 12, or $3,000 in rent.
- That $3,000 in rent is a 3% return on your $100,000 investment.
- This 3% is rent on property, which is Trade (Bey).
- Starting with the same $100,000 cash.
- You give someone the money.
- They proceed to purchase the same home with those funds.
- They pay you the same $250 per month, or 3% a year for use of the money.
- This is basically rent on money, or Riba.
Tenant or homeowner?
In an ijara Islamic finance transaction you are technically a tenant. You sign a lease obligating you to a rent payment over a period of time. However, unlike a typical rental property lease, you are responsible for all the maintenance of the property, and you have all the other rights and duties of a homeowner.
You can sell the property anytime you wish, remodel, decorate, landscape, sublet, or basically utilise the property for any legal purpose it is zoned for. The only exception may be if you engage in an activity that adversely affects the property’s value, like demolishing a garage without rebuilding it. For all practical purposes your role is the same as a homeowner, because once you have fulfilled your obligations under the lease or promise to purchase, you become the owner of the property.
Sharing of a gain or loss in Islamic finance
One of the basic Sharia compliance principles is there should be a sharing of either a gain or loss in any Islamic finance transaction. The ijara transaction is structured in such a way 100% of the gain is rightfully the customer’s. Under the Shariah, the gain or loss is shared by the parties in a transaction according to their percentages of ownership. The ijara transaction abides by this principle, in that at the time of realization of the gain or loss, there is only one owner of the property, and that is the customer.
Ijara transaction in a transactional view
From a procedural perspective, at the time of sale, the four steps alongside take place.
- The Trust will transfer the title of the property to the customer,
- the customer will then transfer the title to the new buyer,
- the new buyer will then settle the transaction according to the agreement with the customer,
- and then the customer will settle with the trust according to the agreement between the customer and the trust (the ijara documents).
Read this in another language
The same explanation of the ijara structure, prepared for our community in Arabic, French and Somali.
Have more questions? Don't hesitate to reach us
Our team answers by phone or email during business hours, and a pre-qualification takes about ten minutes.
How is this different from a mortgage?
ijara CDC co-owns the property with you and sells you its share over time. There is no riba, because there is no debt instrument — the agreement transfers ownership, not money at a rate.
What does a monthly payment cover?
Two parts: your use of the share ijara CDC still owns, and the purchase of an additional slice of that share. The second part grows as your ownership grows.
How long does pre-qualification take?
About ten minutes, and it does not affect your credit.
Can I pay off my share early?
Yes. Additional payments buy more of the co-owned share and carry no penalty.
Which states does ijara CDC serve?
More than 20 states across the USA, alongside Canada. Contact us for the current list and the requirements where you live.
Who reviews the contracts?
The Sharia Advisory Board and real estate counsel review the structure and the documents before signing.
What can I finance?
Residential and commercial property, residential and auto conversions, investment opportunities, and the ijaraCDC partner broker program.