Ijara Financing Program
A lease that transfers the right of use, with ownership held by the lessor and every term named in the contract. The features below are what make the structure Sharia-compliant and transparent for both parties.
Background
There was once a time when Mughal rulers used the ijara as a form of agricultural investment. It has been modified many times since, adapting to changing times and requirements while keeping true to the essence of Sharia law.
Today ijara financing is used well beyond agriculture — in real estate, in equipment manufacturing, and across many other sectors. That it has survived the test of time and the demands of a fast-moving business world speaks to the integrity at the core of its operating principles.
What is ijara financing?
In essence, ijara financing is the transfer of the right of use of an asset to another person or business. It is a form of leasing: the owner receives a rental payment from the lessee for the use of the asset, while continuing to hold the ownership rights.
The right of use runs for a specific period, named in the contract alongside the exact rental amount. The object of the contract is valuable, non-perishable, and its nature of use is identifiable and concrete.
Salient features
A customer may want the use of a particular asset without the funds to acquire it. They approach a bank or other financial body, which acquires the asset; the two then agree that the customer leases it for a set period at a fixed rent. That agreement carries the following features.
- The corpus of the asset stays in the full possession of the lessor, who carries every liability arising from that possession.
- The contract usually names the exact uses the asset may be put to. Where it names none, the lessee may use it in a legitimate, conventional way.
- If misuse or negligence damages the asset, the lessee reimburses the lessor. Where the cause lay beyond the lessee’s control, the lessor bears the cost.
- Where two or more people own the asset jointly, the rent is shared between them in proportion to their respective shares.
- The rent is stated explicitly in the contract, including any variation between phases of the term, and the lessor cannot change it later.
- The rent may be set on the basis of what the lessor paid to acquire the asset, where both parties agree — in accordance with Sharia rules governing Islamic financing.
- The leasing period begins the day the asset is delivered to the lessee as a leased object.
- The agreement is null and void once the leased object ceases to have any functional use.
- At the end of the term, ownership may transfer to the lessee for a nominal amount, under a sale deed independent of the ijara contract.
Final analysis
Taken together, these features keep the transaction absolutely transparent, and both parties benefit from the agreement.