Ijarah: The Alternative to Leasing

The often discussed concepts, such as  ‘Musharakah’ and ‘Mudarabah’ do not always reflect an appropriate tool for all financial activities in Islamic finance. This is why contemporary scholars strive to develop further financial instruments and investment concepts, such as the here discussed concept of  ‘Ijarah’ to address this problem. Linguistically speaking in Arabic ‘Ijarah’ refers to the process of renting. According to the Financial Times Lexicon ‘Ijarah’ is defined as “ownership of the right to the benefit of using an asset for a period in return for a consideration” [1]. Thus the core idea is to facilitate access of an asset for instance to someone in return for an agreed ‘Ujrah’, which translated means rent or rental fee and is fixed together with the pre-determined lease period.

The traditional and conventional concept of leasing may seem to incorporate characteristics of ‘Ijarah’. The crucial differentiation to a conventional sale is that under ‘Ijarah’ the ownership is not transferred during the lease time while only the right to use the asset for that instance is transferred. This is why leasing is originally not a tool of financing. However, considering certain rules theoretically it can also be applied in finance to replace interest based lending.  ‘Ijarah’ acts as an Islamic alternative of leasing by adjusting the contract to be compliant with Shariah.  Different characteristic of ‘Ijarah’ as opposed to traditional lease for financing relate to issues of ownership, date of payment and to the question of who bears the risk during the leasing time such as who would be liable for potential loss . As far as the ownership is concerned it must remain with the lessor during the lease period. However, there are concepts that require additional contracts apart from the leasing contract that allow the ownership to be transferred after the lease period. In Islamic finance this particular concept is referred to as  ‘Al- Ijarah thumma al-bai’ which translated means lease followed by sale.  ‘Ijarah – wa iqtina’ is a concept where banks usually cover the purchase price and profit over a usually long leasing time so that the bank could give the asset to the lessee in return for no money or little money. These approaches would be considered to be financial leases and should not be confused with the operating lease, which does not offer an option for the lessee to buy the leased asset afterwards. Mufti Muhammad Taqi Umsani discusses all related issues and rules in more detail in his book  An Introduction to Islamic Finance [2].

It is crucial to bear in mind that Islamic finance is still developing and that hence, concepts like the one discussed here are often not yet perfectly developed. A variety of issues, especially concerning ownership and the option or commitment to purchase the asset after the lease period are often discussed by scholars in relation to Schariah. Another challenge is reflected by the securitization of ‘Ijarah’ in terms of ownership. Under the rules of Schariah rent can only be claimed based on ownership [2].

In practice, so called ‘Islamic Banks’ often replace terms instead of actually modifying and adjusting certain issues to be interest free and in harmony wit Shariah . Hence, contemporary financial leasing that is applied by ‘Islamic Banks’ is often not in line with the rules of Shariah and must be seen critically. Even if it is officially Shariah compliant , meaning it a Shriah scholar has given his confirmation one must challenge the approach in the context of  “Fatwa Shopping“[3].

[1] Financial Times Lexikon. Definition of ijarah,2014 , accessed  January, 20 ,2014.


[2] Mufti Muhammad Taqi Usmani. An Introduction to Islamic Finance, 2007.

[3] John Foster . How Sharia –compliant is Islamic banking? BBC,2009 , accessed January, 21,2014. http://news.bbc.co.uk/1/hi/business/8401421.stm




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