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KembaraXtra–Islamic Finance–Islamic Capital Market – Ijarah (Leasing)
• Ijarah is a Shari’ah-compliant leasing contract used in Islamic finance where financing is structured through rental payments instead of interest-based lending.
• The contract involves payments arising from purchasing and renting an asset rather than lending money.
• Under an Ijarah arrangement, the owner of the property or asset acts as the lessor, while the user of the property acts as the lessee.
• In Islamic banking, the Islamic Financial Institution typically assumes the role of the lessor, and the customer assumes the role of the lessee.
• The lessor leases the property or asset to the lessee in exchange for agreed rental payments.
• Rental payments represent payment for the usufruct (use or benefit) of the asset and do not constitute interest.
• Ownership of the asset remains with the lessor throughout the lease period.
• Because ownership remains with the lessor, ownership-related risks and major maintenance responsibilities are borne by the lessor.
• The lessee is responsible only for usage-related obligations as specified in the contract.
• Transfer of ownership does not automatically occur under a standard Ijarah contract.
• Ownership is transferred to the lessee only if the asset is eventually purchased through a separate sale agreement.
• This structure is commonly referred to as Ijarah wa Iqtina or Ijarah Muntahia Bittamleek.
• In such arrangements, the leasing contract and the sale contract must remain separate to ensure Shari’ah compliance.
• Ijarah is widely used for equipment leasing, vehicle financing, property and real estate leasing, and infrastructure financing.
• The Ijarah contract ensures asset-based financing and allows Islamic financial institutions to earn lawful income through rental rather than interest.
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