Ijarah refers to a lease or commission contract that involves in the exchange of usufruct or benefits of an asset or services for a rent or commission for an agreed period at an agreed consideration.
In the context of Islamic finance, the ijarah concept is usually applicable in financing contracts such as in real property financing, vehicle financing, project financing and personal financing.
There are also financing products that enable the customers to lease the assets from Islamic financial institutions with an option to acquire the leased assets at the end of the lease tenure based on the concept of ijarah muntahia bi al-tamlik or al-ijarah thumma al-bai`.
The rules of Ijarah, in the sense of leasing, is very analogous to the rules of sale, because in both cases something is transferred to another person for a valuable consideration.
The only difference between Ijarah and sale is that in the latter case the corpus of the property is transferred to the purchaser, while in the case of Ijarah, the corpus of the property remains in the ownership of the transferor/ lessor, but only its usufruct i.e. the right to use the asset, is transferred to the lessee.
Necessary Conditions of Ijarah
The last point I will touch on the Necessary Conditions of Ijarah which is Subject to:
It must have valuable use, thus, a thing having no usufruct or value, cannot be leased
It must not be perishable for the whole period of the lease
It must be actually legally attainable, which means leasing something which cannot be delivered is not permitted.
It should be precisely specific
It is necessary to make known the purpose for which the asset is rented because it must be free from ambiguity and uncertainty
In commercial sectors, it is not permitted to lease a property to a company that will use the leased assets for Shari’a prohibited activities, such as to convert it into a gambling centre or bar
The period for using it must be fixed and agreed upon by both parties. Renewal terms also must be stated clearly and it should not be left alone to the lessor’s discretion
It is permissible to lease the property to those whose major activities are halal or permissible even they are involved some secondary prohibited activities
If you are interested to get us to help you with Islamic finance consultancy and Shariah advisory, feel free to contact us. Our team are looking forward to grow your brand with Shariah compliance products and services.