Upon completion of this chapter, you should be able to:
1. Define Ijara in comparison with a conventional lease.
2. Describe the types of Ijara offered by modern Islamic banks.
3. Explain the Shariah rules and general principles that guide Ijara
contracts and the documents related to Ijara.
4. Discuss the differences of Ijara from a conventional lease, a loan and
INTRODUCTION TO IJARA
The term Ijara is derived from the root word ‘ajr’, which means reward or
wages for work done or services rendered. In the financial world, Ijara is a bi-
lateral contract involving transfer of the use of an asset for an agreed period
for a consideration. It involves two parties: the lessor or Muajir, who is the
owner of the asset and the lessee or Mustajir, who uses the asset. The owner
of the object temporarily transfers its usufruct to the lessee for the agreed
period and the lessee should be able to derive benefit from it without con-
suming it. The ownership of the leased asset remains with the lessor, along
with all risks pertaining to ownership. The physical possession of the asset is
held on trust by the lessee, who is not liable for any loss, destruction or re-
duction in value of the asset, unless caused by misuse or intentional negli-
gence by the lessee.
In Islamic jurisprudence, the term Ijara is used for two different situations.
One, as in the case of a conventional lease, is the transfer of the usage of an
asset, while the other is where a person is employed for some service in ex-
change for wages, like teachers, lawyers, and doctors. According to Islamic
scholars, the Ijara contract consists of three main elements. Like all contracts
Ijara also involves offer and acceptance – Ijab and Qabul. There are the con-
tracting parties, the lessor and lessee; the subject matter of the contract, in-
cluding the consideration or rent (called Ujrah) that the lessee pays for the
right to use and derive benefit from an object owned by the lessor. The asset
is called the Majur and the benefit derived from the asset is called Al Man-
faah. It is important to note that the benefit from use of the asset is the sub-
ject matter of the contract, not the asset itself, and this benefit is guaranteed
by the contract.
Ijara is very similar to a conventional lease. The majority of Islamic scholars
consider Ijara as a Shariah-compliant financial instrument if the object in
consideration has beneficial use and is Halal. Not every object or asset is suit-
able for Ijara or leasing. It needs to be tangible, non-perishable, valuable,
identifiable and quantifiable. For example, perishable items like food, fuel,
etc. cannot be leased, neither can money be leased.
IJARA IN ISLAMIC BANKS
Ijara is a service-based contract, used significantly to meet short and me-
dium-term financing needs, involving either rent or hire purchase of an asset
based on an agreed rental fee and period. Islamic banks offer this product to
retail and business customers and some common applications involve rental