ijara

Ijara, from the Arabic for "to give on rent," is a contract in Islamic law by which a lessor conveys the use of an asset to a lessee in exchange for rental payments over a defined period. Ownership of the asset remains with the lessor for the duration of the contract, while the lessee gains usufruct and the right to use the asset as specified. The arrangement is intended to be separable from interest-based lending and must involve a permissible (halal) asset and a clearly defined term, rent, and conditions. In a typical ijara, the lessor bears ownership risk and major maintenance costs, while the lessee pays rent and handles day-to-day use.

In modern Islamic finance, ijara is a common asset-backed financing tool. Banks purchase a tangible asset (such as a vehicle or equipment) and lease it to the customer under an ijara contract. At the end of the term, the parties may agree to transfer ownership or to renew the lease. Variants include Ijara Muntahia Bittamleek (lease ending in transfer of ownership), and Ijara wa Iqtina (lease with an option or mechanism to acquire the asset). Ijara Thumma Al-Bay is a structure that combines lease with a post-lease sale. The form and responsibilities can vary by jurisprudential school and by contract, but all must adhere to Shariah guidelines, including clear terms and avoidance of riba and gharar.

Historically rooted in classical Islamic jurisprudence, ijara dates to early fiqh writings but was developed into standardized financing tools in the modern Islamic finance industry, with guidance from bodies such as AAOIFI. It is used for real estate, vehicles, equipment, and project finance, offering an asset-based alternative to interest-based lending.