ijarah

Ijarah is an Islamic finance concept that translates to leasing. It is a contract where the lessor (owner of an asset) agrees to rent out an asset to a lessee (renter) for a specified period in exchange for a known rent. This arrangement is permissible in Islam as it involves the transfer of usufruct (the right to use and benefit from an asset) rather than the ownership of the asset itself.

There are two main types of Ijarah: Ijarah al-Tashghil and Ijarah al-Intiha' bi al-Tamleek. Ijarah al-Tashghil is a straightforward lease agreement where the ownership of the asset remains with the lessor throughout the contract period. The lessee pays rent for the use of the asset and must return it at the end of the term. Ijarah al-Intiha' bi al-Tamleek, often referred to as a lease-to-own agreement, allows the lessee to acquire ownership of the asset at the end of the lease term, usually through a separate purchase agreement or by making a final payment.

Key principles of Ijarah include the need for the leased asset to be clearly defined, the rental payment to be predetermined, and the lease term to be specified. The asset must be in existence and capable of being leased at the time of the contract. In Islamic finance, Ijarah is often used to finance the acquisition of tangible assets like property, vehicles, or equipment, providing an alternative to conventional interest-based loans. The rental payments can be fixed or variable, depending on the terms agreed upon by the parties.