Ijarah is a key Islamic finance structure that is sharia compliant and widely used in Australia and around the world. It provides a way to lease assets without involving interest, which is prohibited in Islamic finance.

What is Ijarah?

Ijarah is a leasing agreement where the lessor (owner) leases an asset to the lessee (user) for a specified period in return for a specified rent. This structure ensures that the transaction is fair and sharia compliant, as it avoids riba (interest).

How Does Ijarah Work?

1. Customer Request: The customer approaches the Islamic bank with a request to lease a specific asset.
2. Bank Purchase: The bank buys the asset from the supplier and takes ownership of it.
3. Lease Agreement: Both parties agree on the terms and conditions of the Ijarah and execute the lease contract.
4. Lease Period: The customer pays periodic lease rent for the use of the asset over the agreed lease period.
5. End of Lease: At the end of the lease period, the asset is either returned to the bank or transferred to the customer if it is an Ijarah Muntahia Bittamleek (lease-to-own) agreement.

Benefits of Ijarah

Sharia Compliant

Ijarah is fully sharia compliant, as it avoids riba (interest) and ensures transparency in the transaction. This makes it an ethical choice for Muslims in Australia seeking Islamic finance solutions.

Flexible Leasing Options

Ijarah offers flexible leasing options, including normal leases and lease-to-own agreements (Ijarah Muntahia Bittamleek), catering to various needs.

Wide Applications

Ijarah can be used for various purposes, including home financing, vehicle financing, and service financing. It is a versatile tool in Islamic finance.

Conclusion

Ijarah is a key structure in Islamic finance, offering a sharia compliant way to lease assets. Its transparency and ethical nature make it a preferred choice for many Muslims in Australia. By understanding how Ijarah works, you can make informed decisions about your financial needs while adhering to Islamic principles.

MECHANISM OF AN IJARAH TRANSACTION:

1. A customer who needs certain asset visits the Islamic bank and promises to lease the asset.
2. The Islamic bank purchases the asset from the supplier and pays the full amount on the spot as per the quotation.
3. Both the parties agree on the terms and conditions of Ijarah and execute the lease contract against the predefined periodic lease rent for a specific lease period.
4. In a normal lease, after the completion of the lease period, the Lessee would return the asset to the Lessor.
5. In case of ‘Ijarah muntahia bittamleek’, the ownership of the leased asset is transferred to the customer at the end of the lease period in which case the rental paid by the customer includes the cost of the asset as well.

APPLICATIONS OF IJARAH CONTRACT IN ISLAMIC FINANCE:

Ijarah contract is applied to the kind of products listed below:

• Home financing
• Vehicle financing