Understanding Ijarah: A Key Islamic Finance Structure

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

What is Ijarah Finance?

Ijarah finance 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 Finance Work?

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

Benefits of Ijarah

Sharia Compliant

Ijarah finance 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 Rental Options

Ijarah finance offers flexible rental options, including normal rental and rent to own agreements (Ijarah Muntahia Bittamleek), catering to various needs.

Wide Applications

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

Conclusion

Ijarah finance 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:

A customer who needs certain asset visits the Islamic bank and promises to lease the asset.
The Islamic bank purchases the asset from the supplier and pays the full amount on the spot as per the quotation.
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.
In a normal lease, after the completion of the lease period, the Lessee would return the asset to the Lessor.
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