Ijara: leases & hire

“Ijara: leases and hire; sale of usufruct” (Serlah 2002, p 13), means the right to benefit (in Arabic ‘manfa’ah’) by using the assets or equipment (Serlah 2002, p 13). The literal Arabic definition of the term Ijarah means giving something in rent. However the implied meaning of Ijara in the Arabic context is the right of usage and enjoying the advantages and getting the profits of assets and properties that a financial institution owns. Ijarah contracts are comparable to the English term ‘leasing’ (Abdelhamid 2005, p 55). It means also, lease financing (NCBI 2005, p 36) and operating lease; the main concept of this contract refers to leasing lands, equipment, buildings or other facilities to the customers in exchange for an agreed rent. It is a leasing agreement when the financial institution (mostly a bank) provides specific productive equipment or assets for the customers. Then the customers lease it back in a particular period. Under this kind of contract, the customers avoid spending the initial capital. In some situations, the customers will own the equipment at the end of the contract (Hassan 2005, p 4-5). This contract’s basic structure is built on leasing an asset based on special agreement between the clients and the financial institution. This asset must be leased for a certain time with the possibility that the customers can acquire ownership.

Furthermore, the assets should be secured and have a long productivity life with advanced agreement on the lease payments to keep the project away from speculation (Segrado 2005, p 10). According to this contract’s rules, the financial institution (lessor) keeps all the ownership rights and responsibilities of the assets or the properties that go with ownership rules. It is used traditionally by financial institutions in many Islamic, Arabic, and other countries around the world to provide funding for the purchases required for the customers’ projects (NCBI 2006, p 36). It is essential to mention that this type of contract is a very popular Islamic financial product which the banks adopt that deals with the Islamic funding system for long-term assets (Obaidullah 2002, p 12).

The Ijara wa Iqtina’a concept within the Islamic mortgage is similar to the lease to own’ model. The Ijara wa Iqtina’a is a mode in which the financial institution buys the house. The customer repays the money in monthly installments according to an agreed period in advance. During this arrangement, the client pays an agreed rent to the financial institution for occupying the house (Wilson 2007, p 10). Some of the writers refer to this mode as Lease-Purchase.

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