Ijarah, often referred to as Islamic leasing or rent, is a fundamental concept in Islamic finance. It is a contractual agreement or collaboration between the two parties that involves the lease or rental of an asset, property, or service for a specified period. All this is allowed based on an agreed-upon rental payment.
Ijarah adheres to the principles of Islamic Sharia law, which prohibits riba (usury or interest) and promotes ethical and equitable financial practices. All this might be complicated for you to understand. If that’s the case, then make sure to read this article till the end to know about the core principles of Ijarah.
Ijarah is a bilateral contract between two parties: the lessor (the owner of the asset) and the lessee (the user or renter of the asset). The lessor agrees to lease the asset to the lessee for a specified period, and the lessee agrees to pay rent in exchange for the use of the asset.
Ijarah is structured to comply with the principles of Sharia. This means that the rental payment (rent) must be a fixed amount and cannot include any form of interest. Additionally, the asset being leased should be halal (permissible) under Islamic law, and its use must not violate Islamic ethics.
Ijarah’s contract works on the basis of the ownership, which remains with the lessor. However, the lessee has the right to use it for the agreed-upon period. Due to this agreed contract between both parties, the lessee bears the risk associated with the asset during the lease period. This means that any damages or losses incurred while using the asset are typically the responsibility of the lessee unless specified otherwise in the contract.
The lease period and rental payments are critical components of an Ijarah contract. Both parties must agree on the duration of the lease and the specific rental payment amounts. The rental payments can be made periodically, such as monthly or annually, and they should be fixed amounts, not subject to change over the term of the lease.
Many entrepreneurs resort to acquiring assets on a rental basis, and it is quite profitable. The lessee is entitled to use the asset for the intended purpose as defined in the contract. The lessor should ensure that the lessee uses the asset in a manner that adheres to Islamic principles and ethics. Additionally, the contract may specify any restrictions on the use of the asset.
The Ijarah contract may include provisions for early termination, renewal, or extension. The conditions under which either party can terminate the lease, as well as the process for extending the lease period, should be clearly defined in the contract.
The lessor often retains the right to inspect and maintain the leased asset during the lease period to ensure its proper upkeep. Any necessary repairs or maintenance should be agreed upon beforehand while forming the contract.
Responsibilities that involve taxation, as well as insurance, are usually specified in the Ijarah contract. In most cases, the lessee is responsible for taxes, while the lessor retains ownership and, consequently, insurance coverage.
The Ijarah contract should also conform to local laws and regulations governing lease agreements. It’s essential to ensure that the contract complies with both Islamic principles and legal requirements in the relevant jurisdiction.
Ijarah is an important tool of Islamic finance that allows individuals and businesses to access assets and services while following Islamic ethics. The core principles of Ijarah, such as non-interest-based payments, ownership retention, and Sharia compliance, provide a framework for ethical and suitable leasing arrangements under Islamic law. You can also check Ijarah Financing at Hejaz Financial Services here.