Ijarah: A Smart & Sharia-Compliant Alternative to Conventional Leasing

Islamic finance provides an increasingly appealing alternative to conventional banking, offering a framework rooted in values such as fairness, transparency, and social responsibility. The prohibition of Riba (interest), Gharar (uncertainty), Maysir (gambling), and deception forms the foundation of this Sharia-compliant system, making it a compelling choice for the growing number of Muslims seeking financial solutions that align with their values. One such innovation within this space is Ijarah, a leasing model designed to comply with Sharia principles, offering a unique approach to financing.

The term Ijarah, derived from the Arabic for “lease,” “rent,” or “hire,” encapsulates a straightforward contractual arrangement in which the owner of an asset (the lessor) permits another party (the lessee) to use that asset for a defined period in exchange for pre-agreed rental payments. Unlike traditional leasing models, which may involve interest-bearing loans or the leasing of intangible assets, Ijarah is firmly grounded in tangible property that holds material value, ensuring that the transaction aligns with the core tenets of Islamic finance.

What are the Key Features of Ijarah?

• Profit Sharing

One of the most significant differences between Ijarah and conventional finance lies in the absence of Riba (interest). In traditional lending systems, financial institutions charge interest on the borrowed sum, often resulting in an unequal transfer of wealth. By contrast, Islamic finance operates on the principle of shared profits, rather than interest-based transactions. In an Ijarah agreement, the lessor receives a return on their investment through fixed rental payments, rather than accruing interest, which is inherently prone to fluctuation. This ensures that both parties benefit from the arrangement in a manner that adheres to Islamic ethical standards.

• Asset Criteria

A defining feature of Ijarah is its stringent criteria for the asset being leased. The asset must hold material value, be easily identifiable, and its quantity should be clearly defined. This ensures that the lease is tied to something tangible and of concrete worth, in line with the principles of transparency and fairness. Unlike other financial arrangements that may involve abstract investments or intangible assets, Ijarah focuses on substantial, identifiable property—such as real estate, vehicles, or machinery. This provides both parties with clarity, ensuring that the transaction is straightforward, fair, and grounded in something of enduring value.

• Eligible Assets

Ijarah is limited to assets that possess enduring value and whose benefits are not exhausted upon immediate use. As a result, the lease typically pertains to tangible, long-lasting assets like real estate, vehicles, or equipment—items whose value is spread out. The deliberate avoidance of consumables or currency in the leasing process ensures that the transaction remains rooted in significant value, distinguishing it from conventional leasing models that may involve goods with limited or diminishing utility.

• Clear Roles and Responsibilities

The clarity of roles and responsibilities in an Ijarah agreement is pivotal. Both the lessor and lessee have distinct obligations, which helps prevent misunderstandings and potential conflicts. The lessor retains ownership of the asset and bears responsibility for its maintenance, while the lessee is granted the right to use the asset for the agreed-upon period. Each party’s responsibilities—including the allocation of costs for repairs and upkeep—are clearly outlined, ensuring a transparent, mutually agreed-upon arrangement. Furthermore, should the lessee fail to meet their obligations, the lessor retains the right to repossess the asset, safeguarding the interests of both parties.

• Transparency

At the heart of Ijarah lies a commitment to transparency. The terms and conditions of the lease are agreed upon from the outset, with no hidden clauses. Both parties are fully aware of the rental amount, the lease duration, and any additional terms, ensuring that the agreement is clear and unequivocal. This transparency fosters trust between the lessor and lessee, reducing the likelihood of disputes or misunderstandings over the course of the lease.

• Option to Buy

A unique feature of Ijarah is the option for the lessee to purchase the asset at the conclusion of the lease term. While this option is not mandatory, it provides the lessee with the flexibility to acquire the asset they have been leasing. The purchase price is usually determined at the outset of the agreement. This option distinguishes Ijarah from conventional financing models, offering an ethical alternative to systems that may impose hidden fees or terms disproportionately benefiting the lender at the expense of the borrower.

• The Faith-Based Ethical Dimensions of Ijarah

Ijarah is not simply a financial product; it reflects a deep commitment to Islamic values. By avoiding interest-based financing, Ijarah provides a solution that is fully compliant with Islamic ethical principles. The rental payments are fixed, offering businesses a degree of certainty and predictability, exempt from the volatility of fluctuating interest rates. In contrast to traditional financing, where the lender is largely insulated from risk and benefits from interest, the lessor in an Ijarah agreement retains ownership of the asset and assumes responsibility for any depreciation or damage, except in instances of negligence by the lessee.

Furthermore, any penalties imposed under Ijarah agreements are directed to charitable causes, ensuring that they serve as a deterrent rather than a means of profit. This reinforces the moral foundation of Ijarah and aligns it with broader Islamic values of fairness, responsibility, and social welfare.

In essence,…

Ijarah offers a robust and inclusive alternative to traditional leasing and financing. By adhering to Islamic finance principles, it provides a solution that is fair, transparent, and aligned with moral values. With its emphasis on profit-sharing, tangible assets, clearly defined roles, and an option to buy, Ijarah ensures that both parties are treated fairly and with respect. It’s not only a smart financial decision but also a choice that reflects a commitment to fairness, transparency, and Islamic principles, making it a compelling option for both businesses and individuals seeking a values-driven financial solution.

About Rogers Capital

Established in 2017, Rogers Capital seamlessly orchestrates data-driven decision-making to deliver fiduciary, technological and credit services across the board. From powering possibilities to driving business success through innovation, we enable meaningful change.

Its credit sector specialises in providing tailored credit services to individuals and businesses, placing a strong emphasis on credit financing solutions and personal credit. Moreover, it manages the leasing and factoring arms of the credit sector.

As one of the most recognised non-banking financial institutions in Mauritius, Rogers Capital – Credit expansive portfolio consists of 100,000+ valued clients at both individual and business levels and partners with 500+ merchants and 150+ car dealerships.  It is the sole provider of Ijarah, a sharia-compliant financing solution which caters for a more inclusive market.