What is Ijara Muntahia Bittamleek (Islamic Finance Lease)?
Ijara muntahia bittamleek is a Sharia-compliant finance lease structure in which the lessor (typically an Islamic bank) leases an asset to the lessee for a fixed rental, with ownership transferring to the lessee at the end of the lease term through gift, sale, or gradual purchase.
How It Works
- Lessor purchases the asset and leases it to the lessee under an Ijara contract.
- Lessee pays rental installments covering the asset cost plus profit margin.
- A separate promise to gift, sell, or sell gradually transfers ownership at the end.
- Under IFRS 16, treated as a finance lease with a right-of-use asset and lease liability.
Saudi Context
Saudi Islamic banks (Al Rajhi, Alinma, Bilad) and finance companies offer ijara muntahia bittamleek as the most common Sharia-compliant alternative to conventional finance leases for commercial vehicles, equipment, and real estate. SAMA regulates these contracts and SOCPA aligns accounting treatment with IFRS 16 for both lessee and lessor.
Example
A Saudi SME enters a 5-year ijara on a SAR 600,000 truck with monthly rent of SAR 12,500 (total SAR 750,000). Under IFRS 16, the lessee records a right-of-use asset and lease liability of SAR 600,000 (PV of payments), and ownership transfers at the end through a SAR 1 token sale.