What is Ijara?
Ijara is a Sharia-compliant leasing contract in which the lessor (typically a bank) owns an asset and transfers the right to use it to the lessee for a defined period in exchange for periodic rental payments. Ownership remains with the lessor throughout the lease term. Ijara is widely used for equipment finance, real estate, and aircraft financing in the Islamic finance market.
How It Works
- Lessor acquires or already owns the asset.
- Lessor leases the asset to lessee for a fixed rental over a defined period.
- Lessor retains ownership and bears ownership risks; lessee bears operating risks.
- Variants: operating Ijara (no transfer) and Ijara wa Iqtina (lease ending with ownership transfer).
- Sharia compliance requires the leased asset to exist and be capable of use.
Saudi Context
Saudi Islamic banks structure equipment leasing, vehicle finance, and aircraft finance under Ijara. The Saudi mortgage market widely uses Ijara wa Iqtina (also called Ijara Muntahia bi Tamleek) where ownership transfers at lease end. SAMA regulation and AAOIFI standards govern accounting. Saudi sukuk based on Ijara are common in the Saudi Debt Capital Market.
Example
A bank buys a SAR 500,000 truck for a logistics company and leases it under Ijara wa Iqtina for 5 years at SAR 9,500 per month. At the end of 5 years, the bank transfers ownership to the lessee for a nominal price (e.g., SAR 1). The structure is Sharia-compliant and economically similar to a finance lease.