How Ijara Works

 For devout Muslims, Sharia law prohibits mortgages because of the prohibitions on interest and unequally shared risk. The Ijara-wa-Iqtina (lease and ownership) process allows Muslims to create a rent-to-own agreement in which the home’s inhabitant becomes a renter, thus abiding by Sharia principles.

The Ijara process is asset-based rather than credit-based Islamic financing method that has been used in the U.S. for more than 20 years. Similar to conventional auto leases, the Ijara loan sets up a lessor-lessee relationship rather than a creditor-debtor relationship.  An Ijara sets up a Trust which becomes the owner of the real estate property in question.  The Trust then leases the property to the customer. The customer pays a portion of the purchase price every month as a rental payment. When the customer wishes to move out of the house, the Trust is obligated to sell the property to the customer under the terms of a promise to purchase; then the customer becomes the sole owner. However, while the customer is entitled to purchase the property, they are not obligated to do so.

In compliance with Sharia law forbidding unequally shared risk (Gahrar or Gharar), the Trust is the sole owner and thus takes on 100% of the loss or gain, which it then passes along to the beneficiary, who is usually the customer. This sharing of gain or loss is directly related to a Musharaka transaction. Ijara loans can be used for a wide variety of items, but are most common with high-value items such as houses. Ijaramortgages are legal under U.S. banking regulations and comply with the provisions of the Truth in Lending Act.