Ijara Financing Program - ijaraCDC

Ijara Financing Program

Ijara Financing Program: Its Salient Features

There was once a time when Mughal rulers used the ijara as a form of agricultural investment. Ijara financing since then has undergone several modifications to adapt to the changing times and dynamic requirements, while keeping true to the essence of Sharia laws. Today, ijara financing is used not only used in agriculture but also in myriad other sectors such as real estate and equipment manufacturing. That ijara has survived the test of time and the challenges of a fast-paced business world are ample testimonies to the integrity lying at the core of its operational principles. A brief discourse on the salient features of ijara financing will make clear why this form of Islamic financing is preferred by business entities, entrepreneurs, and individuals.

What is Ijara Financing?

In essence, ijara financing refers to the transfer of right of use of an asset to another individual or a business entity. This is actually a form of leasing where the owner of the asset receives a rental payment from the lessee for the use of the asset while the former continues to hold on to ownership rights. The right of use is for a specific period, which is mentioned in the contract along with the exact amount of the rental payment. Furthermore, the object of the contract is valuable, non-perishable, and its exact nature of use is identifiable and concrete.

Salient Features of Ijara Financing

An individual or a business entity, who is the customer, may wish to buy or benefit from the use of a particular asset but may not have the requisite funds to acquire it. So the customer gets in touch with a bank or any other financial body who acquires the asset. Both parties then come to an agreement that the customer or the lessee will lease the asset from the lessor for a particular period and also pay the latter a fixed amount of money as rent for using the asset. This is the ijara financing agreement and the following are the features of the transaction, as evident from this contract:

  • The corpus of the asset remains in full possession of the lessor. This means that the lessor is responsible for all the liabilities arising out of this possession.
  • Usually an ijara financing contract specifies the exact use(s) that the asset can be put to. The lessee cannot use it for any purpose that has not been mentioned in the contract. However, if the contract does not mention any particular usage, the lessee may use it in a legitimate, conventional way.
  • The lessee must reimburse the lessor in case any misuse or negligence leads to a damage of the asset. However, if the damage has been caused by factor(s) that lay beyond the control of the lessee, the lessor shall bear the costs.
  • If the asset is jointly owned by two or more persons, the rental payment is shared by the owners. The proportion of the payment to be distributed amongst the owners is determined by the proportion of their respective shares.
  • The amount of rental payment to be tendered to the lessor, whether or not it varies for different phases of the leasing period, is explicitly mentioned in the ijara financing contract. The lessor cannot make changes to this amount at any point of the leasing period.
  •  The amount of rental can be determined on the basis of the cost that the lessor had to incur to acquire the asset. This arrangement is agreed to by both parties. This is in accordance with Sharia rules governing Islamic financing.
  • The leasing period in ijara financing agreements start from the day the asset is delivered to the lessee as a leased object.
  •  The ijara financing agreement is considered null and void when the leased object ceases to have any functional use.
  • After the leasing period has ended, the ownership rights of the asset may be transferred to the lessee, if he so wishes. This is done after he pays a nominal amount to the lessor after both parties have entered into a sale deed that is independent of the ijara financing contract.

Final Analysis

The afore-mentioned salient features of ijara financing ensure that the transaction is absolutely transparent and both parties can benefit from this financial agreement.