Ijara wa Iqtina - ijaraCDC

Ijara wa Iqtina

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Ijara & Renting With Islamic Finance

Ijara, translated literally, refers to renting, but Ijara-wa-Iqtina refers to renting to acquire or renting to own. This term is most commonly used for the purpose of referring to a situation where a family or individual is renting a property with the purpose of ultimately owning it. Ijara is also used for equipment as well as property, though it is most commonly used to refer to renting property since this is the most common situation where someone would rent to own.

The process involved in Ijara for Muslim leasing and Islamic financing purposes is pretty simple and involves creating a Trust with a single asset. The Trust will then purchase the property in question, and then will lease this property to whoever the customer is. With every monthly payment that is made, part of the payment is going to go toward ownership while the remainder goes to the renting, until the point where the customer owns the entire property 100 percent.
What makes Ijara different from conventional leasing situations is that the Trust is obligated to sell the property to the buyer in an Ijara using what is known as a Promise to Purchase. This contract also entitles the customer to the ability to purchase the property, and yet they are not actually going to be obligated to make the purchase.
There are different types of purchasing agreements including Musharaka and Murabaha, and these dictate what the purchase price is ultimately going to be. The purchasing price is going to be agreed to in a “Promise to Purchase,” and it is generally going to be equal to the amount of the original purchase minus a down payment amount but plus $1.00. As ownership by the customer is increased with each additional monthly payment, the purchase price is going to decrease until the final payment of ownership is made, which will be equal to $1.00.
It is important to understand how Islamic financing works in order to truly benefit from this type of purchasing situation. Financing for Muslim mortgages and similar property purchases has to be in accordance with Sharia, the Muslim religious law that dictates “way of life” for the Islamic people. Because it is law to follow Sharia, all financing practices that involve Muslim borrowers or sellers must be in accordance with Sharia, and it is illegal to practice otherwise. One of the biggest things to consider when it comes to Sharia is that interest cannot be charged, and there is not meant to be any profiting by the lending institution or bank on the practice of lending money, because this is against Islamic law.
It is important that you understand Islamic financing and all facets of its laws in order to truly effectively buy, borrow and sell in this arena. Islamic financing and Muslim mortgages are different from financing, buying, selling and borrowing in general and you will want to make sure that you are following all rules and guidelines whenever you are participating in this type of financing.