Ijara (Islamic lease, including ijara muntahia bittamleek)

In plain words

Think of renting a flat from a landlord who has also promised, in a separate letter, to give you the flat once you have paid a set number of months. While you rent, the flat is the landlord’s: if the roof caves in, the landlord fixes it, and if the building burns down, your rent stops. You look after it day to day and pay on time. That is ijara, and the version with the letter is ijara muntahia bittamleek.

An Islamic bank cannot charge interest on a loan, because a fixed increase on a loan of money is riba. It can own a real asset and charge rent for its use. So instead of lending AED 120,000 for a car, the bank buys the car, stays its owner and rents it out. The rent covers the bank’s cost and profit, and is earned because the bank owns something useful and carries the risks of owning it.

Ijara sits alongside murabaha as one of the most used Islamic financing contracts, and is the usual choice for long terms: a murabaha price is fixed once agreed, while ijara rent can be reset to a market benchmark.

How it works

How an ijara works

The bank becomes an owner first, and only then a landlord.

1. 1

   The customer picks the asset

   A car, machine or home. The customer promises to lease it once the bank owns it.

2. 2

   The bank buys and owns it

   Title, and the owner’s risks, now sit with the bank.

3. 3

   Lease signed, asset delivered

   Rent is due only for periods the customer can use the asset.

4. 4

   Rent, then ownership

   Monthly rent, reset each period if variable. At the end the asset returns to the bank, or passes to the customer under a separate promise.

Customer holdsThe use of the asset

Bank holdsTitle and the owner’s risks

Animated diagram

An ijara ending in ownership, step by step

Swipe sideways to see the whole diagram.

1. The customer chooses the asset and promises to lease it. Nothing is leased yet: the bank owns nothing.
2. The bank buys the asset. Title, and the risk of owning it, are now the bank’s.
3. The lease is signed and the asset handed over. Rent can be charged only from delivery.
4. Monthly rent. In a variable ijara each period’s rent is set in advance from EIBOR, SAIBOR or SONIA plus a margin.
5. At the end the bank transfers title by gift or sale, under a promise kept separate from the lease.

The word and where it comes from

Ijara (إجارة) comes from the root a-j-r (أ ج ر): wage, reward, rent. The same root gives ajr, a worker’s pay or a spiritual reward, and ujra, the rent itself. Classical law uses ijara for hiring a person’s work and for hiring the use of a thing; banking uses the second. Jurists define it as a sale of usufruct, the right to use an asset, for a known payment over a known period, while the asset stays with its owner.

The Quran describes Moses agreeing to work for a set term (Surah al-Qasas 28:26-27), a passage often cited for hire contracts. The lease that ends in ownership is modern, worked out by jurists and by AAOIFI, whose Shari’ah Standard No. 9 on ijarah and ijarah muntahia bittamleek was first adopted in 2000. ¹

Ijara muntahia bittamleek: the lease that ends in ownership

Ijara muntahia bittamleek (إجارة منتهية بالتمليك), or IMB, also called ijara wa iqtina (lease and acquisition), is the form most customers meet. Alongside the lease, the bank promises that the customer will become owner. AAOIFI recognises several ways to transfer: ¹

• Gift (hiba) once all rent is paid, since the rent has already covered cost and profit.
• Token sale at the end, for a nominal price such as one dirham or riyal.
• Sale at a set price, agreed in advance, or the unrecovered cost if the customer buys early.
• Gradual sale of portions over the term, close to diminishing musharaka.

Why the promise must stay separate

Classical law does not allow two contracts conditional on each other in one deal, nor a sale that starts at a future date. If the lease said “and this is also a sale, effective in year five”, the customer would be tenant and buyer at once, and nobody could say who carries the risk today. So the transfer sits in a separate promise, binding only on the party who gives it, usually the bank. The gift or sale itself is a new contract signed when the time comes. Most Sharia boards follow AAOIFI in treating a promise binding on both sides as a disguised contract.

The effect is practical. If the asset is destroyed in year three, the lease ends and the promise falls away with it. The customer does not owe the balance of a “sale price”, as they would under a loan.

Who carries what during the lease

Ijara rests on one idea: the bank earns rent because it really owns the asset, so the owner’s burdens cannot be moved onto the customer.

Illustration

Owner’s duties and user’s duties in an ijara

Swipe sideways to see the whole diagram.

Banks often appoint the customer as agent, under a wakala, to arrange takaful or repairs, then reimburse them. That is accepted if the cost really falls on the bank. Malaysia’s central bank gives parties more room to agree how maintenance and takaful costs are passed on; AAOIFI is stricter.

Rent: fixed or reset to a benchmark

The first period’s rent must be known at signing. Later periods can follow an agreed formula, such as 3-month EIBOR (UAE), SAIBOR (Saudi Arabia), SONIA (UK) or SOFR (US dollars), plus a margin, each fixed before its period begins. Many Sharia boards also expect a cap and floor to limit gharar, or uncertainty. Banks call this a profit rate, but it prices rent for an asset, not interest on a debt.

Forward ijara for homes not yet built

For an off-plan home, banks use ijara mawsufa fi al-dhimma (إجارة موصوفة في الذمة), a forward lease of a precisely described asset delivered later, usually paired with an istisna under which the bank orders the home. Payments before handover are generally treated as advance rent, adjusted or refunded if the home is not delivered as described. Scholars still debate parts of this, so each bank’s Sharia board sets the treatment.

What makes an ijara valid

Products typically fail by charging rent from the funding date rather than handover, making the customer pay the full “outstanding balance” after a total loss, or pushing insurance onto the customer without reimbursement.

How it differs from conventional finance

Ijara also differs from conventional leases. A finance lease moves almost all ownership risks to the lessee while the lessor keeps title; an ijara keeps them with the bank. An operating lease is closer to a plain ijara, but has no Sharia rules on late payment or transfer.

Under IFRS, which most Gulf banks use, an IMB usually looks much like a finance lease receivable. The monthly numbers can match a loan closely; the difference shows when things go wrong.

Rent that moves with the market

A murabaha price cannot change once agreed, so a 25-year murabaha leaves the bank with 25 years of rate risk. Ijara shares it, one period at a time.

Ijara, murabaha, musharaka and tawarruq

Rough rule: an asset for years at a market-linked price suits ijara; a short term at a fixed price suits murabaha; a large deposit and a growing share suit diminishing musharaka. Tawarruq is for cash, and many scholars see it as a last resort.

Across the Islamic world and beyond

United Arab Emirates

Ijara is a staple of UAE home and car finance, often priced off EIBOR after a fixed introductory period. Since 2018 the Higher Sharia Authority at the Central Bank of the UAE has required mainland Islamic banks and windows to follow AAOIFI standards, including No. 9, and approve new products. ² DIFC and ADGM run their own regimes.

Saudi Arabia

Islamic finance dominates Saudi retail banking, and ijara is a main tool for homes and cars, priced off SAIBOR. SAMA supervises banks and licenses finance companies under the 2012 Finance Lease Law. Each bank’s Sharia committee approves its own documents.

Malaysia

Bank Negara Malaysia regulates Islamic banks under the Islamic Financial Services Act 2013 and has a policy document on ijarah; its Sharia Advisory Council rulings bind the courts. Car finance often uses AITAB (al-ijarah thumma al-bai, lease then sale), which must also fit hire-purchase law. A Kuala Lumpur SME leasing a MYR 800,000 machine over five years at 6% pays MYR 13,333 of cost plus MYR 4,000 profit in month one, MYR 17,333 in total. If a fire destroys the machine in year three, the lease ends, the bank claims on its takaful, and the SME owes no more rent unless the fire was its fault.

United Kingdom

Many UK home purchase plans use ijara, often with diminishing musharaka: the deposit buys a share and the customer rents the provider’s share. They have been FCA-regulated since 6 April 2007. ³ Alternative finance rules, including section 71A of the Finance Act 2003, mean stamp duty land tax is paid once, not on both the provider’s purchase and the later transfer. ⁴ A Manchester buyer with £60,000 down on a £300,000 flat might pay rent of £1,100 in month one on the provider’s £240,000 share at 5.5%, plus £800 a month to buy it out over 25 years.

Bahrain, Qatar, Kuwait and beyond

Bahrain hosts AAOIFI, and its central bank requires Islamic banks to apply AAOIFI standards. Ijara is common in Qatar and Kuwait, in aircraft and ship finance, and as the most common structure behind sukuk, where investors own leased assets and receive the rent. Retail ijara in continental Europe is rare.

Building an ijara product

A regulator sees an ijara as financing; a Sharia auditor sees a lease. Most of what satisfies both lives in the ledger and back office.

• Asset register. Each asset’s description, VIN or deed number, price, seller and status, so ownership is provable on any date.
• Ownership before lease. Block lease activation until purchase and delivery are recorded; start rent from delivery.
• Rent resets. Store each period’s benchmark, fixing date, margin, cap, floor and rent, and notify customers in advance.
• Maintenance and usage costs. Separate the owner’s costs from the user’s, and track agency reimbursements.
• Takaful. Cover in the bank’s name, with renewals, claims and how premiums flow into rent.
• Total loss. Stop rent from the loss date, close the lease, record the claim, cancel the promise.
• Late rent. Route charges to a charity account, never income.
• Early buy-out and title. Quote the price under the promise, issue the sale or gift contract, register the title.
• Audit trail. Every promise, purchase, delivery, reset and transfer dated and retrievable.

Read why this matters in ignoring Sharia compliance can block your product.

Example: a Riyadh home on ijara muntahia bittamleek

Common misconceptions

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