What Is Ijara?
Ijara is a leasing agreement where the owner of an asset (the Islamic bank or financier) leases it to a customer for an agreed rental payment over a defined period. The customer benefits from using the asset while payments are made; ownership may transfer at the end (ijara wa iqtina) or remain with the owner (operating ijara).
Islamic Mortgage via Ijara
The most common use of ijara for Western Muslims is the Islamic home mortgage. Instead of borrowing money to buy a house (which would require paying interest), the process works like this:
- You identify a house you want to buy
- The Islamic bank buys the house from the seller
- The bank leases the house to you
- You pay monthly rent — part of which may reduce the principal for eventual ownership transfer
- At the end of the term, ownership transfers to you (ijara wa iqtina)
You've never paid interest — you've paid rent. The bank earned rental income (halal) not interest income (haram).
Ijara in Sukuk
Ijara sukuk are the most common form of Islamic bond. A government or corporation sells an asset to investors (through an SPV), then leases it back. Investors receive rent payments. At maturity, the asset is repurchased. This is how the UK government's Sterling sukuk work.
Ijara vs Conventional Leasing
Conventional leases can include interest components in the pricing. Ijara specifically structures payments as pure rent with no interest element. Islamic scholars have specific requirements: the asset must exist, the bank must bear ownership risk during the ijara period, and the rental must not change based on a reference interest rate (like LIBOR).
Bottom Line
Ijara is the Islamic leasing structure used for mortgages, sukuk, and equipment finance. It converts what would otherwise be an interest-bearing loan into a halal rental arrangement backed by a real asset.