Ijarah

In Islamic finance, Ijarah is an increasingly popular Shari’ah-compliant financial structure in all forms of asset financing. It is a mode of finance where the Islamic bank purchases an asset or equipment at the request of a client and leases it to the client a price that includes a fair return for the bank. Ijarah is generally used by Islamic banks for financing consumer goods, equipment and vehicles, home financing; it has also found its way into project and transportation financing and into asset-based financing in larger and more complex transactions. Under the standard Ijarah contract, the client does not normally have the option to purchase the leased asset in installments; he may however purchase the asset at the end of the lease period. This may be achieved by means of Ijarah wa Iqtina, that is equivalent to a leasing and installment loan in conventional banks, whereby each lease rental payment includes a portion of the agreed asset price and can be made for a term covering the asset’s expected life. The optional purchase price declines over the period of the lease agreement.