The term Ijara (Leasing) in Arabic literally means to give something on rent.

Ijara contract is an agreement wherein a lessor (muajjir) leases physical asset or property to a lessee (mustajir) who receives the benefits associated with ownership of the asset against payment of predetermined rentals (ujrah). Ijara is for a known time period called ijara period.The contract of ijara financing can be utilized as a mode of financing to provide the customers with short to medium-term financing to lease such items which may include: real estates, buildings, equipments, machineries, computers, motor vehicles, and other acceptable (not be haraam or forbidden assets). BENEFITS OF USING IJARAH: 1. It is easier to lease than borrow for short-term needs. 2. To avoid different types of risk 3. Ijara mostly do not require credit evaluation. 4. Gives more freedom of changing equipment as technology advances 5. Easier to get finance through leasing for companies with credit standing; these kinds of companies may not be able to borrow from banks or the public and if they do, have to pay high rate of interest. 6. In many cases, leases can be advantageous from taxing point of view. Since equipment leased remains the ownership of the lessor and hence the lessor pay the taxes. 7. In many countries, leasing is an off-balance-sheet financing. The asset itself is kept on the lessor's balance sheet, and the lessee
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reports only the required rental expense for use of the asset. Companies will often use off-balance-sheet financing to keep their debt to equity (D/E) and leverage ratios low, especially if the inclusion of a large expenditure would break negative debt covenants. SALIENT FEATURES OF THE IJARA CONTRACT

1. Asset to be leased must have a valuable use that is compliant with Sharia. 2. Asset to be leased must not be consumable. That is, it can be returned to the lessor in its original form at the end of the lease period. Normal wear and tear accepted. 3. Ownership of the asset remains with the lessor and only the usufruct is transferred to the lessee. Usufruct means the right of using anothers property for profit, without spoiling its substance 4. Liabilities and risks incidental to ownership will reside with the lessor. 5. Period of the ijara arrangement must be clearly specified 6. Purpose and mode of usage should be agreed upfront 7. The leased asset is a trust in the hands of the lessee. Lessee liable for damage to leased asset only to the extent of the lessees negligence. 8. Lessee does not guarantee the safeguarding of the leased asset nor indemnifies the lessor of damages 9. Rental payment must commence after the delivery of the leased asset either actually or constructively (e.g. give keys to house) 10.Upon loss or non-existence of usufruct, the ijara contract is terminated Ijara-thumma-al-Bay' (Lease-sale) or (Financial Lease) Businesses often require financing to purchase machinery, equipment, other fixed assets and land and buildings To address this need, Islamic financial institutions have resorted to a type of ijara contract which is loosely comparable to the conventional financial lease In ijara-thumma-al-Bay' (lease-sale), or as some call it "Ijara-waIktina'a" or Ijara muntahiea bitamleek, the lessee is offered the option of ultimately purchasing the asset or property at the end of ijara period at a predetermined price. The basic idea is for the bank to finance the purchase of an asset via a leasing arrangement and at the end of lease period, ownership of the asset is transferred to the customer
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In this type of ijara, the full cost of the asset or property is amortized during the lease period; that is why it is called by some as "full

payment lease" This type of leasing cannot be canceled except if the lessor is compensated for any losses. o Ijara-thumma-al-Bay' cannot be constructed to imply that it is a combination of two different contracts.; that is, it is not a leasing (ijara) contract with a condition to sell. Rather, it involves two different contracts to be executed at two different stages. First contract is a leasing contract (ijara) with a unilateral promise (waad) to sell the asset to the customer at a predetermined price. Once the lease expires and lessee has made all payments, the lessor is obliged to fulfill his promise to sell by executing the contract of sale (bay) Such a promise is made as an additional agreement to the main ijara agreement. From the standpoint of the customer, such promise may be seen as an option to purchase the asset at the end of the lease period. Since an option is a right without obligation, by implication, the unilateral promise must be binding on the bank. Note that the sale contract is independent of the ijara contract. In an ijara-thumma-al-Bay', the bank remains the owner till the very end bearing all the risks and responsibilities, and the customer is responsible for only the rentals as long as he uses the equipment or property. He becomes the owner only if, and when, he exercises his option to purchase at the end of the period. The financing process of ijara-thumma-al-Bay' is the same as the process mentioned above except point 8 where now the bank transfers the ownership of asset to customer at the end of Ijara period
follows: 1) Ownership: Conventional Lease : Leasing can provide financing for movable (industrial, transport and agricultural plant and equipment) or real estate assets, while at the same time allowing the creditor institution to retain ownership of the asset throughout the term of the contracts. Ijara : Muajjir (lessor) is the owner of the leased property. 2) Risk bearer: Conventional Lease : The lessor assumes and manages the risk of the asset.

Ijara : The risk and liabilities of ownership lie with the Muajjir. The leased asset shall remain the risk of the Muajjir throughout the lease period. Any loss or harm caused by factors beyond the control of the Mustajir lessee shall be borne by the Muajjir. 3) Starting time for rental obligation Conventional Lease : The rental falls due from the date when the lessee accepted the goods. Ijara : The rental falls due from the date of handing over the asset to Mustajir. 4) Usefulness of property Conventional Lease : The leased equipment must not be limited use property. Ijara : It is a condition that the asset to be leased must be a non-fungible one which can be utilized more than once. 5) Penalty Conventional Lease : Penalty can be charged to the lessee for delayed payment. Ijara : Penalty can be charged to the lessee for delayed payment though the amount recovered is only to be used for charitable purposes by the lessor. 6) Repossession of an asset Conventional Lease : The lease must not contain an option to purchase the asset at a bargain price. Ijara : 1. There cant be two contracts in one contract. Since the purpose of purchase bargain option is entirely different than the purpose of transferring the usufructs of an asset. Inserting the clause of purchase bargain option serves the purpose of another contract. On the one hand it allows the lessee to avail the usufructs of the leased asset and on the other hand it also gives the right to the lessee to purchase the same leased asset, which is not allowed in Shariah. 7) Valuation upon completion of leased period:

Conventional Lease : The asset must have secondary value after the expiry of the primary lease term. Ijara : A leased asset must have a value upon completion of the agreed leased period. 8) Premature termination of lease: Conventional Lease : Lease can be terminated in the event that the lessee fails to meet his obligations, notably the obligation to pay rent. The lessor must then instigate legal proceedings involving the bringing of a claim, where equipment is concerned. Lessee cant terminate lease if contract does not contain cancellation clause. Ijara : Premature termination of the lease is allowed provided that the lessee has violated or contravened the terms of the lease. 9) Effect of premature termination: Conventional Lease : On termination of lease contract, all obligations that are still executory on both sides are discharged. Ijara : From the time of termination, the lessee is not obliged for rental payment. 10) Sale and lease back as one transaction: Conventional Lease : This transaction involves the sale of the property by one company to another which in turn leases the same property back to the original seller. Ijara : Sale and lease back are allowed, but only as two separate transactions. 11) Determinant of rent: Conventional Lease : Lessors consider market related forces while scheduling lease payments. The market rate of interest provides a basis for lease determination. Ijara : Rent is determined by market given forces. In practice, the market rate of interest is used to determine the rental rate, although this is not explicitly stated. 12) Equivalent to a sale:

Conventional Lease : A manufacturer or dealer doesnt recognize any selling profit on entering into an operating lease because it is not the equivalent of a sale. Ijara : Leasing differs from sale in the way that it does not transfer the corpus or ownership of the property, which remains with the transferor.