Ijarah is an exchange transaction in which a usufruct of an asset is transferred to lessee in return for a payment, but where ownership of the asset itself is not transferred. The lessee can agree at the outset to buy the asset at the end of the lease period.
Benefits of Ijarah
Ijarah offers many benefits to both Musta’jir (lessee) and the Muij’ir (lessor). The following are some of the benefits that a Musta’jir can derive from a Ijarah:
- Ijarah is acceptable within the Islamic modes of finance as rental payments are made and interest is not involved.
- Ijarah assures maximum conservation of capital as it makes large investments in fixed assets unnecessary. The Musta’jir can use this for other purposes such as working capital, trade debts, and seasonal expenditures.
- Ijarah permits conservation of existing lines of credit that can be used for other purposes.
- The terms and conditions are flexible and can be customized for the Musta’jir.
- Ijarah rentals can be structured in accordance with the Musta’jir’s cash flow requirements.
- Ijarah being long-term provides a hedge against inflation.