Ijara is the contract by which an owner transfers to another person, for a set term and a known rent, the use of a lawful asset or service, while keeping ownership of the asset and the risks that come with it.
Usufruct, not the asset, as the object of the contract
In a sale the thing itself changes owner; in an Ijara only its utility, the manfa'a, is transferred. The lessee pays to live in, drive or produce with the asset, never for the asset as such, which explains all the rules that follow.
Four pillars without which there is no lease
Jurists require parties with legal capacity, a clear offer and acceptance, a defined usufruct and a known rent. If one is missing, for instance a rent left to the lessor's future discretion without a formula, the contract is vitiated by gharar.
Leasing a thing or hiring a person
Islamic law places the lease of an asset and the hire of services under the same word. An employee tied to one employer is an ajir khass; a craftsman working for several clients, such as a tailor, is an ajir mushtarak, with a different liability.
Why money cannot be leased
An item consumed by use, such as food, fuel or money, cannot be leased because it cannot be returned as it is. Leasing 10,000 euros would amount to lending at interest; this is the clear line between Ijara and riba.
What AAOIFI Standard 9 places on the owner
The AAOIFI Sharia standard on Ijara assigns to the lessor the major maintenance without which the asset cannot be used, as well as insurance of the asset. The lessor may factor these costs into the rent but cannot contractually shift the burden to the lessee.
The lessee as a trustee of the asset
The lessee holds the asset on trust, as an amin. It is liable for loss or damage only in case of misconduct, negligence or use contrary to the contract. A clause making the lessee liable for any loss, even accidental, is invalid.
Rent paid in advance and rent before delivery
The parties may agree on rent paid in advance, at the end or in instalments. However, no rent is due until the asset has been made available; sums paid before delivery are advances to be returned if the lease never starts.
Subleasing at a higher rent: the schools differ
According to AAOIFI, the lessee may sublease unless the head lease forbids it, including at a higher rent. The Hanafi school allows the lessee to keep the difference only if it has improved the asset; otherwise it recommends giving the surplus in charity.
Reviewing the rent without creating uncertainty
For a long lease the first rent must be quantified, and later ones may follow a published benchmark according to a formula known to all from the outset. Each new period becomes a firm amount before it starts, often within a floor and a cap.
Example: a warehouse leased over five years
A warehouse is leased at 4,000 euros a month in the first year, then reviewed annually against an index with a 5 percent cap. If the index rises by 7 percent, the rent moves to 4,200 euros; if it falls, the new amount can drop accordingly.
Sale of the asset or death of a party during the lease
The owner may sell the leased asset to a third party; the buyer then takes over the lease and collects the rent. On the death of a party, the Hanafi school considers that the contract ends, while most of the other schools keep it running with the heirs.
From a bilateral lease to listed Ijara Sukuk in Malaysia
The same contract underpins Ijara Sukuk: investors hold a leased asset and receive its rentals. In Malaysia, the Securities Commission and its Shariah Advisory Council oversee these issues and require that the underlying asset be identifiable and actually leased.
Specialist external source
The Securities Commission Malaysia guidelines on the Islamic capital market set out the requirements for products such as Ijara Sukuk and the role of its Shariah advisory council.