What is Ijarah?
An Islamic lease-to-own financing structure with no interest (riba).
In Ijarah, the bank buys an asset and leases it to you for a fixed monthly rental; ownership transfers at the end. It's used for Shariah-compliant car and home finance — the cost is a transparent rental, not interest.
Example
Meezan Car Ijarah finances a vehicle as a lease rather than an interest loan.
How Ijarah works
Ijarah is an Islamic leasing arrangement used instead of an interest-bearing loan. The bank buys the asset — a home, car or equipment — and leases it to you for an agreed rent over a set period. Because you pay rent for use rather than interest on a loan, the structure is compliant with Islamic finance principles.
Ijarah wa iqtina
In the common 'Ijarah wa iqtina' (lease-to-own) variant, ownership of the asset transfers to you at the end of the term, once all rental payments are complete. It is widely offered for home and car finance by Islamic banks alongside Murabaha.
Who bears the risk: a key AAOIFI requirement
Under Ijarah, ownership of the leased asset stays with the bank (the lessor) throughout the lease term — the contract does not transfer title, only the right to use the asset. A peer-reviewed review of Shariah-standard compliance in Malaysian Islamic banking (Journal of Risk and Financial Management, 2020) sets out what this means in practice: because the bank remains the owner, it is meant to bear responsibility for major structural maintenance, asset-related taxes and insurance, not the customer using the asset — the customer pays only for use (rent), not for owning and maintaining the asset as a lessee-owner would under a conventional lease. The same review found this is one of the areas where real-world bank practice sometimes drifts from the standard, for example by structuring things so the customer effectively covers costs the bank is meant to carry.
A second example: home Ijarah with a rent step-down
Compare a $150,000 Ijarah wa iqtina on a home over 15 years. Unlike Murabaha, where the total cost is fixed at signing, an Ijarah lease's rental can be structured to reduce over time as the customer's ownership share in a linked diminishing-partnership arrangement grows, or it can be fixed for the whole term — the bank discloses which structure applies before the lease starts. Either way, the payment is legally structured and described as rent for use of the asset, not interest on a loan balance, which is the feature that keeps it Shariah-compliant.
How Ijarah relates to Murabaha and other glossary terms
Ijarah and Murabaha are the two most common Islamic alternatives to a conventional amortizing loan, but they work differently: Murabaha is a sale at a disclosed markup with a fixed total cost from day one, while Ijarah is a lease where the bank keeps ownership until the end of the term (in the lease-to-own variant) and the customer pays rent rather than instalments on a sale price. Both avoid interest (riba), and both are typically compared against a conventional loan's EMI schedule when a customer is deciding between Islamic and conventional financing for the same asset.
FAQ
Who is responsible for major repairs on an Ijarah asset?
Because the bank retains ownership of the asset during the lease, AAOIFI's Shariah standard holds the bank (lessor) responsible for major structural maintenance, related taxes and insurance — the customer pays rent for use, not for asset ownership costs, though in practice some banks structure agreements that shift more of this onto the customer.
Can an Ijarah lease be cancelled early?
Terms vary by bank and jurisdiction and are set out in the lease agreement, similar to how a conventional lease or loan can carry early-exit terms. There is no single global rule; check the specific bank's Ijarah contract for its early-termination and remaining-rental provisions.