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Definition

Ijara - What Is Islamic Lease-to-Own and How Does It Work?

Quick answer

Ijara is a Shariah-compliant lease contract in which a financier buys an asset and leases it to a customer for a fixed monthly payment, with no interest. It differs from conventional leasing in that the financier bears all risk throughout the term. When the lease ends with automatic ownership transfer, it is called Ijara Muntahia Bittamleek (IMBT) - "lease ending in ownership." This is the most widely used structure for halal car financing globally and is governed by AAOIFI Shariah Standard No. 9.

01

What does the word "Ijara" mean?

Ijara (إجارة) is Arabic for "rent" or "lease." In Islamic finance it refers to a contract where:

  • One party (mu'jir / lessor) owns an asset
  • Another party (musta'jir / lessee) pays a fixed rent to use it
  • The rent (ujrah) is fixed in advance and not indexed to interest
  • Ownership stays with the lessor during the lease

Ijara is one of the oldest Islamic finance structures, documented across all four Sunni schools (Hanafi, Maliki, Shafi'i, Hanbali) and indirectly referenced in the Quran (Al-Qasas 28:26-27).

02

Ijara vs Ijara Muntahia Bittamleek (IMBT)

Feature
Ownership transfer
Ijara (pure lease)
Never
IMBT (lease-to-own)
At final payment
Feature
End of contract
Ijara (pure lease)
Asset returned
IMBT (lease-to-own)
Asset becomes lessee's
Feature
Use for car financing
Ijara (pure lease)
Rare
IMBT (lease-to-own)
Standard
Feature
AAOIFI reference
Ijara (pure lease)
Standard 9, clause 4
IMBT (lease-to-own)
Standard 9, clause 8

Bilen Utan Riba uses IMBT. When you make your 60th (or 48th, or 36th) payment, the car is yours. No additional fees, no residual buyout, no friction.

03

How Ijara works step by step

Step 1 - Asset identification. You choose the car. It must be permissible under Shariah (rules out cars whose primary purpose is haram - in practice this almost never excludes anything).

Step 2 - Purchase by lessor. The lessor (Bilen Utan Riba / Ribafri AB) buys the car from the dealer with its own capital. Critically, the purchase must happen before the lease contract is signed - otherwise the transaction becomes "bay'al-'inah" (a sham sale), which is haram.

Step 3 - Lease signing. We sign an Ijara contract: fixed rent, fixed term, asset description, maintenance terms, takaful (Islamic insurance), early settlement terms, purchase option / gift on final payment.

Step 4 - Use. You use the car as if it were yours. We do not interfere with daily use.

Step 5 - Ownership transfer. At the final payment, ownership transfers automatically. In Sweden this requires a Transportstyrelsen registration update, which we handle.

04

Conditions for a valid Ijara (Shariah requirements)

AAOIFI Shariah Standard No. 9 sets seven conditions:

  1. True ownership - lessor must genuinely own the asset, not just on paper
  2. Risk transfer - lessor bears destruction risk
  3. Fixed rent - rent must be known at contract signing
  4. Permissible asset - asset itself must be halal
  5. Permissible use - usage must be halal
  6. Separate purchase option - any purchase option must be a separate promise (wa'd), not part of the lease itself
  7. No interest-based late penalties - no riba-disguised charges

Violation of any of the above invalidates the contract under classical fiqh.

05

How Ijara differs from conventional leasing

Aspect
Interest in pricing
Conventional lease
Yes (effective rate baked in)
Ijara (Bilen Utan Riba)
No (fixed profit margin)
Aspect
Depreciation risk
Conventional lease
Partly with customer (residual guarantee)
Ijara (Bilen Utan Riba)
Entirely with lessor
Aspect
Late fees
Conventional lease
Interest + admin fee
Ijara (Bilen Utan Riba)
Admin fee only, donated
Aspect
Final payment
Conventional lease
Residual buyout or return
Ijara (Bilen Utan Riba)
Free ownership transfer
Aspect
Insurance
Conventional lease
Customer's responsibility
Ijara (Bilen Utan Riba)
Lessor's responsibility (takaful)
06

Common misconceptions

"Ijara is just leasing with an Arabic name." False. The structure looks similar on the surface but is fundamentally different in risk and pricing model. A "lease" branded as Ijara but priced using interest is not halal.

"It is the same as hire purchase." Close, but not quite. Hire purchase in most Western markets uses interest in pricing. Ijara uses a pre-determined profit margin without interest.

"There must be an official Islamic certification." There is no government-issued Islamic certification in Sweden. Validation is via a Shariah Supervisory Board of qualified scholars. Bilen Utan Riba's board has three independent scholars from three schools.

07

AAOIFI standards governing Ijara

  • FAS 8 - Accounting for Ijarah
  • FAS 32 - Accounting for Ijarah Muntahia Bittamleek
  • Shariah Standard 9 - Shariah rules for Ijarah
  • Shariah Standard 17 - Investment Sukuk al-Ijarah

Bilen Utan Riba complies with all four. Our contract template is reviewed against these standards.

FAQ

FAQ

Does Bilen Utan Riba use Ijara or Murabaha?

Bilen Utan Riba uses the Murabaha contract in the pilot phase, because that structure fits Swedish consumer credit law best. This page explains Ijara as a concept for completeness. Read more about our choice on the Shariah Guarantee page.

Is Ijara the same as Murabaha?

No. Murabaha is a cost-plus sale: the financier buys and immediately sells to the customer at a pre-agreed profit, customer pays in installments. In Murabaha the customer owns the asset from day one. In Ijara the financier owns the asset until the final payment.

Can I exit the Ijara contract early?

Yes. Classical fiqh allows early termination on various conditions. Our contract: pay remaining principal, no interest-based exit fees.

What if the car is totaled?

Our problem. Takaful covers total loss. You bear no depreciation risk - that is what we are paid for.

Is Ijara only for cars?

No. Globally Ijara is used for homes (IMBT mortgages in UK, USA, Malaysia), equipment, aircraft, ships. We focus on cars in Sweden for now.

Who is the registered owner during the Ijara?

Bilen Utan Riba (Ribafri AB) is the registered owner. You are the registered user with Transportstyrelsen. Ownership changes hands at the final payment.

References

Sources

Read more

Want to see how we apply Islamic finance in practice? Read about our Murabaha model.