Ijara in Arabic literally mean ‘to give something on rent’. The term Ijara has two meanings in Islamic perspective:
One meaning of Ijara is to employ the services of a person on wages given to him as a consideration for his hired services.” The employer is called ‘mustajir’ while the employee is called ‘mu`jir’.
Second meaning of Ijara relates to the usufructs of assets and properties, and not to the services of human beings. ‘Ijara’ in this sense means ‘to transfer the usufruct of a particular property to another person in exchange for a rent claimed from him.’ In this case, the term ‘Ijara’ is analogous to the English term ‘leasing’. Here the lessor is called Mujir’, the lessee is called ‘mustajir’ and the rent payable to the lessor is called ‘ujrah’. Note: For this report the second type of Ijara is more relevant, because it is generally used as a form of investment, and as a mode of financing also.
Ijara is a lease agreement under which a certain asset is leased out by the lessor to a lessee against specific rent or rental for a fixed period. Ijara contract is used to finance lease for items such as real estates, buildings, equipment, machineries, computers, motor vehicles, and other goods; except the things that are haram or prohibited in Islam. In addition, the things that cannot be used without consuming cannot be leased out e.g. money, edibles, fuel, etc. Two fundamental principles of Islamic finance are:
– It has to be asset-based financing: The first fundamental principle of Shariah is that as opposed to conventional financial dealing, profit is generated when something having intrinsic utility is sold or offered for use. Money has no intrinsic value. As such dealing in money cannot generate profit unless converted into real assets.
– There has to be an element of risk: The second basic element of Shariah is that one cannot claim a profit or fee for a property/transaction, the risk of which was never borne by him