Ijarah Contract: Introduction

Ijarah is a term in Islamic jurisprudence (fiqh) which literally means "to lease" or "to give something on hire." In Islamic law, the term Ijarah is used in two distinct contexts. The first refers to the hiring of a person's services in exchange for remuneration. In this case, the employer is referred to as the Musta'jir, while the hired individual is known as the Ajir. Thus, if Party A hires Party B as a manager or an ordinary employee, Party A is the Musta'jir and Party B is the Ajir.

This type of Ijarah encompasses any contract whereby one party hires another party, that is, hires his or her services. Whether the hired person is a physician, a teacher, or a laborer is immaterial; all such individuals are classified as Ajirs, while the hiring party is the Musta'jir. The compensation paid to the Ajir is referred to as Ujrah.

The second type of Ijarah relates not to personal services but to property and assets. In this context, Ijarah means granting another person the right to use an asset in exchange for rental consideration. In this sense, the term Ijarah is equivalent to the English concept of leasing. Under this arrangement, the lessor (the party providing the asset) is called the Mujir, the lessee is called the Musta'jir, and the rental payment is called the Ujrah.

Both forms of Ijarah are discussed extensively in classical Islamic legal literature, and each is governed by its own set of rules. This article focuses primarily on the second type of Ijarah, as it is more closely associated with investment and financing activities.

The rules governing Ijarah in the leasing sense closely resemble the rules of sale contracts because, in both cases, something is transferred to another party in exchange for consideration. The fundamental distinction between a sale and an Ijarah, however, is that in a sale the ownership of the asset passes to the purchaser, whereas in an Ijarah only the right to use the asset is transferred to the lessee, while ownership remains with the lessor.

As can be seen, Ijarah is not inherently a financing product or financing technique; rather, it is an ordinary commercial transaction similar to a sale. Nevertheless, due to certain tax advantages, leasing has become a widely used financing mechanism in many countries. Financial institutions began leasing equipment and assets to their clients as an alternative to conventional interest-based lending. In determining rental payments, they generally calculate the total cost incurred in acquiring the asset, add the amount of interest they could have earned on that capital during the lease term, and divide the resulting figure by the total number of rental periods, thereby determining the periodic rental payment.

This raises an important question: can a leasing arrangement be used as a financing instrument, and does such a practice comply with the principles of Islamic finance? The answer depends on the specific terms and conditions of the transaction. As noted above, leasing is fundamentally a commercial transaction rather than a financing product. Therefore, any leasing arrangement must always be structured and governed in accordance with the Shariah rules applicable to Ijarah contracts. In the following parts of this article, we will examine the principal rules governing Ijarah under Islamic jurisprudence. It is hoped that, after reviewing these rules, readers will gain a clearer understanding of the circumstances under which an Ijarah contract may be utilized as a Shariah-compliant financing tool.

Undoubtedly, the subject of Ijarah is broad and relatively complex. Therefore, this article will be presented in several installments.

Source: fiqh.uz