Ijara is a lease contract whereby the bank in the capacity as the owner and lessor will lease the assets owned by it to the customer (lessee). The underlying asset for the ijara transaction is ranging from tangible assets such as property, equipment, and machinery to intangible assets such as services. Under ijara, the Bank will lease the asset to a customer rental amount for a pre-determined rental period. In case the Bank does not possess the asset as yet, the Bank will purchase it from the supplier at the request of the customer, and subsequently lease it to them.
In cases where the assests are already owned by the clients, the bank can offer an ijara facility on the basis of “purchase & leaseback”, whereby the Bank purchases the asset from the client (instead of a third party supplier) and pays the purchase price of the asset to the client in their capacity as the “owner and seller of the asset”. Following the sale agreement, the customer subsequently signs the Ijara agreement with the Bank and the lease contract commences.
Ijara Facility is suitable for medium to large company expenditures mainly related to acquiring fixed assets to use for the project at hand, and has practical applications in manufacturing, logistics and transportation, and other industrial sectors. Ijara financing also allows for the flexibility of variable rental, as the rental rate may be reviewed on a periodic basis as agreed upon between the Bank and the client.