Ijarah is a lease agreement between two parties to the act. The party giving out a particular asset on lease, effectively the owner of the subject asset is known as the lessor. While, the party to the agreement that takes up the asset on lease for its use is known as the lessee.
The agreement entails the lessor giving out his asset to the lessee for a period that is specified in advance. The amount to be paid by the lessee to the lessor, in each installment is also agreed at the start of the contract. It is also mutually agreed that the lessee would pay the lessor the residual worth of the asset at the end of the contract. This worth, unlike additional installments, would be paid in bulk.
All costs related to the asset such as its registration with the relevant authorities before use, its insurance, should that be required, as well as its maintenance are to be duly taken care of by the lessee. The lessor has no part to play towards contributing in these costs which have to be borne out by the lessee entirely.
Also, the agreement, once agreed and started, cannot be revoked. The lessee cannot return the lessor’s asset before the agreed on date at which the contract ends. The lessee cannot therefore avoid later payments to the lessor by virtue of returning the asset at an early date, at will. The contract is binding on both parties for the duration specified and any party deviating from its terms can be challenged in a court of law.
The concept of Ijarah is such that it allows a separation of ownership and use of the same asset(s). This situation poses a number of benefits for both the lessee and the lessor. The lessee is able to acquire and use an asset of tremendous use and profit to him without paying in bulk for the purchase of the asset. This is what is different from purchasing the asset outright from the market. So, the lessee is able to acquire and use the asset with little finances at his end, not paying anything at the start of the agreement and only paying at regular intervals as he generates income from the asset or from a secondary source.
Coming to the benefits offered by such an arrangement to the lessor, the lessor does not have to wait for a buyer to accumulate enough money to purchase his product. He can simply settle down for a breakup of the total cost of the asset and an agreement that states that he would receive money against his asset, in installments from the lessee. Also, that the lessee would be bound to “purchase” his asset at the end of the contract with the residual value of the asset being paid like a normal transaction, i.e. in full. This also benefits the lessor in the sense that he receives a stream of finance without having to wait for it over a long time since fixed assets require a lot of payment to secure full ownership, an ability not shared by every other buyer in the market.