Ijarah

Ijarah

  • Ijarah refers to a contract that transfers ownership of a permitted usufruct and/or service for a specified period in exchange for a specified consideration.
  • Ijarah is a binding contract which shall not be terminated unilaterally by any of the contracting parties.
  • The asset and usufruct shall be owned by the lessor.
  • The rental shall be determined and agreed at the pint of execution of the ijarah contract.
  • The rental may be determined by fixed amount, specified benchmark or specified formula or combination of both, as agreed by the contracting parties.
  • It offers fixed rate financing; you pay at the same rate monthly.
  • Ijarah is inflation friendly. As the costs go up over five years, you still pay the same rate as when you began the lease.
  • There is less upfront cash outlay; you do not need to make large cash payments for the purchase of needed equipment.
  • Ijarah better utilizes equipment; you lease and pay for equipment only for the time you need it.
  • There is typically an option to buy equipment at end of lease term.
  • You can keep upgrading; as new equipment becomes available you can upgrade to the latest models each time your lease ends.
  • Typically, it is easier to obtain lease financing than loans from commercial lenders.
  • It offers potential tax benefits depending on how the lease is structured.

For this reason Ijarah is very advantageous. Ijarah can also help you enhance your status to the lending community by improving your debt-to-equity and earnings-to-fixed assets ratios. There are a variety of ways in which ijarah can be structured. This provides greater flexibility so that the lease is structured to best accommodate the individual cash flow requirements of a specific business.