Structure and key features of an Ijarah transaction
Produced in partnership with Hogan Lovells
Structure and key features of an Ijarah transaction

The following Banking & Finance practice note produced in partnership with Hogan Lovells provides comprehensive and up to date legal information covering:

  • Structure and key features of an Ijarah transaction
  • The structure
  • The acquisition
  • The lease
  • Control and maintenance of the asset
  • Mandatory prepayment and acceleration
  • Voluntary prepayment and maturity
  • Advantages and disadvantages of an ijarah structure

Structure and key features of an Ijarah transaction

A Shari’ah compliant leasing agreement takes the form of an ijarah which can either be akin to an operating lease, whereby the asset is returned to the lessor at the end of the rental period (much like hiring a car), or a finance lease, whereby the total rent for the asset equates to at least 100% of its full market value and title to the asset may pass to the lessee at the end of the rental period. For more information on these leases, see Practice Notes: Operating leases and Finance leases. In practice, the leasing of a Shari’ah compliant asset requires only minor deviations from a conventional lease. Since an ijarah is used primarily for Shari’ah compliant asset finance and residential mortgages, it is more common for the financing to be structured so that the asset passes to the lessee on maturity. This Practice Note will principally consider this form of ijarah. This Practice Note also assumes that the asset is in existence at the time of the financing; a different structure, an istisna’a, is used for a pre-delivery financing but is not discussed in this Practice Note. For more information see Practice Note: Structure of an Istisna'a transaction.

Under the terms of an ijarah, the purchaser (in time, the lessor) will purchase an asset at the

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