Banking
Ijara
An Islamic finance lease: the bank owns the asset and rents it to the customer.
Last reviewedWhat does Ijara mean?
Ijara is a lease contract in Islamic finance. The bank buys an asset such as equipment, a building or an aircraft and rents it to the customer for an agreed rent over an agreed period. Because the bank owns the asset, it carries ownership risk, which is what makes the return acceptable under Sharia. In ijara muntahia bittamleek (a lease ending in ownership), the customer gets the asset at the end, much like hire purchase, through a separate promise to sell or gift it rather than as part of the lease itself. Example: a bank buys a machine for 100,000 and leases it for five years at 2,000 a month (120,000 in total), after which ownership passes to the customer. Rents can be reset from time to time by reference to a market benchmark.
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Related terms
- MurabahaAn Islamic finance sale at cost plus an agreed profit, usually paid in instalments.
- SukukIslamic certificates that give investors a share in assets, used in place of bonds.
- Net interest margin (NIM)What a bank earns on its loans and investments after paying for its funding, as a share of those assets.
- Cost-to-income ratioOperating costs as a share of operating income. Lower means a more efficient bank.
- Cost of riskLoan loss charges as a share of loans, usually quoted in basis points.
- Non-performing loan (NPL) ratioThe share of a bank's loans that borrowers have stopped paying.
- CET1 capital ratio (and risk-weighted assets)A bank's highest-quality capital as a share of its risk-weighted assets.
- Liquidity coverage ratio (LCR)Whether a bank holds enough easy-to-sell assets to survive 30 days of stress.