CIFE Murabaha & Ijara 2 — Questions and Answers
Question 1: What is 'Ijara' in Islamic finance?
- A leasing contract where the bank (lessor) purchases an asset and leases it to the client (lessee) for agreed periodic rental payments, retaining ownership risk (Correct answer)
- A sale-and-leaseback of cash deposits
- A profit-sharing equity arrangement
- A form of Islamic guarantee
Correct answer: A leasing contract where the bank (lessor) purchases an asset and leases it to the client (lessee) for agreed periodic rental payments, retaining ownership risk
Ijara is an Islamic lease where the financier buys and owns the asset, leasing its usufruct (beneficial use) to the client for defined rental payments; the lessor retains title and bears major ownership risks.
Question 2: What is 'Ijara wa Iqtina' (Ijara Muntahia Bittamleek)?
- A lease ending in ownership, where the client has an option or commitment to purchase the asset at the end of the lease term for a nominal or agreed price (Correct answer)
- A short-term rental with no purchase option
- A perpetual lease with fixed rental payments
- An Islamic mortgage without a final purchase
Correct answer: A lease ending in ownership, where the client has an option or commitment to purchase the asset at the end of the lease term for a nominal or agreed price
Ijara Muntahia Bittamleek (lease-to-own) combines a lease with a separate promise to transfer ownership at the end of the term, making it a common Islamic alternative to conventional mortgage finance.
Question 3: In an Ijara contract, who is responsible for major maintenance and insurance of the leased asset?
- The lessor (bank/financier) bears major maintenance and insurance as it is the legal owner (Correct answer)
- The lessee bears all maintenance and ownership costs
- The government is responsible for all maintenance
- Neither party has any maintenance obligation
Correct answer: The lessor (bank/financier) bears major maintenance and insurance as it is the legal owner
Since the lessor retains legal ownership of the asset in Ijara, it is responsible for major structural maintenance and insurance, as these are risks and costs of ownership, not of use.
Question 4: How is the rental amount typically structured in an Ijara for a variable-rate period?
- Rental payments can be tied to a benchmark rate (e.g., LIBOR/SOFR or central bank rate) and revised at agreed intervals, provided the future amounts are determinable at reset dates (Correct answer)
- Rental must be fixed for the entire lease term regardless
- Rental is always zero for the first year
- Rental is set by the government each quarter
Correct answer: Rental payments can be tied to a benchmark rate (e.g., LIBOR/SOFR or central bank rate) and revised at agreed intervals, provided the future amounts are determinable at reset dates
Ijara rentals may be variable if linked to a transparent benchmark with amounts determinable at each reset date; this is permissible because the rental for each period is known in advance at the time of revision.
Question 5: What critical Shariah condition distinguishes a valid Ijara from a disguised loan?
- The lessor must genuinely own the asset and bear the risks of ownership throughout the lease term (Correct answer)
- The lessee must make a down payment equal to 50% of the asset value
- The lease must be for exactly 12 months
- The rental must equal the asset's purchase price divided by the term
Correct answer: The lessor must genuinely own the asset and bear the risks of ownership throughout the lease term
Genuine asset ownership and risk-bearing by the lessor is the critical Shariah requirement that distinguishes Ijara from a disguised loan; if the lessor bears no real risk, the structure becomes a Riba transaction in form.
Question 6: What is 'Operating Ijara' as opposed to 'Finance Ijara'?
- Operating Ijara is a short-term lease where the asset returns to the lessor at the end with no ownership transfer, similar to an operating lease; Finance Ijara ends with ownership transfer (Correct answer)
- Operating Ijara always involves real estate only
- Finance Ijara is used only for government projects
- They are identical contracts with different names
Correct answer: Operating Ijara is a short-term lease where the asset returns to the lessor at the end with no ownership transfer, similar to an operating lease; Finance Ijara ends with ownership transfer
Operating Ijara is a shorter-term lease focused on the usufruct without an ownership transfer mechanism; Finance Ijara (Ijara Muntahia Bittamleek) is structured to transfer ownership at the end of the lease.
CIFE Murabaha & Ijara 2
What is 'Ijara' in Islamic finance?