Major principles in Islam (part 8) – The Ijarah Contract
Continuing the series, Seeking the Halal, the Ijarah contract is the fifth type of contract, based on Imam al-Ghazali’s categorisation in Ihya’ ‘Ulum al-Din, in Kitab al-Kasb (The Book of Lawful Earning). Imam al-Ghazali divided the subject of earnings into six main types of contracts, around which most forms of trade and business revolve.
We have already discussed four of these contracts in previous sessions, including the Salam (forward sale) and Istisna‘ (manufacturing contract). Now we have the Ijarah contract, which refers to leasing or renting.
Definition and nature of Ijarah
Ijarah literally means “to give something on hire” or “to rent”. Technically, it refers to a contract in which ownership of a lawful, known benefit is transferred in exchange for a known consideration. The object of exchange is not the physical asset itself, but rather its manfa‘ah (usufruct), the right to use and benefit from it.
Imam al-Quduri in his famous work Matn al-Quduri, defines Ijarah as:
“A contract to transfer a permissible and known benefit in exchange for a known consideration.”
In modern terms, this means that one party provides the benefit of use or service of an asset, such as a house, vehicle, or equipment, to another, in return for a specific payment (rent). The lessee gains the right to use the property, while ownership remains with the lessor.
For example, when you rent a house, you do not own the physical structure, the walls, doors, or land, but you own the right to live in it for the agreed duration. This right of use, known as usufruct, is what constitutes the essence of the Ijarah contract.
Scriptural basis of Ijarah
The concept of Ijarah is established in the Qur’an and Sunnah. Allah says:
استأجره إِنَّ خَيْرَ مَنِ اسْتَأْجَرْتَ الْقَوِيُّ الْأَمِينُ
“Hire him, for truly the best one you can hire is the strong and the trustworthy.”
(Surah al-Qasas, 28:26)
This ayah refers to the story of Prophet Musa (peace be upon him), when he was employed by the father of the two women. It serves as evidence for the permissibility and virtue of Ijarah as a means of lawful earning and exchange of benefit.
The Prophet ﷺ also practiced and permitted such contracts. In one narration, when he and Abu Bakr (may Allah be pleased with him) migrated from Makkah to Madinah, they hired a guide to lead them through the desert, demonstrating the validity of hiring services for payment.
Old and modern applications
Classically, Ijarah covered the leasing of property, animals, or labour. Modern applications include hiring of machinery, vehicles, offices, and even Ijarah muntahiya bi-tamlik (leasing that ends with ownership transfer), which is widely used in Islamic finance today.
The essence, however, remains unchanged, it is a lawful exchange of benefit, distinct from riba, as ownership of the asset and its risk remain with the lessor.
Summary of core elements
The fundamental pillars of Ijarah are:
- The contracting parties, the lessor (owner) and lessee (beneficiary).
- The subject matter, the benefit or service to be provided.
- The consideration, the agreed rent or payment.
- The time period clearly specified and known.
Thus, Ijarah is a balanced contract that allows mutual benefit without transferring ownership, forming one of the key pillars of halal economic activity.
The pillars of Ijarah
The lease, or Ijarah in Arabic, is classified under the category of earning (kasb). This means that the rent received from leasing an asset or providing a service is a lawful form of earning.
According to the Hanafi school, whose principles in this matter are largely shared by other schools, Ijarah has two main pillars (arkan):
The subject matter (ma‘qud ‘alayh), which is the usufruct (the benefit or use of the asset). If the usufruct ceases to exist, then the rent ceases with it. For example, if a house that is being leased is destroyed by fire, the tenant can no longer live in it or benefit from it. Consequently, the rent is no longer due because the benefit, which is the basis of payment, no longer exists. The payment is tied to the continued availability of the usufruct, not merely to the passage of time.
The consideration (‘iwad), which is the rent or payment agreed upon. This amount must be known, lawful, and agreed upon by both parties.
In addition to these, as with all contracts in Islam, there must be an offer and acceptance (ijab wa qabul), representing the mutual consent (rida) of both parties.
One of the scholars who discussed this concept in great depth is Professor Ali al-Qaradaghi, whose doctoral thesis was dedicated to the principle of consent in contracts (Mabda’ al-Rida fi al-‘Uqud). His research compared how different madhhabs and legal systems interpret consent and its role in ensuring contractual fairness. This principle, rida, is foundational to all valid Islamic contracts, whether in Ijarah, partnership, sale, or even marriage, since the Prophet ﷺ said:
إِنَّمَا الْبَيْعُ عَنْ تَرَاضٍ
“Indeed, trade is only by mutual consent.”
(Ibn Majah)
Conditions for the validity of Ijarah
The Hanafis mention five key conditions for an Ijarah contract to be valid:
The benefit must be clearly identified
This means the use or service being rented must be specific and known, such as living in a particular house, driving a specific car, or receiving a defined service. Ijarah is not restricted to physical property; it can also cover human services such as tailoring, sewing, plumbing, or any skilled labour. When you pay a tailor to sew a garment, this too is an Ijarah, the lease of a person’s time and skill in exchange for a wage.
The duration must be specified
The period for which the benefit is provided must be clearly known and agreed upon, for example, one year, six months, one week, or even a few days (as in short-term rentals or service contracts). Without a defined time period, the contract becomes ambiguous and invalid.
The rent must be known
The payment amount, timing, and method must be clearly stated, leaving no ambiguity, deception, or hidden conditions. The type of payment (cash, transfer, etc.), the rate, and when it is due (at the beginning, middle, or end of the period) must be explicitly mentioned. Transparency here is essential to avoid gharar (uncertainty) and ghish (deception).
As the Prophet ﷺ warned:
مَنْ غَشَّنَا فَلَيْسَ مِنَّا
“He who deceives us is not of us.”
(Sahih Muslim)
The remaining conditions relate to the lawful nature of both the benefit and the contract itself, that the asset or service must be permissible in Shariah, and that the ownership of the usufruct must be validly held by the lessor at the time of lease.
Conditions for validity of Ijarah (continued)
The benefit must be permissible in Sharia
The use for which the property or asset is rented must be lawful. If a person rents a property with the intention of establishing something impermissible, such as a nightclub, pub, or a place for gambling, then the Ijarah contract itself becomes invalid.
The Prophet ﷺ said:
إِنَّ اللَّهَ إِذَا حَرَّمَ شَيْئًا حَرَّمَ ثَمَنَهُ
“When Allah forbids something, He also forbids its price.”
(Ahmad and Abu Dawud)
Thus, leasing property for an activity that is haram results in income that is haram or at least doubtful. The asset must therefore be used only for purposes that are permissible and free from sin.
The lessor must be able to deliver the usufruct
The owner of the asset must be capable of providing access and benefit to the lessee. If the property is inaccessible, for instance, locked and unavailable, or in a state that prevents use, the contract is not valid, since the essential benefit cannot be delivered. The lessee must be able to enjoy the agreed use for the contract to hold.
Rulings regarding the leased asset
Once the lease is active, a key question arises: who bears the liability of the asset? The general rule in Islamic law is that the lessor (owner) retains ownership and therefore bears liability for the leased property, unless the damage occurs due to the lessee’s negligence, misuse, or transgression.
For example, if a tenant leaves a tap running and floods the apartment, the tenant is responsible for that damage. But if the boiler breaks down due to age or malfunction unrelated to the tenant’s actions, then the owner must repair it. The tenant is not liable for such major maintenance issues because they fall under the owner’s responsibility.
Thus, major repairs, such as structural issues or essential fittings, are the duty of the lessor, whereas minor upkeep, like cleaning, minor wear and tear, or dusting, is on the lessee, since these arise from everyday use.
The Prophet ﷺ said:
لَا ضَرَرَ وَلَا ضِرَارَ
“There should be neither harming nor reciprocating harm.”
(Ibn Majah)
This principle underlines that both parties must uphold fairness and avoid actions that cause harm to the other.
Use and misuse of the property
The lessee must preserve the property, use it responsibly, and in accordance with the purpose agreed upon in the contract. If the house was rented for personal residential use, the tenant cannot convert it into a business premises or overcrowd it beyond what was agreed. For instance, if the contract specifies use for two people, bringing in ten would be a violation.
Landlords often include specific conditions, such as prohibiting smoking, pets, or certain activities, and the tenant is Islamically bound to respect these. Breaking agreed conditions constitutes breach of contract and can render the Ijarah invalid.
Payment of rent
Rent is only due when the usufruct is actually available. If, due to unforeseen circumstances like fire, flood, or earthquake, the lessee is unable to use the property, the rent during that period is not payable. The rent is tied to the ability to benefit, if benefit is interrupted, payment stops.
The timing of rent payment is flexible and depends on mutual agreement. It may be paid in advance, in arrears, monthly, yearly, or according to any agreed schedule. The Prophet ﷺ said:
الْمُسْلِمُونَ عَلَى شُرُوطِهِمْ
“Muslims are bound by their conditions.”
(Abu Dawud)
Therefore, as long as the terms are lawful, the agreement is binding and enforceable.
Termination of the Ijarah Contract
The contract of Ijarah automatically ends if the leased asset is destroyed or the usufruct becomes unattainable. It may also terminate mid-term if unforeseen events make continued use impossible.
In such cases, fairness dictates that rent is calculated only for the period of actual use. For example, if the lease was for one year but the tenant used the property for six months before it became unusable, rent is due only for six months. This ensures justice and mutual satisfaction between both parties, reflecting the Islamic principle of equity in transactions.
Different types of Ijarah
The essence of Ijarah is the transfer of usufruct, the right to use or benefit from something, in exchange for payment. As mentioned earlier, if the lessee cannot benefit from the asset for any reason beyond their control, the rent for that period is not due. Even if it was paid in advance, it must be refunded, unless the damage or loss of benefit was caused by the lessee’s negligence or misuse.
There are generally two broad categories of Ijarah:
Ijarah of assets, where a physical property, vehicle, or object is leased for its use.
Ijarah of persons or services, where a person’s time, skill, or expertise is hired for payment.
Ijarah of persons (Service Contracts)
This form of Ijarah involves paying someone for their professional service or labour, such as a tailor, teacher, builder, dentist, or plumber. In this case, the object of the contract is not a physical asset but the service itself.
The Prophet ﷺ himself employed people for specific services and compensated them for their work. In one narration:
أَعْطُوا الْأَجِيرَ أَجْرَهُ قَبْلَ أَنْ يَجِفَّ عَرَقُهُ
“Give the worker his wages before his sweat dries.”
(Sunan Ibn Majah)
This hadith highlights the ethical responsibility to pay promptly and fairly for services rendered.
In such contracts, clarity is essential to avoid ambiguity (gharar). The scope of the work, duration, and compensation must be explicitly stated. For example, payment for two hours of teaching per day of a specified subject, or payment for tailoring a dress of a certain fabric, size, and style. The more precisely these details are defined, the more valid and secure the Ijarah becomes.
New forms of Ijarah in modern times
Although the concept of Ijarah is centuries old, its principles continue to apply in modern contexts. Today, we encounter many new forms of leasing that operate under the same foundational rules. Examples include:
Operational Ijarah: such as vehicle rentals, equipment hire, and office or residential leasing.
Short-term leases: such as renting desks, rooms, or shared workspaces on hourly or daily rates.
Equipment and machinery leases: used by businesses to access expensive tools without purchasing them outright.
These arrangements all fall within the framework of Ijarah, provided they meet Shariah conditions, namely, that the benefit is lawful, the rent is known, and ownership of the asset and its liability remain with the lessor.
Ijarah Muntahiyah bi-Tamlik (Lease Ending with Ownership)
A more recent and widely used structure in Islamic finance is Ijarah Muntahiyah bi-Tamlik, a lease that ends with ownership transfer.
To illustrate, consider the case of someone who wants to earn extra income by driving for Uber but cannot afford to purchase a car outright. In many countries, Uber requires cars to be relatively new, which can cost £25,000 or more. Since the driver does not have the cash, he seeks a leasing arrangement.
Conventional auto financing usually includes interest (riba), which renders the contract impermissible. However, some large companies now offer interest-free car finance, allowing payments to be made in instalments over several years with no added interest.
In this case, the arrangement resembles Ijarah, the driver pays monthly for the car’s use, and ownership gradually transfers to him at the end of the term. This is permissible in Shariah, provided that:
- The leasing and sale components are clearly separated, there must be a distinct sale contract at the end of the lease term.
- The lease payments are for use only, not as disguised instalments of a loan with interest.
- The transfer of ownership occurs through a new, valid contract, such as a gift (hiba) or sale, after the final payment.
This form of Ijarah combines the flexibility of leasing with the ultimate benefit of ownership, provided it avoids riba, ambiguity, and unfair clauses.
Ijarah Muntahiyah bi-Tamlik (Lease ending with ownership)
In this modern form of Ijarah, two distinct contracts are involved, not one combined agreement. The first is a lease contract, and the second, concluded later, is a sale or gift contract.
For example, a person leases a car for five years. During this period, they pay regular lease instalments for the use of the vehicle. Once the term is completed and all payments have been made in full, a separate contract is executed to transfer ownership, either as a gift or through a nominal sale.
In most cases, this transfer occurs for a symbolic amount, such as £1, £500, or £1,000, not the full market value of the car. It simply formalises the transfer of ownership after the lessee has fulfilled their lease obligations.
At the outset, there is also a binding promise of sale (wa‘d bi al-bay‘) or a conditional gift (hiba mu‘allaqah). This ensures that, once all lease payments are completed, the lessor (for example, the Islamic bank) is obliged to sell or gift the asset to the lessee. This promise safeguards the lessee’s rights and prevents any exploitation.
This model creates a diminishing ownership structure (tamalluk mutanaqqis), where the lessor’s ownership share gradually decreases over time. As the lessee continues paying rent, the lessor’s stake diminishes from 100% to 0% by the end of the term. The arrangement therefore begins as a lease and ends with ownership, hence the name Ijarah Muntahiyah bi-Tamlik.
This structure is not limited to cars. It is widely applied in machinery, industrial equipment, and factory financing, where businesses lease heavy equipment from Islamic banks over several years. Once the agreed term ends, ownership of the equipment transfers to the lessee, either by gift or nominal sale.
Application in Housing Finance (Home Purchase Plans)
In the United Kingdom, this model forms the basis of what is known as the Home Purchase Plan (HPP), an alternative to conventional mortgages. Instead of borrowing money with interest, the customer enters into a Sharia-compliant structure that combines Ijarah with ownership transfer.
The process begins with Ijarah: the Islamic bank purchases the house and leases it to the client. The client pays monthly instalments. The lease continues for a fixed term, usually around twenty years, depending on financial eligibility and credit assessment.
At the end of the term, a final contract is executed to transfer ownership to the client, either through a sale at a nominal price or a conditional gift. This approach provides a lawful alternative to interest-based loans while achieving the same end result: home ownership.
Diminishing partnership (Sharikah Mutanaqisah)
A similar structure used in Islamic finance, particularly in the UK, is the Diminishing Partnership model (Musharakah Mutanaqiṣah). Though slightly different in legal form, it operates on the same principles of shared ownership and gradual transfer.
In this arrangement, both the Islamic bank and the client jointly purchase the property. For instance, the client contributes 20% as a deposit, while the bank contributes 80%. Thus, ownership begins as an 80–20 partnership.
Each month, the client makes two payments:
A rental payment for using the bank’s share of the property (the 80%).
A purchase payment to buy additional shares from the bank.
Over time, the client’s ownership share increases, while the bank’s share diminishes, 80%, 70%, 60%, and so on, until the client owns the property outright. By the end of the agreed period, there is no rent remaining to pay, as the bank’s share has been fully purchased.
This dual structure involves two separate but parallel contracts: a lease contract and a partnership contract. The rental represents payment for the bank’s share of use, while the purchase payments reduce the bank’s ownership share.
Practical Illustration
To understand the division, consider an example. Suppose the monthly payment is £1,000. Out of this, £800 might represent rent for the bank’s share of the property, and £200 might go towards purchasing more of the bank’s ownership stake. Over time, as the ownership share of the client increases, the rent portion decreases correspondingly.
By the final year, the client owns nearly all the property, and the rent becomes negligible. Once the last share is purchased, full ownership transfers to the client, and the lease ends automatically.
Summary
The Ijarah Muntahiyah bi-Tamlik and Musharakah Mutanaqiṣah models demonstrate how Islamic finance adapts classical Sharia principles to modern contexts. Both preserve the essential features of Ijarah, lawful use, clear ownership, and transparency, while enabling individuals and businesses to acquire assets without engaging in riba (interest).
Review of Rental Rate
The rental value is reviewed periodically, sometimes every year, every two years, or every three years, depending on market fluctuations. This ensures fairness and alignment with actual property values. If the average rent in the area rises or falls, the lease component may be adjusted accordingly, following the conditions agreed upon in the original contract.
Current Practice in the UK Islamic Finance Sector
In the United Kingdom, this model forms the foundation of nearly all Islamic home finance products. The term Home Purchase Plan (HPP) is used instead of “mortgage.” All HPPs offered by Islamic banks operate under the principle of Musharakah Mutanaqiṣah, a partnership combined with a lease and gradual transfer of ownership.
Prominent providers include Al Rayan Bank, Gatehouse Bank, and Kuwait Finance House (UK), which was recently converted into a fully operating Islamic bank with a major presence near Oxford Street. Smaller providers such as Pfida and Offa also offer HPPs, though their capacity remains limited due to their size and demand.
These institutions apply the same diminishing partnership principle across varying property values, from modest homes to multi-million-pound properties. Larger institutions tend to focus on higher-value properties, as their business models are structured around higher “ticket sizes.” Small financial institutions, while more accessible, may have waiting lists due to high demand.
Profit and Calculation of Rent
Islamic banks earn profit not from interest (riba), but from rental income, the payment for usufruct, which is permissible. The rent is calculated according to a specific formula that takes into account the market rental value of comparable properties, the bank’s ownership share, and agreed review intervals. The exact calculation methods are proprietary to each bank but are based on fair market indicators.
These arrangements are available to both Muslims and non-Muslims alike. The contracts are structured upon Islamic legal principles but open to anyone seeking an ethical and interest-free alternative to conventional mortgages.
While this method is not yet cheaper than standard mortgages in most cases, it is halal, transparent, and asset-backed, free from riba, speculation, and ambiguity. Several new institutions are preparing to enter the UK market with the aim of offering more competitive rates while maintaining full Sharia compliance.
The separation of contracts in Ijarah Muntahiyah bi-Tamlik
An important question often arises in this discussion: why must the Ijarah (lease) and bay‘ (sale) be kept as two separate contracts, rather than two clauses within one document?
The answer lies in the fundamental principles of Islamic contract law. These are two distinct contracts with different legal effects and objectives. A lease transfers the right to benefit from an asset for a specific period, while a sale transfers ownership of the asset itself. Combining them into a single contract can cause contradictions, for instance, ownership and usufruct being transferred simultaneously, which violates the clarity required in ‘uqud (contracts).
The Prophet ﷺ said:
نَهَى رَسُولُ اللَّهِ ﷺ عَنْ بَيْعَتَيْنِ فِي بَيْعَةٍ
“The Messenger of Allah ﷺ forbade two sales in one sale.”
(Sunan al-Tirmidhi)
Scholars explain that this prohibition includes situations where two transactions are interlinked in a way that creates uncertainty or compulsion. By keeping the lease and the sale as separate agreements, each transaction remains clear, voluntary, and independently valid.
Another reason for separation is to preserve genuine consent (rida) and prevent exploitation. One party should not impose a condition such as, “I will rent my house to you only if you agree to buy it.” Linking the two transactions could pressure one party into a deal they would not otherwise accept. By maintaining separation, the lease stands on its own, and the later sale or gift happens only through mutual consent at the appropriate time.
However, at the beginning of the arrangement, the lessor (often the Islamic bank) provides a binding promise to sell or gift the asset once the lessee has completed all lease payments. This ensures fairness and protects the lessee’s rights, preventing a situation where the bank could refuse to transfer ownership after the contract’s completion.
There has been discussion among the jurists regarding whether such a promise (wa‘d) is binding. The Hanafi school traditionally considered promises morally binding but not legally enforceable. However, according to the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI), the international regulatory body for Islamic banks, the promise in such structured finance contracts is deemed legally binding for the sake of protecting both parties and ensuring contractual certainty.
As for concerns such as the seller’s death or incapacity, these do not generally arise in institutional settings because the seller is typically an Islamic bank, not an individual. The bank, as a legal entity, continues to exist regardless of staff changes or shareholder turnover, except in rare cases of insolvency or financial collapse.
In practice, the process works as follows: a client identifies a property they wish to purchase. The Islamic bank conducts credit checks and due diligence, then enters into a partnership with the client. The client pays a deposit (say, 20%), while the bank pays the remaining 80%. The property is owned jointly, but the client leases the bank’s share while gradually buying it over time until full ownership is achieved.
This structure ensures fairness, clarity, and Sharia compliance, avoiding riba while enabling ownership through lawful trade (bay‘) and usufruct (manfa‘ah).
Flexibility, compassion, and practical realities in modern Ijarah
In real-life situations, unforeseen circumstances may affect a person’s ability to keep up with Ijarah or Home Purchase Plan payments. Islamic finance recognises this reality and, while operating as a business, it is guided by compassion, fairness, and mutual ease that lies at the heart of Sharia.
If a client faces genuine financial difficulty, such as job loss or illness, Islamic banks generally review the case with understanding. If the hardship is temporary and verifiable, the bank may defer or reschedule the payments until the client recovers. However, this relief cannot continue indefinitely. Like any financial institution, the bank must remain sustainable, since it holds and manages the trust (amanah) of depositors and shareholders.
As the Qur’an commands:
وَإِن كَانَ ذُو عُسْرَةٍ فَنَظِرَةٌ إِلَىٰ مَيْسَرَةٍ
“And if the debtor is in difficulty, then grant him time until it is easy for him.”
(Surah al-Baqarah, 2:280)
This verse captures the balance, compassion for the struggling party, but within reason and fairness. Islamic banks therefore aim to avoid the harsh treatment associated with conventional repossession, and instead deal with clients in a dignified, understanding manner, while maintaining commercial responsibility.
These Ijarah-based financing models are open not only to Muslims but to anyone seeking an ethical, transparent, and interest-free financial structure. Though not necessarily cheaper than conventional mortgages at present, they represent a conscious effort to uphold divine guidance in economic life.
As the Prophet ﷺ said:
رَحِمَ اللَّهُ رَجُلًا سَمْحًا إِذَا بَاعَ، وَإِذَا اشْتَرَى، وَإِذَا اقْتَضَى
“May Allah have mercy on a man who is gentle when he sells, when he buys, and when he demands his due.”
(Sahih al-Bukhari)
Islamic finance, when practiced sincerely, strives to embody this prophetic balance, firmness with fairness, and business with mercy.
Yet Islam also recognises financial responsibility. The money managed by banks is a trust from shareholders and depositors, not charity funds. Therefore, decisions must balance compassion with accountability. The Prophet ﷺ said:
رَحِمَ اللَّهُ رَجُلًا سَمْحًا إِذَا بَاعَ، وَإِذَا اشْتَرَى، وَإِذَا اقْتَضَى
“May Allah have mercy on the one who is gentle when he sells, gentle when he buys, and gentle when he demands payment.”
(Sahih al-Bukhari, 2076)
This prophetic balance, between mercy and fairness, underpins Islamic economic ethics.
As for ethical concerns, such as renting property to individuals involved in sinful activities, the rule remains that a Muslim cannot knowingly facilitate or profit from what Allah has forbidden. Therefore, if a landlord feels discomfort or moral objection to how their property will be used, they are within their rights to refuse. The heart guided by taqwa often senses what is inappropriate even before the mind justifies it.
In conclusion, Ijarah exemplifies how Islamic law preserves dignity, fairness, and ethical purpose in worldly dealings. It allows individuals to meet their needs, acquire homes, and develop businesses, all while remaining conscious of Allah. The goal is not only lawful income but tranquillity of conscience: to earn and live in a way that pleases the Creator.
Ya Allah grant us halal provisions, barakah in our wealth, and sincerity in our contracts. Protect us from deceit and from what is doubtful, and make our earnings a means of nearness to You, not distance from You. Ameen.
Delivered by Shaykh Haytham Tamim to the Convert Club on 28th Oct 2025.