Ijara is a method of medium-term financing by which the bank buys machines and equipments followed by transferring the usufruct to the beneficiary for a period during which it retains the title of ownership of these assets.
Ijara is the equivalent of leasing contract. However, this differs it from leasing, it is the absence of penalty in case of monthly non-payment in case of delay because the penalties that would arise for these reasons would be considered as interests, or Islamic Finance refutes this process. Sharia also disapproves any provision in a financial contract that penalizes a debtor in good faith already in trouble.
Moreover, in an Ijara contract, payments cannot begin until the lessee has taken possession of the asset in question. In contrast, in a leasing contract, the payments can begin from the moment when the lessor buys the underlying asset. In this way, the risk of destruction or loss of the asset is borne by the lessor who continues to have responsibility for the asset, except case of malice or negligence of the lessee.
On the other hand, in an Ijara contract, it is possible to determine the amount of each payment, but not before the date when the delivery of the underlying asset is planned. This flexibility makes this instrument particularly useful in case of financing of projects, an activity where the uncertainty about the future profitability of an investment project can be significant.
Therefore, the Ijara contract offers insurance, but also constraints on the legal plan and can result in double transfer in case of exercise, by the final buyer, of its purchase option. Thus, the contract conditions are predefined, in case of change of one of the conditions, even with the agreement of both parties, a new contract must be made with new conditions.