Ijarah is a lease agreement based on the principles of Islamic financial relationships.

Key rules of leasing in Islamic financial law:

1. Lease: It is an agreement in which the owner transfers the right to use their property to another party for an agreed-upon fee for a specified period.
2. Valuable Characteristic: The leased item must have a valuable characteristic or a useful property in its use, as items with no utility cannot be leased.
3. Financial Obligations: The owner of the leased property is responsible for all financial obligations related to ownership, while financial obligations related to the use of the property fall on the lessee. For example, when leasing real estate, property tax, insurance, depreciation expenses are the responsibility of the lessor, while expenses related to the use of the property, such as electricity, water, heating bills, etc., are the responsibility of the lessee.
4. Lease Term: The lease term must be clearly defined.
5. Purpose of Use: The lessee cannot use the leased property for purposes other than those specified in the lease agreement. If the purpose of use is not specified in the contract, the lessee can use it for purposes that align with its characteristics of use. However, if the lessee wishes to use it for purposes different from its characteristics, they must obtain permission from the lessor.
6. Compensation for Losses: The lessee is obliged to compensate the lessor for losses incurred due to improper use or negligence concerning the leased property.
7. Risks and Ownership Rights: The lessor bears all risks associated with the ownership of the leased property throughout the lease term. This means that losses resulting from factors beyond the lessee's control are borne by the lessor.
8. Co-ownership of Property: Property owned by multiple parties can be leased, and the lease payments must be distributed among all co-owners in proportion to their shares in the property.
9. Lease of a Co-owner's Share: A co-owner of the property can lease their share to another co-owner, not to another person.
10. Identifiability of the Property: For a valid lease agreement, the leased property must be identifiable.
11. Lease Payment: The lease payment must be determined at the time of the contract for the entire lease term. For example, if Lessor A leases an apartment to Lessee B for five years with a condition that the monthly rent will be $1,000 in the first year and will increase by 10% each subsequent year, such a contract is considered valid. However, if Lessor A stipulates that the rent in the first year will be $1,000 per month, and the rent for subsequent years will be determined at the lessee's discretion, such a contract would be considered invalid due to the lack of clarity regarding the lease payment.
12. Increase in Lease Payment: The lessor cannot unilaterally increase the lease payment, and any such agreement is considered invalid.
13. Prepayment of Lease Payment: The lease payment or a portion of it can be paid in advance to the lessor before the property is handed over to the lessee, but the amount collected by the lessor remains with them as a "payment on account of future rent" and should be accounted for after its due date.
14. Commencement of Lease Term: The lease term begins on the day the leased property is handed over to the lessee, regardless of whether the lessee starts using it immediately.
15. Loss of Property Functionality: If the leased property loses its function for which it was leased and cannot be restored, the lease terminates on the day of the loss. However, if the loss is due to the improper use or negligence of the lessee, they must compensate the lessor for the residual value of the property up to the point of loss.

Islamic banks and financial institutions use Ijarah contracts for operational leasing, financial leasing, including home financing with a buy-back arrangement, and for issuing Islamic bonds (Sukuk) that are freely traded on the secondary securities market, as opposed to debt contracts. An advantageous feature of the Ijarah contract is the flexibility to adjust lease rates according to market conditions. However, when securitizing an asset that will generate revenue, it must have a value and payout levels that are active in the market at the time of bond issuance.

Key differences between the Ijarah contract and traditional leasing:

1. Start of Payments: In leasing, payments begin upon contract signing because the primary focus is on providing financing for the purchase of the asset. In Ijarah, payments start upon the transfer of the asset into the lessee's possession, as the primary emphasis is on the actual asset rather than financial resources.
2. Use of the Asset: The Ijarah contract specifies how the leased property will be used since the primary emphasis is on renting a specific asset for a defined purpose, as stated in the contract. In traditional leasing, the financial aspects take precedence, and details about the use of the asset may be less specific.
3. Compound Interest Accrual: In the event of delayed payments in leasing, a bank may charge interest on the outstanding amount, including interest for past periods. This is considered compound interest, which contradicts Islamic finance principles. In an Ijarah contract, such terms and accruals are excluded.
4. Risk of Asset Loss: In leasing, if the leased asset is lost due to circumstances beyond the lessee's control, their obligations to pay lease payments remain in force because the primary focus is on the funds allocated for the purchase, not the asset itself. In an Ijarah contract, where the leased property is central, the loss of the asset terminates the obligation to pay lease payments, given the focus on the asset itself.