IJARA & ISTISNA
                     Presentation Prepared 
by Group 3 1
Presentation outline In this presentation audience will be 
familier with :
• Introduction &
• How does it work
• Types 
• Characteristics/Features 
• Pros /Cons 
• objective/purpose 
• Rules 
• Uses
• Elements
• Pillars
• Termination
• Accounting recording (entries)

Introduction 
• Al-Ijarah (Arabic: إلجارة or Ijarah, ‘Islamic lease’ is a leasing or renting contract. in (,ا
traditional Islamic jurisprudence (fiqh), it means a contract for the hiring of persons, 
services, or the "usufruct" (manfa'ah) of a property, generally for a fixed period and price.
• Ijarah is a term of Islamic fiqh. it means ‘to give something on rent’. In the Islamic 
jurisprudence, the term ‘ijarah’ is used for two different situations. In the first place, it 
means ‘to employ the services of a person on wages given to him as a consideration for 
his hired services.’ The employer is called (musta’jir) while the employee is called (ajir). 
 He may be a doctor, a lawyer, a teacher, a laborer & so on. while the wages paid to the 
ajir are called their ‘(ujrah)’.
• The second type of ijarah relates to the usufructs (manfa'ah) of assets and properties, 
and not to the services of human beings. ‘Ijarah’ in this sense means ‘to transfer the 
usufruct of a particular property to another person in exchange for a rent claimed from 
him.’ In this case, the term ‘ijarah’ refers to the English term ‘leasing’. Here the lessor is 
called ‘mu’jir’, the lessee is called ‘musta’jir’ and the rent payable to the lessor is called 
‘ujrah’.

Types of ijarah
In general, ijarah is divided into two types
• Ijarah al-amal (hiring a person)
• It’s referred to a contract in which someone hire or employ a person on wages. The hired 
person provides his services in return for compensation. In this context, the employer is called 
“al-mustajir” and the employee is called “ajeer”. The compensation is given to the employee is 
called “ujrah”. This type of ijarah is very common and has different forms. It includes every 
contract in which someone is hired to provide his services and skills and get paid in return for 
his services and expertise. He may be a doctor, a lawyer, a teacher or any other person who can 
render some valuable services.
• Ijarah al-ayn (lease of an asset)
• It’s referred to a contract in which one person leases his asset to another person in return for 
rent. For instance, someone rents his car to another person and gets rent in exchange of the 
usufruct of the car. In this contract, the ownership of an asset remains with lessor. However, 
the asset is transferred to the lessee to get the benefits and usufruct of it. When the period 
of ijarah is completed, the asset is returned back to the lessor who is the owner.
Because of the evolution of Islamic banking other types of ijara include :
• Simple Ijara (Operating Lease/ijarah tashgheeliah)
• According to operating ijarah, an owner of a property leases it to others for a 
specified period. The ownership of the leased property remains with the owner 
at the end of the lease tenor. It is a short-term contract where the lessee can 
break free from the arrangement any time he wishes to, for E.g. In its most basic 
form, the operating lease contract involves a bank that leases an asset (house, 
car, or etc.) to some individual or some business entity and in turn receives some 
pre-determined amount of rent at periods specified by the contract. According to 
Sharia scholars and Islamic banking analysts, this is the purest of all forms 
of ijara contracts because it is closest to the ideals set down by the classical form 
of the ijara agreement.
Cont..
• Ijarah thumma al bai' (hire purchase, Lease-Sale or Financial Lease) 
• This is one of the most commonly entered-into of all ijara contracts and is 
preferred by businesses who seek finances to fund their buys of 
equipment, machinery, and some forms of fixed assets such as land and 
buildings. These form of ijara contract shares many points of similarity 
with the conventional form of the financial lease agreement. In this 
transaction (hire purchase, Lease-Sale or Financial Lease)  the customer 
leases (hires) a good and agrees to purchase it, paying in installments so 
that by the end of the lease it owns the good free and clear. This involves 
two contracts:
• an Ijarah that outlines the terms for leasing or renting over a fixed period;
• A Bai that triggers a sale to be completed by the end of the term of the 
Ijarah.
Cont..
• (Ijarah wa-iqtina, al-ijarah muntahia bitamleek)
• Ijarah wa-iqtina (literally, "lease and ownership")  is also 
called al ijarah muntahia bitamleek ("lease that ends with 
ownership"). [Like a ijara thumma bay`, it may involve both 
a lease contract and a sale contract. This is a modern form 
of ijarah that has been created following the evolution of 
Islamic banking and finance. It frames a form of ijarah in 
which ownership is transferred to the lessee at the end of a 
specific period. According to the method of ownership 
transfer, this particular type of ijarah can be classified into 
four different types:
• Ijarah muntahia bittamleek through hibah (gift): 
• Ijarah muntahia bittamleek through ba'i (sale):
Cont
•..Ijara mawsoofa bi al dhimma  (forward ijarah) 
Ijara mawsoofa bi al dhimma Islamic contract, means "lease described with 
responsibility“
• The service or benefit being leased is well-defined (means the service or good is 
already known), but the particular unit providing that service or benefit is not 
identified. 
• A type of ijarah which involves the sale of a clearly specified underlying asset, which 
is currently being produced or constructed, for a future delivery.  With ijarah 
mawsufa fi al-dhimmah (forward ijarah), a financier undertakes (starts) payment 
during the construction period, whilst (while) customer's payments will start within a 
specific period after completion. Although forward sales (a sale of something to be 
given to the buyer on a particular date in the future) are impermissible (not allowed.) 
under sharia law!! , forward contracting through ijarah is permissible provided that 
the rent amount will be paid only after delivery of the underlying asset.
Cont..
• Sale-and-Lease Back
• Ijara financing has come to be regarded as one of the most 
ingenious(brilliant/smart) banking methods that have ever been developed to 
meet the diverse and specific needs of a wide range of customers. The sale-and-
lease back agreement is probably at the forefront of all ijara contracts that 
promise quick-fix and simple solutions to those in need of ready money.
• In this agreement, the individual in need of immediate money sells an asset or a 
property it owns to the bank. He then leases it back for some specified period of 
time and pays the bank rent for use of the asset. The bank however, now owns 
the asset; at the end of the contract period, it transfers the right of ownership to 
the customer.
Characteristi
cs/features
The following features of ijara differentiate it from a conventional lease:
• The lessor must own the assets for the full lease period.
• If the lessee defaults on payments or delays payments, the lessor can’t charge 
compound interest.
• The leased asset’s use is specified in the contract.
Pros & cons
• Advantage
• Suitable and Easy Source of Finance
• Liquidity
• Time Saving
• Cost Saving
• BENEFITS OF TAXES
• TERMINATION RIGHTS
•  
• Disadvantage
• DEBT
• NO OWNERSHIP
• Loss in the Salvage Value of Asset
Objectives/purpose
•  Islamic banks use this mode of financing with the purpose of 
enabling customers to use durable goods and equipment such as 
ships, housing, heavy machines and plants in productive enterprises 
who may be unable to buy them for their production purposes, 
also Ijarah can be used indirectly for Sukuk issues by the corporate 
and the government sectors.
Rules 
• Following are some of the basic rules of Ijarah:
Contracting parties
1. The contracting parties involved in ijarah contract are lessor and lessee. The lessor is one 
who owns the asset and leases his asset for a rent. The lessee is the one who takes the asset 
on lease agreement to get the usufruct of it. As the contracting parties, both lessor and lessee 
must have legal capacity to enter into a contract.
Asset
2. The leased asset in ijarah must have valuable use. Therefore, things with no valuable use 
are not given on lease, although It is necessary for a valid lease that the leased asset is fully 
identified by the parties
3. The leased asset must be non-consumable thing. Therefore, anything which cannot be used 
without consuming, cannot become a subject matter of ijarah. For e.g. food, money, & etc.
Cont.
.
• 4. As the ownership remains with lessor, all the liabilities and 
ownership risk shall be borne by lessor. However, the liabilities 
regarding the use of the property shall be borne by lessee. For 
e.g., lessor has leased his house to lessee. the property taxes 
of the house shall be borne by the lessor, while the electricity 
bills, water tax and other expenses relating to use of the 
property shall be borne by the lessee.
• 5. The lessee cannot use the leased asset for any purpose other 
than the purpose specified in the lease agreement. 
• 6. The lessee is liable to compensate the lessor for every harm 
to the leased asset caused by any misuse or negligence on the 
part of the lessee.
Cont..
Lease period
• 7. The period of lease must be determined clearly in 
the ijarah agreement. So, there would be no conflict and dispute among 
the parties.
• 8. According to majority of scholars, there is no restriction or limit with 
regard to lease period. It’s permitted for any period, short or long as long 
as it’s determined in the contract.
Determination of Rental
• 9. The rental amount must be known and determined at the time of 
contract. If the rental amount is unknown and leads to dispute among the 
parties, the contract become void.
• 10. It’s permissible for lessor to ask for collateral or third-party guarantee 
from lessee to secure the rental payment.
Uses 
In practice, ijarah can be used in various contexts and settings, including 
ordinary ijarah, ijarah sukuk, and securitization:
• Ordinary ijarah: lease of plant and equipment, real estate, durable goods, 
etc.
• Ijarah sukuk: these are certificates of equal value issued by the owner of 
a leased property/asset with the aim of selling it and recovering its value 
in the sukuk market, so that the sukuk holders become owners of the 
underlying properties/assets.
• Securitization: Securitization is the process of turning assets into 
securities.
 



Termination
• The Termination Of Lease What events result in termination of the lease? 
The lease terminates when one or more of the following events occur:
•  
• 1. the property or service becomes worthless; 
• 2. both parties mutually decide to terminate the agreement; 
• 3. one party unilaterally terminates the lease if the other party 
contravenes the agreement.


Introduction 
• Istisna’ (Arabic: تصناع means asking someone to) صناعه origin) ,(,اإلس
construct, build or manufacture an asset. In Islamic finance, istisna' is 
generally a long-term contract whereby a party undertakes to manufacture, 
build or construct assets, with an obligation from the manufacturer or 
producer to deliver them to the customer upon completion
Istisna' Application: Examples
• Infrastructure projects are the main examples of istisna' application. This 
includes: construction of power plants, factories, roads, schools, hospitals, 
building and residential developments. The parties to an istisna' contract are: 
the Producer or Manufacturer; the Bank (i.e. the financier); and the Customer 
(i.e. purchaser of goods).


How does it work?
• Istisna' is the sale where a commodity is transacted before it comes into 
existence. It means to order a manufacturer to manufacture a specific 
commodity for the purchaser. If the manufacturer undertakes (start) to 
manufacture the goods for him with material from the manufacturer, the 
transaction of istisna’ comes into existence. But it is necessary for the 
validity of istisna’ that the price is fixed with the consent of the parties and 
that necessary specification of the commodity (intended to be 
manufactured) is fully settled between them.
The contract of Istisna’ creates a moral obligation on the manufacturer to 
manufacture the goods, but before he starts the work, any one of the 
parties may cancel the contract after giving a notice to the other. However 
after the manufacturer has started the work, the contract cannot be 
cancelled unilaterally
• Istisna’ Validity, Amendments and Cancellations
• In order for the istisna' to be valid, the price must be fixed from the outset 
(beginning) to avoid GHARAR. In the event of any unforeseen 
(unexpected/DURUUF) event that causes a delay in delivery the price of istisna' can 
be amended(make minor changes in (a text) in order to make it fairer, more 
accurate, or more up-to-date.), if it is mutually agreed. After the manufacturer has 
started the work, the contract cannot be cancelled unilaterally (only by one side).

Parallel Istisna’ Structure
The parallel istisna' involves: the customer (the buyer); the Islamic bank (the seller); and the manufacturer (in some cases it 
can also involve sub-contractors), where the buyer can obtain financing from the Islamic bank  The following diagram shows 
parallel istisna' structure:
Characteristics/features
• Istisna is a kind of sale which is transacted before the subject matter is 
produced.
Istisna sale contract:
• Specification of type, kind, quality and quantity of the subject matter to 
be produced.
• Price of the subject matter must be known.
• Delivery date of subject matter must be determined.
• Option of rejection of goods by the buyer if the subject matter does not 
conform to the agreed specification.
Pros & cons
• Advantage 
∞The biggest advantage the customer of an Islamic bank enjoys is faith-based, 
giving him the satisfaction that he is dealing with Sharia-compliant products 
and services.
∞The key advantage of an istisna’ contract is that it can provide flexibility to 
the customer, where payments can be made in installments linked to project 
completion, at delivery or after project completion. In contrast to istisna', for 
salam contract the payment has to be made in full, in advance.
∞Istisna can be used by small, medium, commercial enterprises & corporate 
entities

Objectives/purpose
• The main objective of the Istisna’a mode of financing is to promote 
manufacturing capability in the IDB member countries (The Islamic 
Development Bank (IsDB) (Arabic: لتنمية This may relate . ((ابلن كاإلسالم يل
to manufacturing of complete assets in the form of capital goods. These 
goods may benefit the industrial, agricultural or infrastructure sector. This 
mode of financing can also be applied toLong Term Trade Financing (LTTF) 
to enhance intra-trade among IDB member countries.
Rules
Uses
Istisna instruments are widely used in the construction industry or for 
project financing and trade financing. For example,
• Kuwait Finance House (KFH) uses the istisna contract for home financing 
(properties under construction) and project financing.
• Qatar Islamic Bank (QIB) signed an istisna agreement in late 2010 to 
finance a major residential complex (means complex comprising of a 
building or buildings) in the north of Qatar.
• Istisna Sukuk
• Minimizing uncertainty (gharar) in istisna
• Usually, a contract for a not-yet-manufactured product presents some uncertainty 
about the product. Islamic law prohibits finance institutions from being part of 
transactions that involve uncertainty (called gharar). To avoid uncertainty, the 
istisna contract is as detailed as possible regarding what the end product will be.
• In the istisna contract, the customer approaches the bank with the desired asset’s 
specifications. Both the customer and the bank sign the istisna contract, and then 
the bank manufactures the product or the asset for the customer through its 
agent, such as a manufacturer.








May Allah Bless You All (Pray For Me)
By Abdijabar Mahamad Ali (Nageeye)