Shar‘i Ruling on Islamic Bank Leasing – Complete Explanation
Source: Qur’an o Hadees Ki Roshni Mein Ahkam o Masail – Volume 01
Leasing is one of the important transactions in modern finance. The word lease is the translation of the Arabic term al-Ijārah, which is an established Shar‘i term. However, modern-day leasing differs from Shar‘i Ijārah.
"Bay‘ manfa‘ah ma‘lūmah bi-ajrin ma‘lūm"
— Selling a known benefit for an agreed-upon rent.
(‘Umdat al-Qārī Sharḥ Ṣaḥīḥ al-Bukhārī 18/251)
① Hiring a person’s services (e.g., an engineer) for payment.
② Transferring the right to use one’s property (e.g., a car or house) in exchange for rent.
Economists, when referring to leasing, usually mean the second type — transferring the right to use an asset.
In Ṣaḥīḥ al-Bukhārī, both types of Ijārah are mentioned. The key points are:
◈ The actual ownership remains with the lessor (owner).
◈ The lessee benefits from the property and pays rent.
◈ Ownership expenses (e.g., property tax) are borne by the owner.
◈ Usage-related expenses (e.g., electricity, gas, water bills) are borne by the lessee.
◈ If the leased property is damaged without the lessee’s fault or negligence, the loss is borne by the owner.
In the 19th century, a new type of leasing emerged called al-Bay‘ al-Ijārī — “lease ending with sale.”
How It Works:
◈ The bank purchases a car and leases it for a number of years.
◈ Rent is collected in installments.
◈ This rent includes not only the bank’s cost but also profit equivalent to what it would earn as interest.
◈ After all installments are paid, ownership is transferred to the lessee.
◈ During the lease period, all risks and damages are borne by the customer, not the bank.
Some scholars say:
◈ This is a new contract form not prohibited by Shariah, thus permissible.
Other scholars say:
◈ It combines two contracts (Ijārah + Sale), which is not allowed.
◈ The most important objection: involvement of interest (Riba).
When buying a vehicle:
◈ The customer pays part of the price as a down payment (minimum ~10%).
◈ The rest is paid in installments, with the extra amount depending on the down payment.
◈ Lower down payment = higher interest amount, and vice versa.
Example:
Baleno Car – Case 1
Baleno Car – Case 2
Difference:
The difference is pure interest, because the asset’s base value is the same in both cases, but the cost changes solely due to the down payment size.
If it were a genuine Ijārah:
◈ Rent would only be for the right of use.
◈ The bank would bear the loss of the asset as the owner.
This shows that modern leasing is essentially an interest-based transaction disguised as Ijārah.
Some claim this is Bay‘ bi-al-Taqsīt (installment sale), which is permissible. However:
This is incorrect, because:
① Details show it cannot be called installment sale.
② It combines two contracts: Ijārah + Sale.
③ In installment sale, ownership transfers immediately to the buyer — here, ownership is conditional upon final payment, which contradicts the nature of sale.
Islamic Fiqh Academy – Jeddah (10–15 Dec 1988, Kuwait Session)
First Alternative:
After the lease term, the lessee has three options:
① Return the asset and end the lease.
② Renew the lease contract.
③ Purchase the asset.
◈ Some scholars object that this binds the lessor to the lessee’s choice, but this objection is not strong.
◈ If implemented properly, this method is Shar‘i permissible.
Second Alternative:
◈ Use Bay‘ bi-al-Taqsīt but without making ownership conditional upon the last installment.
◈ Take other forms of security instead.
(Reference: Buḥūth fī al-Iqtiṣād al-Islāmī, Dr. Ali al-Qurrah Daghi)
Note:
For more details, see the book:
"Daur-e-Hazir ke Maali Mu‘amalat ka Shar‘i Hukm"
Source: Qur’an o Hadees Ki Roshni Mein Ahkam o Masail – Volume 01
Definition of Leasing
Leasing is one of the important transactions in modern finance. The word lease is the translation of the Arabic term al-Ijārah, which is an established Shar‘i term. However, modern-day leasing differs from Shar‘i Ijārah.
Shar‘i Ijārah Defined:
"Bay‘ manfa‘ah ma‘lūmah bi-ajrin ma‘lūm"
— Selling a known benefit for an agreed-upon rent.
(‘Umdat al-Qārī Sharḥ Ṣaḥīḥ al-Bukhārī 18/251)
Two Types of Shar‘i Ijārah:
① Hiring a person’s services (e.g., an engineer) for payment.
② Transferring the right to use one’s property (e.g., a car or house) in exchange for rent.
Economists, when referring to leasing, usually mean the second type — transferring the right to use an asset.
The Shar‘i Process of Ijārah
In Ṣaḥīḥ al-Bukhārī, both types of Ijārah are mentioned. The key points are:
◈ The actual ownership remains with the lessor (owner).
◈ The lessee benefits from the property and pays rent.
◈ Ownership expenses (e.g., property tax) are borne by the owner.
◈ Usage-related expenses (e.g., electricity, gas, water bills) are borne by the lessee.
◈ If the leased property is damaged without the lessee’s fault or negligence, the loss is borne by the owner.
Modern Leasing (al-Bay‘ al-Ijārī)
In the 19th century, a new type of leasing emerged called al-Bay‘ al-Ijārī — “lease ending with sale.”
How It Works:
◈ The bank purchases a car and leases it for a number of years.
◈ Rent is collected in installments.
◈ This rent includes not only the bank’s cost but also profit equivalent to what it would earn as interest.
◈ After all installments are paid, ownership is transferred to the lessee.
◈ During the lease period, all risks and damages are borne by the customer, not the bank.
Scholarly Opinions on This Method
Some scholars say:
◈ This is a new contract form not prohibited by Shariah, thus permissible.
Other scholars say:
◈ It combines two contracts (Ijārah + Sale), which is not allowed.
◈ The most important objection: involvement of interest (Riba).
The Interest Element Explained
When buying a vehicle:
◈ The customer pays part of the price as a down payment (minimum ~10%).
◈ The rest is paid in installments, with the extra amount depending on the down payment.
◈ Lower down payment = higher interest amount, and vice versa.
Example:
Baleno Car – Case 1
- Down payment: Rs. 500,000
- Monthly installment: Rs. 9,738 (for 5 years)
- Total installments: Rs. 584,280
- Total paid: Rs. 1,084,260
Baleno Car – Case 2
- Down payment: Rs. 200,000
- Total installments: Rs. 984,480
- Total paid: Rs. 1,184,480
Difference:
The difference is pure interest, because the asset’s base value is the same in both cases, but the cost changes solely due to the down payment size.
If it were a genuine Ijārah:
◈ Rent would only be for the right of use.
◈ The bank would bear the loss of the asset as the owner.
This shows that modern leasing is essentially an interest-based transaction disguised as Ijārah.
Is This Just “Installment Sale”?
Some claim this is Bay‘ bi-al-Taqsīt (installment sale), which is permissible. However:
This is incorrect, because:① Details show it cannot be called installment sale.
② It combines two contracts: Ijārah + Sale.
③ In installment sale, ownership transfers immediately to the buyer — here, ownership is conditional upon final payment, which contradicts the nature of sale.
Shar‘i Alternatives to Modern Leasing
Islamic Fiqh Academy – Jeddah (10–15 Dec 1988, Kuwait Session)
First Alternative:
After the lease term, the lessee has three options:
① Return the asset and end the lease.
② Renew the lease contract.
③ Purchase the asset.
◈ Some scholars object that this binds the lessor to the lessee’s choice, but this objection is not strong.
◈ If implemented properly, this method is Shar‘i permissible.
Second Alternative:
◈ Use Bay‘ bi-al-Taqsīt but without making ownership conditional upon the last installment.
◈ Take other forms of security instead.
(Reference: Buḥūth fī al-Iqtiṣād al-Islāmī, Dr. Ali al-Qurrah Daghi)
Note:
For more details, see the book:
"Daur-e-Hazir ke Maali Mu‘amalat ka Shar‘i Hukm"
