Renting to become owner: Islamic leasing with sale promise, its structures, pitfalls and the difference with classic credit leasing.
Ijara muntahia bi-t-tamlik (lease ending in ownership) is the structure of Islamic leasing: the bank buys the asset, leases it, and promises to sell it to the tenant at the end, through lease payments, buy-back of shares or a symbolic price.
The accepted structures
- Lease + separate sale promise: the lease and the promise are two distinct contracts; at term, the sale takes place at a price fixed in advance or symbolic (donating the residual value): the main structure codified by AAOIFI Standard No. 9 (Ijarah and Ijarah Muntahia Bittamleek).
- Diminishing musharaka: the bank and the customer co-own the asset; the customer pays rent on the bank's share and progressively buys back its shares until full ownership: the most robust structure, since the transfer takes place through real successive sales.
- Lease with share buy-back: each instalment combines rent and purchase of a fraction: compliant if rent and purchase are distinguished.
Compliance conditions
- The real owner bank: it buys, it bears the risks of ownership (destruction before leasing delivery, legal liability); a "bank" that never owns anything is in fact lending.
- A market rent, revisable: fixed or indexed under the lease; no arbitrary increase (AAOIFI Standard No. 9 frames rent revision).
- A firm promise: the sale promise (wa'd) binds morally and may be made binding (wa'd mulzim) under AAOIFI Standard No. 9, but the final sale remains a distinct contract: if the customer leaves before term, he leaves as tenant, not indebted for the remaining capital like a loan.
- Charges and insurance: major repairs to the bank (owner), daily maintenance to the tenant; the asset insured by the bank (or takaful).
The difference with classic leasing
Classic leasing often hides an interest financing (rents computed from a rate + 1 euro option, bank never bearing ownership risks). Islamic ijara requires the lessor's real ownership, the bearing of the attached risks and the absence of interest: substance qualifies, not the label.
Practical note
The tenant-buyer checks: who carries the insurance and the heavy repairs? is the sale promise written with a price? what happens on early exit (rent balance, no capital debt)? Three honest answers = a serious structure.