What is the key characteristic of an Ijara contract in Islamic finance?

An Ijara contract in Islamic finance is fundamentally a lease agreement, which involves the leasing of an asset or property for use by a lessee in exchange for rental payments over a specified period. The key characteristic of this contract is that it allows a party to utilize an asset without having to purchase it outright. In this structure, the ownership of the asset remains with the lessor, while the lessee benefits from its use.

The aspect of deferred payment is crucial because it aligns with the principles of Islamic finance, which prohibits interest (riba). Instead of paying interest on a loan, an Ijara contract facilitates payments made periodically for the right to use an asset, providing a legal way to generate income from the asset while adhering to Sharia law.

The other characteristics typically associated with Ijara contracts—such as immediate sale of goods, partnership based on expertise sharing, or the conversion of capital into assets—do not accurately capture the essence of an Ijara, which is primarily focused on the lease and the subsequent deferred payments associated with that arrangement. This structure helps in meeting the financial needs of individuals and businesses without conflicting with Islamic ethical and legal standards.