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Glossary

Ijara

Category — Islamic Finance
Ijara is a form of sukuk derived from the ijara lease financing structure. Ijara is a form of lease agreement subject to which one party is entitled to dispose of predetermined benefits. These benefits are produced by the asset of the other party against payment. The Ijara agreement must follow two principles: the payment must not be an interest payment; no transfer of ownership takes place during the agreement term.

In a sukuk al-ijara transaction, an entity seeking to raise capital (the originator) sells the assets to a special purpose vehicle (an SPV). The SPV issues the sukuk to finance the purchase of these assets. The SPV holds assets in trust for the sukuk holders. Each sukuk holder owns a proportionate share in the assets (in accordance with the value of their investments). The SPV then leases the purchased assets to the originator or an affiliate of the originator. The special purpose vehicle uses the lease payments to make payments to the sukuk holders.

Rent payment by al-ijara need not be conditioned on the tenant’s terms of use. The holders of this type of sukuk will bear all expenses for the maintenance and repair of the real estate and compensation for damages, if any. It is advisable to specify the property or real estate leased and being the subject of sukuk al-ijara agreement in additional information.
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