Ijarah is a contract in which the owner of a durable asset transfers its use to another person for an agreed period in exchange for an agreed rent, while keeping ownership and the risks that go with it. That paraphrases the State Bank of Pakistan's definition in Annexure 1 of IBD Circular No. 02 of 2008, the rulebook every Islamic bank in the country must follow. Ijarah is the structure behind Meezan Car Ijarah, the rental component inside every Diminishing Musharakah finance, and the SBP's Islamic refinance schemes for equipment. A conventional lease and an Ijarah can produce the same monthly figure; what separates them is who owns the asset, who bears its loss, when rent becomes due and what happens when you pay late.
Ready to compare halal options?
The definition, and what can and cannot be leased
The SBP's text reads: Ijarah is a contract whereby the owner of an asset, other than consumables, transfers its usufruct to another person for an agreed period for an agreed consideration. Two words carry the weight. Usufruct means the right to use and benefit from a thing without owning it; the lessor keeps the corpus, the lessee gets the use. Consumables are excluded because anything that is used up by being used, such as money, food or fuel, cannot be rented; you can only sell it. That exclusion is the whole reason interest is not a rent for money: money has no usufruct separate from its consumption.
The SBP adds that only assets owned by the lessor can be leased out, with a sub-lease allowed only with the lessor's express permission. That is why an Islamic bank must actually buy the car or machine before leasing it to you, and why the registration in a Pakistani car Ijarah shows the bank as owner. The circular lists Ijarah and Ijarah wa Iqtina together among the trading modes permitted to Islamic banking institutions, alongside Murabaha, Musawamah, Salam and Istisna; our complete guide to Islamic banking in Pakistan places Ijarah among those other contracts.
The SBP Essentials conditions for a valid Ijarah
Section 3 of Appendix A to the SBP's Instructions for Shariah Compliance sets out eleven conditions. They are not optional guidance; a product that breaches them cannot be offered by an Islamic bank or window in Pakistan. The list below paraphrases each condition closely.
- Ownership stays with the lessor: the corpus of the leased asset remains the lessor's; only the usufruct is transferred. Money, edibles, fuel and other consumables cannot be leased.
- No rent before delivery: until the asset is delivered to the lessee, rentals do not become due and payable.
- Lessor bears ownership risk: for the entire term the lessor retains title and bears all risks and rewards of ownership, except loss caused by the lessee's fault, negligence or non-customary use, and third-party liability arising from operating the asset.
- Insurance in the lessor's name: the leased asset is insured in the name of the lessor at the lessor's cost; the lessee may arrange it on the lessor's behalf and be reimbursed. Islamic banks should prefer takaful and must record in writing any case where they do not.
- Early termination only by mutual consent, with reasons recorded in writing.
- Transfer of ownership by separate promise: either party may make a unilateral promise to buy or sell at expiry or earlier at an agreed price, provided the lease is not conditional on that sale; or the lessor may promise to gift the asset once all obligations are met. The lease agreement itself may not stipulate a future transfer of ownership.
- Rent fixed in advance: the rental must be agreed unambiguously, either for the full term or for a specific period in absolute terms.
- No assignment of rentals except at par: a lessor may not sell the right to future rent at a discount.
- Lease ends if the asset stops working: if the asset ceases to give the service for which it was rented the contract terminates; if it is damaged but repairable the contract remains valid.
- Late payment goes to charity: the lessee may authorise the bank to recover a predetermined per-day or per-year amount as a compulsory contribution to a charity fund, which shall not constitute income of the bank; courts may award actual damages excluding opportunity cost.
- Everything else in the contract must be consistent with the general rules of lease and sale.
Who bears ownership risk, maintenance and takaful, and why it matters
The single most important difference between an Ijarah and a conventional finance lease is condition three. In a conventional lease the lessee bears all risk of loss and the lessor is economically a secured lender. In an Ijarah the bank owns the asset, so if the car is stolen or written off through no fault of yours the loss is the bank's and your rent stops because the asset no longer exists. The bank protects itself with takaful in its own name and at its own cost, and may build that cost into the rent, which is why Pakistani car Ijarah quotes bundle a takaful rate of roughly 1.5% to 2.8% of vehicle value a year, the range BankIslami discloses for its auto product.
Maintenance splits by type. Major maintenance that preserves the asset's value is the owner's responsibility; routine running costs such as servicing, tyres and fuel fall on the lessee under customary practice, and negligence makes the lessee liable under condition three. The honest test when you read a bank's Ijarah agreement is to find the total-loss clause. BankIslami's auto finance FAQ, for example, states that in a total loss any shortfall in the takaful claim is borne by bank and customer according to their ownership share at the time; a document that makes you liable for the bank's entire exposure regardless of fault has moved the ownership risk back to you.
Ijarah versus Ijarah wa Iqtina (Muntahia Bittamleek)
A plain Ijarah ends with the asset going back to the owner, as with a rental car or a leased office. Ijarah wa Iqtina, which AAOIFI's Shariah Standard No. 9 calls Ijarah Muntahia Bittamleek, is a lease that ends in the lessee owning the asset. The Shariah problem is that a single contract cannot be both a lease and a sale, because that would make the sale conditional and the rent partly a price. The solution, which the SBP writes into condition six, is to keep the two separate: the lease is one contract, and the transfer of ownership happens through a unilateral promise (wa'd) by the bank to sell at a stated price, or to gift the asset, once the lessee has met every obligation.
In practice this is the end-of-term sequence in a Pakistani car Ijarah. The bank owns the vehicle and leases it for a fixed term. Alongside the lease you sign an undertaking under which the bank promises to sell you the car at the end for a residual value, often set against the security deposit you paid at the start, or to gift it. When the final rental clears, a separate sale deed or gift transfers title. The security deposit is held against the purchase and cannot be treated as advance rent. Our page on Meezan Car Ijarah shows how the market leader documents each step.
Where Pakistani banks use Ijarah today
Consumer vehicles are the largest retail use. Meezan Bank's Car Ijarah is the best-known product; Meezan's site sat behind a bot verification wall on 10 September 2026, so we have not quoted its current rates here. Several other banks structure vehicle finance as Diminishing Musharakah instead, where Ijarah is one of three contracts: BankIslami's auto finance describes itself as Diminishing Musharakah under Shirkat-ul-Milk, with the bank renting its share of the vehicle under a separate lease agreement and the rental revised every six months by an agreed formula. Our comparison of car Ijarah versus Diminishing Musharakah explains which suits a buyer who wants to settle early.
Home finance uses the same device: every Diminishing Musharakah home product is a joint ownership agreement plus an Ijarah of the bank's share plus a unit-purchase undertaking, so the monthly rent is an Ijarah rental on the portion you do not yet own. Equipment and business assets are financed under straight Ijarah or under the State Bank's Islamic refinance windows, whose names appear on BankIslami's declared rate sheet: the Islamic Temporary Economic Refinance Facility, the Islamic Financing Facility for Storage of Agricultural Produce, the Islamic Financing Scheme for Renewable Energy and the Islamic Long Term Financing Facility. Ijarah of plant and machinery is the usual mode under each. Our guide to Islamic SME financing banks compared covers the business side.
| Use | Structure | Who owns the asset during the term | Typical Pakistani example |
|---|---|---|---|
| Car for a consumer | Ijarah wa Iqtina | Bank (registration in bank's name) | Meezan Car Ijarah |
| Car for a consumer | Diminishing Musharakah with Ijarah component | Bank and customer jointly | BankIslami auto finance |
| Home purchase | Diminishing Musharakah with Ijarah of bank's share | Bank and customer jointly | Every Islamic home finance product |
| Plant and machinery | Ijarah, often under SBP Islamic refinance | Bank | ILTFF, IFRE and ITERF-funded leases |
What makes a lease impermissible
Run any lease, including one sold as Islamic, against the following five tests. Each corresponds to a condition in the SBP Essentials, and each is a point at which a product can drift back toward a loan dressed as a lease. The is it halal section of this site applies these tests to specific products.
- Rent charged before delivery: if instalments start when you sign rather than when you receive the asset, the payments for that gap are not rent for use and the contract fails condition two. Watch for cars on order and under-construction property.
- Ownership risk shifted to the lessee: if you bear total loss regardless of fault, or must insure the asset in your own name at your own cost with no reimbursement, the lessor has stopped acting as an owner.
- Late payment penalty kept by the bank: any late fee must go to a charity fund and must not be the bank's income. If the schedule of charges books it as income, or if the amount compounds on itself, it is interest by another name.
- Sale written into the lease: a clause that says ownership transfers automatically on the final payment makes the lease conditional on a sale. The transfer must come through a separate promise and a separate sale or gift.
- Unspecified rent: the rent must be agreed in advance for the full term or for a defined period. A KIBOR-linked rent passes only if each period's rent is fixed at the start of that period, which is how Pakistani banks implement it; our piece on whether KIBOR-based Islamic financing is halal covers that debate.
AAOIFI Shariah Standard 9 and how to check a bank's product fatwa
AAOIFI, the Bahrain-based standard setter, publishes Shariah Standard No. 9 on Ijarah and Ijarah Muntahia Bittamleek. The State Bank has adopted a series of AAOIFI Shariah standards for Islamic banking institutions in Pakistan, and its own Essentials track the AAOIFI text on every point above. Where a bank's product fatwa cites Standard 9, it is telling you the contract has been drafted against that template.
To check a product, ask the bank for three documents: the Shariah board's approval or fatwa for that specific product, the standard Ijarah agreement, and the undertaking to purchase or promise to gift. Read the fatwa for the scholars' names and the date, then read the agreement for the five failure points above: takaful in the bank's name, a charity account in the late payment clause, and transfer of ownership in a separate document. The bank's Shariah compliance department is obliged to answer; if it will not, the business financing hub lists providers that publish these documents openly.
Our view: Ijarah is sound when the bank behaves like an owner
Ijarah is one of the oldest and least controversial contracts in Islamic commercial law; renting out a thing you own is as uncontested as selling it. The debate in Pakistan is about whether banks honour its conditions when the contract is used as a financing tool: whether they truly carry ownership risk, whether the rent is a price for use rather than a return on money, and whether the promise to sell is separate from the lease. A car Ijarah where the bank is the registered owner, covers the vehicle under takaful in its own name, stops charging rent if the car is destroyed, routes late fees to charity and transfers title by a separate deed at the end is valid, whatever its rate is benchmarked to. One that fails any of those is a loan with a lease label. Use the list, ask for the fatwa, and compare the structures in our complete guide to halal car financing before you sign. Facts checked against sbp.org.pk, bankislami.com.pk on 10 September 2026.
Frequently asked questions
Is leasing halal in Islam?
Yes, leasing (Ijarah) is permissible, provided the lessor owns the asset, bears the risks of ownership, charges rent only from delivery, fixes the rent in advance for the term or for each defined period, and does not keep late payment charges as income. The asset must be durable: money and consumables cannot be leased. A lease that shifts ownership risk entirely to the lessee, or that charges compounding penalties, fails these conditions even if it is called Islamic.
What is the difference between Ijarah and Ijarah wa Iqtina?
A plain Ijarah ends with the asset returning to its owner. Ijarah wa Iqtina, also called Ijarah Muntahia Bittamleek, ends with the lessee owning it. The transfer happens through a promise by the lessor to sell at an agreed price or to gift the asset once all rentals are paid, kept in a document separate from the lease. The SBP Essentials forbid any clause in the lease itself that transfers ownership at a future date, because that would make the lease conditional on a sale.
Is car leasing halal in Pakistan?
Car Ijarah from an Islamic bank is halal when the bank is the registered owner, takes takaful in its own name, bears total loss not caused by your negligence, starts rent only on delivery, routes late payment amounts to charity and transfers title by a separate sale or gift at the end. Conventional car leasing from a leasing company or conventional bank is a financing arrangement priced as interest with ownership risk on you, and most scholars treat it as impermissible.
Who pays for takaful on a leased car?
The SBP Essentials require the leased asset to be insured in the lessor's name at the lessor's cost, with takaful preferred. The bank may build that cost into the rental, which is why Pakistani Ijarah quotes include a takaful component of roughly 1.5% to 2.8% of vehicle value a year, the range BankIslami discloses for its auto product. If the lessee arranges the cover on the bank's behalf, the premium must be reimbursed. Cover in the customer's own name at the customer's cost is a red flag.
Why can an Ijarah rental be linked to KIBOR?
Because Shariah requires the rent to be known in advance for the lease period, not fixed forever. The SBP Essentials allow the rent to be agreed for the full term or for a specific period in absolute terms. Pakistani banks set each six- or twelve-month rental at the start of that period using KIBOR plus a margin, usually with a floor and cap, so every period's rent is certain when it begins. Scholars differ on whether using an interest benchmark is wise, but most accept it as permissible.
Compare providers in your state
See side-by-side comparisons of Shariah-compliant products, or let our matcher recommend the best options for your situation.
What happens if I pay an Ijarah rental late?
The lease can require you to pay a predetermined amount per day or per year of delay, but the SBP Essentials state this is a compulsory contribution to a charity fund constituted by the bank and shall not constitute income of the bank. The bank may also go to court for actual damages, excluding opportunity cost. A bank that books late fees as income, or compounds them, is breaching the Essentials. Ask for the charity account details and check the schedule of charges wording.
