Ijara is an Islamic financing agreement where the customer contributes a deposit (down-payment) towards the purchase of a property and Hejaz contributes the remaining amount so that the property can be purchased from the seller. The customer then has full access and use of the property, renting from Hejaz the component of the property that they (the customer) have not paid for. Each repayment that the customer makes comprises of a principal component and a rental component. Through the principal component, the customer gradually purchases Hejaz’s share (equity) in the property and as that occurs, they are renting a smaller part of the property until, at a point in time in the future, the customer has acquired all of Hejaz’s equity in the property.
For example, a customer identifies a house that they wish to purchase for $1,000,000 and contributes a 20% down-payment (deposit) of $200,000. They apply to Hejaz for financing to provide the remaining $800,000. Hejaz then assesses the customer’s borrowing capacity (serviceability assessment) to determine whether they can afford to make repayments for the loan amount that they are seeking. If approved, Hejaz contributes the $800,000 to the property purchase and obtains an 80% equity interest in the property. The customer then lives on the property, paying Ijara (rent) to Hejaz for the 80% that they (the customer) haven’t paid for yet. The customer makes monthly repayments of say $3000 per month for 30 years and gradually acquires the 80% Hejaz share in the property over the years until there is nothing left owing on the loan.