Interest and ijarah are two of the most commonly used terms in Islamic finance, yet many people do not fully understand the differences between the two concepts. In this article, we will explain the differences between interest and ijarah and how they are used in Islamic finance.
Interest, or riba, is forbidden in Islamic finance as it is considered to be an unjust form of wealth accumulation. Interest is a fee charged by a lender for providing a loan. The borrower pays the lender a certain amount of money in addition to the principal loan amount in order to cover the cost of borrowing the money. The rate of interest is typically calculated according to the amount of money borrowed and the length of the loan.
Ijarah is an Islamic finance term that refers to the leasing or renting of an asset. In an Ijarah transaction, the lender leases an asset to the borrower for a fixed period of time in exchange for a predetermined amount of money. The money paid in an Ijarah transaction is typically referred to as a lease payment and is used to cover the cost of the asset being leased.
There are several key differences between interest and Ijarah that are important to understand in order to properly apply Islamic finance principles. Here are some of the main differences between the two concepts:
Interest is forbidden in Islamic finance while Ijarah is acceptable.
Interest refers to a fee charged by a lender for providing a loan while Ijarah involves leasing or renting of an asset.
Interest is calculated according to the amount of money borrowed and the length of the loan while Ijarah payments are predetermined and cover the cost of the asset being leased.
Interest payments are made to the lender while Ijarah payments are made to the owner of the asset.
Interest is typically paid in one lump sum while Ijarah payments are usually made over a period of time.
Overall, the main difference between interest and Ijarah is that interest is prohibited in Islamic finance while Ijarah is allowed and is used as an alternative to traditional lending.
Ijarah is a popular form of Islamic finance because it provides numerous advantages to both the lender and the borrower. Here are some of the key benefits of Ijarah:
Ijarah allows for the purchase of assets without incurring debt.
Ijarah payments are typically lower than interest payments.
Ijarah provides financial flexibility as payments can be spread out over a period of time.
Ijarah encourages asset ownership and allows the borrower to gain the benefits of the asset without having to pay the full cost upfront.
Interest and Ijarah are two important concepts in Islamic finance that are often confused. Interest is prohibited in Islamic finance while Ijarah is allowed and is used as an alternative to traditional lending. Ijarah provides numerous benefits to both the lender and the borrower and is a popular form of Islamic finance.
