Ethica Institute of Islamic Finance™

Is a conventional car lease permissible as the interest involved in the lease is similar to renting?

Islamic leasing (Ijarah) and conventional leasing, while similar in many respects, differ enough that it would be misleading to simply say, as in the question, that it is permissible even if there is interest as leasing is similar to renting. According to the resolution of the Islamic Fiqh Conference regarding impermissible lease-to-own contracts, in No.12, Vol. 1, p.698, Resolution 110 (4/12): ‘Secondly – impermissible instances of the contract: a) A rental contract that ends in the ownership of the rented corpus in return for the rental payments made by the lessee during the tenure without concluding a new contract such that the rental (contract) transforms spontaneously at the end of the tenure into a sale contract. b) The rental of a corpus to a person for a known rental value for a known period of time, with a sale contract conditional on the complete payment of all rent agreed upon during the specified time or appended to sometime in the future. c) A real rental contract which is concurrent with a sale with a condition option to the benefit of the lessor and which is deferred to a distant specified date (the end of the period of the rental contract).’ In addition to the above, there may be other impermissible conditions in the contract including, but not limited to: 1. Requiring the lessee to make major maintenance payments; 2. Requiring the lessee to take conventional insurance when Islamic insurance is available; 3. Requiring the lessee to pay the lessor late payment penalties rather than pay a designated Shariah-compliant charity; 4. Sub-leasing clauses that do not accord with the Shariah; 5. Interest-based securitizations of the car lease.

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