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Leasing is a financial agreement whereby a lessor conveys to a lessee, in return for a payment or series of payments, the right to use an asset for an agreed period of time.
A Finance Lease (ijara wa iqtina) is an installment purchase with the flexibility of a lease contract. Although the title to the asset passes to the lessee at the end of the lease, the lessee always retains the risks and rewards of ownership. As such, the lessee shows the asset and liability on his balance sheet and takes normal depreciation.
An Operating Lease (ijara), on the other hand, is really a long term rental whereby the lessee only uses the asset for a portion of the economic life. The lessor does not recover the total asset value during the lease but will either sell or release the asset in the second-hand market, thus lowering the lessee’s payments. The lessee returns the asset at the end of term, although most leases provide the lessee with a purchase and lease extension option. The lessee expense his rental payments and the asset does not appear in the financials (‘off balance sheet financing’). Highly adaptive to individual customer need, leasing is not merely a matter of regular payments for use of equipment. Payments can be structured to reflect variable client cash flows and budget timing. This allows better use of working capital and improved liquidity.
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