Lease, agency and service contracts

Variable rental (benchmark-linked ijarah rent)

Ijarah rent that is fixed for the first period and then reset by a clear benchmark formula agreed at the start.

A variable rental is an ijarah rent that changes over the term according to a method agreed in the contract. AAOIFI's ijarah standard requires the rental for the first period to be fixed and allows later periods to be set by a benchmark, provided the formula is clear and not open to dispute, and it says the benchmark should be subject to a ceiling and a floor. Variable rentals are common in home finance, so the formula, the reset dates and the caps should be stored as data rather than buried in a document.

Sources

AAOIFI Shari'ah Standards, English edition (full text, PDF): Shari'ah Standard No. 9, Ijarah, items 5/2/1 and 5/2/3

This entry explains a term; it is not a Shariah ruling. Approving a product is for each institution's own Shariah board and regulator.

Related terms

IjarahA lease: the lessor owns the asset and sells its use for an agreed rent over an agreed period.Diminishing musharakahA partnership in which one partner buys the other's share in stages until it owns the whole asset; common in home finance.Ijarah muntahia bittamleekA lease that ends with ownership passing to the lessee, through a separate sale or gift promised by the lessor.Rate of return riskThe risk that changes in market rates affect an Islamic bank's net income; the analogue of interest rate risk in the banking book.