Islamic Car Financing: A Complete Guide to Ijarah


A car is no longer a luxury; it is a necessity. But with today’s prices, most people cannot buy one outright. Conventional banks offer an “auto loan”, which is an interest based loan. Islamic banks meet the same need through “ijarah”. Both involve a monthly payment, so many people say: “Only the name is different; the work is the same.”

This guide clears up that misunderstanding. We will look at what ijarah is, how Islamic car financing works step by step, who holds ownership and risk, and where this arrangement fundamentally differs from a conventional auto loan.


What Is Ijarah?


Ijarah means leasing: giving someone the use of an item, the right to benefit from it, for a fixed period in return for agreed rent, while ownership stays with the owner.

The parties are:




  • Lessor (mu’jir): the owner who leases out the item; in Islamic car financing, this is the bank.
  • Lessee (musta’jir): the person who takes the item on lease; that is you.
  • Rent (ujrah): the payment made for the use of the item.


The Shariah Basis of Ijarah


The permissibility of ijarah is established by the Quran, Sunnah and consensus. The Quran quotes the daughter of Prophet Shu’ayb (peace be upon him): "يَا أَبَتِ اسْتَأْجِرْهُ ۖ إِنَّ خَيْرَ مَنِ اسْتَأْجَرْتَ الْقَوِيُّ الْأَمِينُ" (Surah Al Qasas 28:26), O my father, hire him; the best one you can hire is the strong and trustworthy. And Prophet Musa (peace be upon him) worked for an agreed wage for a fixed period (Surah Al Qasas 28:27). Allah also says: "فَإِنْ أَرْضَعْنَ لَكُمْ فَآتُوهُنَّ أُجُورَهُنَّ" (Surah At Talaq 65:6), if they nurse your children, give them their wages.

So paying and receiving a wage or rent for a service or benefit is not only permissible in Islam, but a well known and approved transaction.


Essential Shariah Conditions of Ijarah


The State Bank of Pakistan has adopted AAOIFI Shariah Standard No. 9 on ijarah. According to its circular of 12 January 2010, among the AAOIFI standards adopted in the first phase was Standard No. 9 (Ijarah and Ijarah Muntahia Bittamleek). Based on this standard and the statements of scholars, the essential conditions of ijarah are: sbp




  1. The asset must not be consumed by use: Ijarah is only valid for things that remain intact while being used, such as a car, house or machine. Money, fuel or food cannot be leased, because they are used up.
  2. The lessor must own the asset: The leased item must belong to the lessor, the bank.
  3. The benefit and rent must be known: The rent, period and type of use must be clear.
  4. Rent starts after delivery: Rent can only begin once the asset is handed over. Charging rent for a benefit not yet received is not permissible.
  5. Ownership risks are on the owner: The risk of destruction or a fundamental defect is the owner’s.
  6. Usage responsibilities are on the lessee: Routine maintenance and costs related to use can be the lessee’s.
  7. The lessee is a trustee: If loss happens through the lessee’s negligence or misuse, he is liable; otherwise, he is not.


The Eight Steps of Islamic Car Financing


Suppose you want a car worth 2,500,000 rupees through an Islamic bank. The arrangement goes through these eight steps:


Step 1: Application and choice of car:

You choose the car you want and apply to the bank. The bank assesses your income and ability to pay.


Step 2: Undertaking:

You promise the bank that if it buys this car, you will take it on ijarah. This protects the bank from buying the car only for you to refuse it.


Step 3: Security deposit:

You give the bank part of the car’s price as a security deposit. This is not a share in ownership, but a guarantee of your obligations, which is adjusted against the car’s price at the end of the ijarah.


Step 4: The bank buys the car:

The bank buys the car from the dealer or manufacturer with its own money and becomes the owner. This is why the car is usually registered in the bank’s name.


Step 5: Delivery and ijarah agreement:

The car is handed over to you, and the ijarah agreement is signed, setting out the term, monthly rent and both parties’ responsibilities. Rent starts only after delivery.


Step 6: Monthly rent:

You pay monthly rent for the agreed term. This is not a loan instalment, but rent for using the car.


Step 7: Takaful and maintenance:




  • Takaful: Since the bank owns the car, arranging its takaful (Islamic insurance) is the bank’s responsibility; in practice, its cost is included in the rent.
  • Major defects: Responsibility for major structural defects lies with the owner, the bank.
  • Routine maintenance: Oil, tyres, servicing and everyday repairs can be your responsibility, as they relate to use.


Step 8: Transfer of ownership:

When the ijarah term ends, the bank, in line with its separate promise, transfers the car to you through a separate contract, by selling it for a nominal price or gifting it; usually your security deposit is adjusted against this price. This is called Ijarah Muntahia Bittamleek, a lease that ends in ownership.


A clarification: Some Islamic banks use diminishing musharakah instead of ijarah for car financing, explained in our home financing guide. So before signing, always ask which method your financing uses.


Ownership and Risk: The Real Difference


The most fundamental difference between Islamic car financing and a conventional auto loan is who bears the loss:


Case 1: The car is destroyed or stolen without your negligence:




  • Islamic ijarah: The loss is the owner’s, the bank’s. The ijarah ends, and you owe no further rent. The bank recovers its loss through takaful.
  • Conventional auto loan: The car is yours; the bank is only a lender. Even if the car is destroyed, you still owe the loan and interest, unless insurance covers it.


Case 2: Loss through your negligence:

If you damage the car through carelessness, misuse or breach of the agreement, you are liable, because you are the car’s trustee.


The legal principle: The Prophet Muhammad صَلَّى اللهُ عَلَيْهِ وَعَلَى آلِهِ وَسَلَّمَ said: "الْخَرَاجُ بِالضَّمَانِ", profit belongs to the one who bears the liability (Sunan Abi Dawud, Hadith 3508). The bank can charge rent because it owns the car and bears responsibility for its loss. The day the bank shifts this responsibility onto the customer, its right to charge rent is weakened too.


How Is Rent Set? Fixed and Variable Rent


Rent in Islamic car financing can be of two kinds:

1. Fixed rent: One rent amount for the whole term.

2. Variable rent: Rent changes after a set period, for example yearly, according to a benchmark such as KIBOR. KIBOR (Karachi Interbank Offered Rate) is the rate at which banks in Pakistan offer to lend to each other, used by financial institutions as a pricing reference.


Is variable rent permissible?


ccording to Mufti Muhammad Taqi Usmani, linking ijarah rent to a benchmark is permissible, provided that:



  • The method of changing the rent is set out in the agreement in advance.
  • The rent for each period is fixed at the start of that period, not afterwards.

This is like a landlord writing in a tenancy agreement that rent will change each year by an agreed method. Using a benchmark to set rent does not change the nature of the transaction; it remains a lease, because the bank owns a real car and bears its risk. The benchmark objection is examined in detail in Part Four of this series.


Late Payment and Early Ownership


Late payment:

The bank may not take any extra money for itself for late payment. To ensure timely payment, you undertake to give a sum to charity if you pay late; this goes into the bank’s charity fund, does not become the bank’s income, and is spent on welfare under the Shariah board’s supervision.


Early termination:

If you want to own the car before the term ends, the ijarah can be ended by mutual consent and the car bought through a separate contract. The pricing method is usually set out in the bank’s promise. This price is set as the purchase price of the car, not as a “penalty”.


Can you sell the car during the ijarah?

No, because the car still belongs to the bank. To sell it, you must first buy it as described above.


Islamic Ijarah vs Conventional Auto Loan



State Bank of Pakistan Regulations


In Pakistan, car financing, whether Islamic or conventional, is subject to the State Bank’s Prudential Regulations for Consumer Financing. Under a September 2021 circular, the maximum tenure of auto financing was reduced from seven years to five years, the minimum down payment was raised from 15 percent to 30 percent, and total auto financing availed by one person from all banks was capped at Rs 3,000,000 at any point in time. In a later amendment, the maximum tenure for vehicles above 1,000 cc engine displacement was reduced from five years to three years.

(State Bank circular: https://www.sbp.org.pk/bprd/2021/CL29.htm) sbpbrecorder

These regulations change from time to time, so always ask your bank about current limits before taking financing.


Common Objections and Answers


Objection 1: “The monthly payment is the same as a conventional bank’s, so what is the difference?”

Answer: Equal prices do not make two transactions the same in reality. Meat from an animal slaughtered the Islamic way and meat from an animal that died on its own may look the same, yet one is halal and the other haram. In ijarah, the bank owns the car and bears its risk; in an interest based loan, the bank is only a lender of money. The comparison above shows this difference in practice.


Objection 2: “The bank includes the cost of takaful in the rent, so the risk falls on the customer anyway.”

Answer: Including costs in the price is a principle of all trade; a shopkeeper includes his rent and electricity bill in the price of his goods too. The real question is: if takaful does not cover a

claim, whose loss is it? In a valid ijarah, that loss remains the owner’s.


Objection 3: “The car is with me, so why is the bank’s name on the registration?”

Answer: Because during the ijarah, the bank is the legal and Shariah owner of the car, and that ownership is what justifies its right to rent. The registration is the legal proof of this fact.


Customer Checklist


Before taking Islamic car financing, ask these questions:




  1. Is my financing based on ijarah or diminishing musharakah?
  2. Is any rent being charged before the car is delivered?
  3. If the car is destroyed without my negligence, whose loss does the agreement say it is?
  4. Is takaful the bank’s responsibility?
  5. If the rent is variable, is the method fixed in advance?
  6. Does any extra amount for late payment go to charity or to the bank’s income?
  7. At the end of the term, at what price and how will ownership be transferred?


Authentic Sources





A Final Word


The monthly payment in Islamic car financing and a conventional auto loan may look the same, but behind the scenes the two are completely different: in one, you owe money; in the other, you are renting a car. In one, all the risk is on you; in the other, the owner, the bank, shares the risk. This is the difference that makes one interest and the other a halal lease. Read and understand your agreement before you sign; that is the mark of an informed Muslim customer.