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Let's imagine this as follows:

A is in need of $10,000 cash urgently and finds no lender. He owns a house, which he had rented out to someone for $500 a month. A, driven by the need of cash wants to lease it out. Now, if he leases it out to B for $10,000 for a period of 1 year, he has to part with the monthly rent he used to get. After the lease period, A returns $10,000 and frees his house. Meanwhile, B saved $6,000 ($500X12).

If we look from banking perspective, B is a banker and has a fixed deposit of $10,000 with A, he gets a monthly interest of $500 in the form of rent saving. On the other hand A can be treated as a borrower who has borrowed $10,000 from a lender B for a monthly interest of $500 which he pays as a deprival of rent.

This is how leasing goes on. Most importantly there is interest involved here.

While some others, including scholars argue that leasing is a process in which A borrows money from B and gives his property in return as surety, which upon return of the lease money, should be returned back. They also argue that since the lessor(A) can use the money independently (and shares no profit gained) and the lessee(B) has no command over it, it is rightful for a lessee to use the leased property and share no profit (the rental savings) gained out of it.

Well, that argument may sound okay, but two questions stand erect.

  1. If Interest is not involved, then why did the rental money of $6,000 which A was deprived of through a period of one year, move to B?
  2. What do Qur'an and Ahadith have to say about leasing?

Jazaakallah...

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  • Maybe I'm missing something here. It seems like there's no interest. From B's perspective, he bought something, and now he's getting an ROI.
    – ashes999
    Jun 26, 2012 at 17:26
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    Okay, thanks, I understand now. +1 good question. But your title is a bit misleading; this is not really straight-up leasing, but lend-and-lease.
    – ashes999
    Jun 26, 2012 at 18:11
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    this is not like, say, car leasing. So I think the title could use more qualification. That's all.
    – ashes999
    Jun 26, 2012 at 18:21
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    @TabrezAhmed: You talk like leasing and renting are different things. They are not. A lease is simply a contract to rent something for a period of time. See the definition.
    – Flimzy
    Jun 26, 2012 at 18:43
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    The question does not describe a lease scenario at all. It simply describes a cash loan with collateral, where use of the collateral is granted in lieu of interest paid on the loan.
    – Flimzy
    Jun 26, 2012 at 19:06

2 Answers 2

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There is a very thin line between "trade and usury". To understand this we must understand the definition of both and also understand why Islam forbade usury (interest).

In trade, both (or all) parties share the risk of market fluctuation.

In usury, only the person who takes the loan bears the risk of fluctuation.

Islam forbade usury becoz.. in usury one party gets bonded and oppressed while the other makes more money irrespective of the condition of the market. In my opinion, the current banking is a bondage becoz either you work hard all month or may not have job, but still your mortgage has to be paid.

Example: After the 2008 financial meltdown many houses were not even worth what was owed after years of payment, the banks were "immune" to the fluctuation and would still receive their principle + interest.

Based on your example above,

a) What if there is no tenant in the house for 5 months of the 12 months?

b) What if there are repairs to be done during the 12 months?

If the risk during 1 year would be B's that means B has "rented the renting business" from A....which would be allowed.

If the risk of these still is on A, then it would be considered interest since B is free of market conditions.

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A is collecting rent and paying interest (Riba).

B is collecting interest (Riba) and paying rent.

Rent is paid as compensation for the use of property.

Interest, riba, is paid as a fixed compensation for the use of money.

B is paying rent of $500 every month (whether or not he cuts a check).

A is paying interest of $500 every month.

The fact that the rent that is being paid is equal to the interest that is being received doesn't change anything.

This is a forbidden contract and Allah knows best.

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