In traditional fiqh, it means a contract for the hiring of persons or renting/leasing of the services or the “usufruct” of a property, generally for a fixed period and price.
[4] In Islamic finance, al Ijarah does lead to purchase (Ijara wa Iqtina, or "rent and acquisition") and usually refers to a leasing contract of property (such as land, plant, office automation, a motor vehicle), which is leased to a client for stream of rental and purchase payments, ending with a transfer of ownership to the lessee, and otherwise follows Islamic regulations.
(This type of transaction is similar to the contractum trinius, a technique used by European bankers and merchants during the Middle Ages to comply with the letter of the Church's prohibition on interest bearing loans.
In a contractum, two parties would enter into three (trinius) concurrent and interrelated legal contracts, the net effect being the paying of a fee for the use of money for the term of the loan.
However, in an ijara wa iqtina contract the transfer of ownership occurs as soon as the lessee pays the purchase price of the asset — anytime during the leasing period.
[17] In contemporary Islamic finance, ijara mawsoofa bi al dhimma is the leasing of something (such as a home, office, or factory) not yet produced or constructed.
While forward sales normally do not comply with sharia, it is allowed using ijarah provided rent/lease payment do not begin until after the customer takes delivery.
[20] Other challenges are not of failure to follow sharia law properly in practice but of disadvantages in cost or consumer protection ijarah has compared to conventional finance.
A workaround (with additional cost) is to establish "bankruptcy-remote" Special-purpose entities to hold title to the property and "serve as parties to various agreements regarding obligations for repairs and insurance".
[21] Abu Umar Faruq Ahmad writes in Theory and Practice of Modern Islamic Finance: The Case Analysis from Australia that at least in that country the lessee of Ijarah wa Iqtina house purchase is in a weaker legal position than the payer of a conventional mortgage.