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The CIFE™ Study Notes are an accompaniment to the online training modules available at Ethica and are not meant to replace the blended learning experience of the complete Certified Islamic Finance …

The CIFE™ Study Notes are an accompaniment to the online training modules available at Ethica and are not meant to replace the blended learning experience of the complete Certified Islamic Finance Executive™ program. Read detailed program information here: http://www.ethicainstitute.com/certification.aspx

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  • 1. CIFE Study Notes ™ A User’s Guide to the 
Certified Islamic Finance Executive™ Program © 2012-2015 Ethica Institute of Islamic Finance
  • 2. © 2012-2015 Published by Ethica Institute of Islamic Finance
 1401, Boulevard Plaza, Tower 1
 Emaar Boulevard, Downtown Dubai
 P O Box 127150, Dubai, United Arab Emirates
 
 www.EthicaInstitute.com
 info@EthicaInstitute.comAll rights reserved. Aside from fair use, meaning a few pages or less for nonprofit educational purposes, review or academic citation, no part of this publication may be reproduced without the prior permission of the Copyright owner.Ethica grants all individuals and institutions permission to forward thisdocument for educational purposes to whomever they wish. You mayforward this PDF or share this link http://bit.ly/EthicaCIFEStudyNotes i
  • 3. Table of Contents 1. Why Islamic Finance 9 - 14 2. Understanding Musharakah 
 15 - 21 Islamic Business Partnerships 3. Understanding Mudarabah
 22 - 28 Islamic Investment Partnerships 4. Understanding Ijarah
 29 - 36 Islamic Leasing 5. Understanding Murabaha
 37 - 43 Cost Plus Financing 6. Understanding Salam and Istisna
 44 - 52 Forward Sale and Manufacturing Contracts 7. Understanding Islamic Insurance 53 - 59 8. Understanding Sukuk
 60 - 66 Islamic Securitization 9. Liquidity Management In Islamic Finance 67 - 73 10. Risk Management In Islamic Finance 74 - 81 11. Glossary – Commonly Used Industry Terminology 82 - 104 12. Contact Ethica 105 2© 2012-2015 Ethica Institute of Islamic Finance
  • 4. Certified Islamic Finance Executive™IntroductionWinner of "Best Islamic Finance Qualification" at the Global Ethicas 100% online delivery platform enables us to give youIslamic Finance Awards, Ethica is chosen by more professionals dynamic and up-to-date material 24 hours a day, rather thanand students for Islamic finance certification than any other waiting around for outdated guidebooks, CDs, and distanceorganization in the world. With over 20,000 paying users in 44 learning emails. Our training and certification is designed forcountries, the Dubai-based institute is accredited by leading maximum knowledge transfer without burdening you with morescholars and serves banks, universities, and professionals across information than you require. All the information, includingover 100 organizations. Ethica’s 4-month Certified Islamic spreadsheets, case studies, questions, exercises, and quizzes isFinance Executive (CIFE) program is delivered 100% online. contained in the training modules.Ethicas award winning CIFE™ is a streamlined training and Our experts are here to answer your questions over emailcertification program designed to take complete newcomers to (questions@ethicainstitute.com).an advanced level of understanding in Islamic finance in just 4 You get access to our entire inventory of training videos duringmonths. your study-period. You can play each video as many times asThe program fee is $1,495, which can be paid online or through you like - 24 hours a day.wire transfer and includes: One module consists of an approximately 20 minute training • 4 months access to self study videos video comprising a variety of exercises, case studies, and • 1 examination attempt quizzes, along which the student is expected to conduct his or her own self-study. Experience with hundreds of other learners • CIFE™ Certificate couriered to your home or office shows that the CIFE™ program is comfortably manageable in • Ethicas 1-on-1 Career Counseling™ about 1 to 3 months of training and about 1 month or less of studying for the examination, enabling most users to complete • Ethicas Recruiters Database™ the program in less than the 4 month access period. 3© 2012-2015 Ethica Institute of Islamic Finance
  • 5. There are no prerequisites for the Ethica CIFE™ though some prior knowledge of finance does help. If you have no prior knowledge ofIslamic finance, youve come to the right place. We designed the material specifically for newcomers seeking a high level of proficiency inthe practical aspects of Islamic finance in a very short amount of time.There are no fixed dates for the program either. You can start whenever you like.The CIFE™ Examination: A 90 minute timed exam comprising 112 multiple choice questions. The pass mark is 70%.How to take the exam: Login, click on My Account and then click on Take CIFE™ Exam.Re-attempt: If you fail you can re-attempt the exam by paying a small fee.Once you understand the 22 core modules listed below that comprise the testable material, you are ready to take the 90-minute onlineCIFE™ examination. You can take the exam as soon as you are ready. For some thats 3 months, for others its more: you choose yourpace. The recommended study schedule shows you how to comfortably finish the program in the allotted 4-month period with aninvestment of as little as 1 hour per week. Course Recommended Course Name Course Description Code Study Schedule CIFE01 Why Islamic Finance? What makes Islamic finance different from conventional finance? And what Week 1 makes it better? We look at 3 real-world examples and find out. We also introduce you to the 4 principles that guide Islamic finance transactions. CIFE02 Understanding Musharakah I Youve heard of joint-stock companies. Now learn about the Islamic variation. Week 1 (Islamic Business Partnerships) We look at Musharakah, the Islamic business partnership where partners pool together capital, expertise or goodwill to conduct business or trade. We look at the basic features of a Musharakah and its types, their mode of operation, duration and the various forms of capital contribution. CIFE03 Understanding Musharakah II We discuss the management of the Musharakah business and take you Week 2 (Islamic Business Partnerships) through some practical applications of how Islamic banks use Musharakah. We also look at profit and loss sharing ahead of the subsequent modules profit calculation exercises. CIFE04 Understanding Musharakah III We complete our discussion on general aspects of Musharakah, including Week 2 (Islamic Business Partnerships) how banks handle negligence, termination, and constructive liquidation. We and Quiz round our discussion with some practical examples of Musharakah calculation, a quick review of financial statements and how exactly profit gets calculated. 4 © 2012-2015 Ethica Institute of Islamic Finance
  • 6. Course Recommended Course Name Course Description Code Study Schedule CIFE05 Understanding Mudarabah I Where Islamic banks meet conventional private equity type investing. Here Week 3 (Islamic Investment Partnerships) you learn Mudarabahs, the Islamic business partnership where one partner supplies capital for the business and the other provides management expertise. We explain the Mudarabah structure and contrast it with Musharakah and Wakalah, explaining how they differ in banking practice. CIFE06 Understanding Mudarabah II How is an investment partnership different from an agency contract? We Week 3 (Islamic Investment Partnerships) discuss the relative merits of the Mudarabah and the Wakalah structure in different situations. We also describe the Mudaribs role, the duration of Mudarabahs and the forms of capital contribution by the investor and in some cases even the Mudarib. CIFE07 Understanding Mudarabah III We discuss the Mudarabahs management and the rules for sharing profit Week 4 (Islamic Investment Partnerships) and loss. We also look at some practical examples showing how Islamic and Quiz banks use Mudarabahs. CIFE08 Understanding Ijarah I (Islamic Whats an Islamic lease? This modules helps you find out. We introduce Week 5 Leasing) Ijarah, the Islamic lease, and look at pre- requisites for their execution, legal title, possession, maintenance, earnest money, default, and insurance. We begin answering the question "How does an Ijarah work?" with step-by-step practical explanations. CIFE09 Understanding Ijarah II (Islamic You learn the rights and obligations of the lessor and the lessee and focus Week 5 Leasing) and Quiz on defective assets, sub-leases, extensions and renewals, transfer of ownership, and termination. CIFE10 Understanding Murabaha I (Cost Learn about the most widely used Islamic finance product: buy an asset for Week 6 Plus Financing) the customer; sell the asset at a premium in installments to the customer. Thats a Murabaha. In these modules we introduce Murabahas and walk you through the first 5 of the 7 important steps necessary for a Murabahas valid execution. CIFE11 Understanding Murabaha II (Cost Wrap up the 7 steps to executing a Murabaha: we cover steps 6 and 7 and Week 6 Plus Financing) go on to discuss common mistakes bankers make when executing Murabahas and how to avoid them. We also look at risk management, default, early repayment, and profit calculation in Murabahas. CIFE12 Understanding Murabaha III (Cost So how does it work in the real world? We look at 6 practical examples of Week 7 Plus Financing) and Quiz Murabahas based on installment repayments, bullet repayments, advance payments, and credit and import Murabaha. 5© 2012-2015 Ethica Institute of Islamic Finance
  • 7. Course Recommended Course Name Course Description Code Study Schedule CIFE13 Understanding Salam And Istisna I What makes a forward contract Islamic? Learn here. In this module on Week 7 (Forward Sales And Manufacturing Salam, the Islamic forward sale, and Istisna, the Islamic manufacturing Contracts) contract, we begin with Salam. We look at the goods for which a Salam may be executed, the pre-requisites, and the use of a Parallel Salam. CIFE14 Understanding Salam And Istisna II We discuss security, replacement, and default before explaining how its Week 8 (Forward Sales And Manufacturing pricing is calculated. We then look at Istisna and discuss the major Contracts) differences between it and the Salam. CIFE15 Understanding Salam And Istisna In this final module we discuss delivery, default, and termination an Istisna. Week 8 III (Forward Sales And We conclude the 3 module series with a practical product structuring Manufacturing Contracts) and Quiz exercise where you get to choose the appropriate financing tools in a given scenario. CIFE16 Understanding Islamic Insurance You learn the difference between Islamic and conventional insurance and the Week 9 and Quiz essentials that make Islamic insurance unique. You walk through a numerical example before taking the Self-Assessment Quiz. CIFE17 Understanding Sukuk I (Islamic Youve read about them. Now learn about them. Sukuks are Islamic shares Week 10 Securitization) and we show you the main features walking you through the 8 step structuring process concluding with a study of Ijarah Sukuk. CIFE18 Understanding Sukuk II (Islamic We continue our discussion on Sukuk with a look at Musharakah and Week 10 Securitization) and Quiz Mudarabah, Sukuk and the limitations of issuing using Murabaha, Salam and Istisna. We close with a case study of the IDB Sukuk. CIFE19 Liquidity Management In Islamic What do Islamic banks do with excess capital in the short- term? How do Week 11 Finance I they access capital for the long-term? You learn the answers to these and other questions in this module. We discuss how Islamic banks manage liquidity and begin by explaining an inter-bank Mudarabah, walking you through how a weightage table works; useful information for other Islamic banking products. We close the module with a look at the application of Sukuk in liquidity management. 6© 2012-2015 Ethica Institute of Islamic Finance
  • 8. Course Recommended Course Name Course Description Code Study Schedule CIFE20 Liquidity Management In Islamic You look at filters for stocks, shares, Musharakah investment pools, and the Week 11 Finance II and Quiz use of agency contracts to manage liquidity. We also look at local and the foreign currency Commodity Murabahas and walk you through the steps for executing each quiz. CIFE21 Risk Management In Islamic Some have said "Banking is risk management." If you dont know anything Week 12 Finance I about risk management this is the module for you. You learn the basics about risk management in Islamic finance and discuss the most common risks facing Islamic banks and the mitigation techniques used to address them. CIFE22 Risk Management In Islamic Now you learn about how risk relates to each specific Islamic finance Week 12 Finance II and Quiz product. We go through each major Islamic banking product, namely Murabaha, Salam, Istisna, Ijarah, Musharakah and Mudarabah, and explain the specific risks associated with each quiz. Week 13 - 16• Review all modules• Reattempt all self-assessment quizzes• Examination 7© 2012-2015 Ethica Institute of Islamic Finance
  • 9. CIFE Study Notes ™A User’s Guide to the 
Certified Islamic Finance Executive™ ProgramImportant Note: The following CIFE™ Study Notes are anaccompaniment to the online training modules available atEthica and are not meant to replace the blended learningexperience of the complete Certified Islamic FinanceExecutive™ program
  • 10. CIFE01Why Islamic Finance?What makes Islamic finance different fromconventional finance? And what makes it better?We look at 3 real-world examples and find out. Wealso introduce you to the 4 principles that guideIslamic finance transactions.
  • 11. www.EthicaInstitute.com
  • 12. CIFE01: Why Islamic Finance? The difference between Islamic finance and conventional finance is the difference• The difference between buying and selling something real and borrowing and lending something fleeting.• Example: Nigerian President Obasanjo Conventional banking transactions are interest based.• Example: Nick the homebuyer Islamic bank transactions are asset or service backed.• Example: Faisal the college student An asset or service cannot be compounded like an interest based loan. An asset or service can only have one buyer or seller at any given time, whereas interest• Islamic finance essentials allows cash to circulate and grow into enormous sums. Interest creates an artificial money supply that isn’t backed by real assets resulting • Transactions in increased inflation, heightened volatility, richer getting rich, and poorer getting poor. • Salient features 
 Nigerian President Obasanjo – Example Nigeria took a $ 5 billion loan in 1985 and paid it off as $44 billion in 2000 as a result of compound interest. How would the Islamic bank manage such a developing country’s need? • An Islamic bank could have arranged for the $4 billion construction of a natural gas pipeline and delivered it to Nigeria for $5 billion using an Istisna. • Or taken an equity stake in a highway project and shared in profits and losses using Musharakah or Mudarabah. • Or purchased commodities and sold them at a premium using a Murabaha. • Or structured a project financing using an Ijarah Sukuk. 11© 2012-2015 Ethica Institute of Islamic Finance
  • 13. Nick the Homebuyer – Example It took him 25 years to pay off his loan and he ended up paying over $400,000.In 2009 Nick lost his job, his house, and all the money he hadspent paying off his mortgage. How would an Islamic bank fulfill Faisal’s need?The property bubble that triggered the global financial meltdown An Islamic bank could structure a service-based Ijarah to leasecould not have happened if the properties had been financed out the university’s credit hours. Faisal ends up paying aboutIslamically because a conventional bank merely lends out cash. 20% or 30% more; but with the interest-based loan, he paysLegally, it can keep lending this cash over and over, well above its about 400% more.actual cash reserves. Islamic finance never can, and never will be able to grow Faisal’sAn Islamic bank, on the other hand, has to take direct ownership debt once it’s fixed.of an actual asset. Whether for a longer period in a lease or 
partnership, or a shorter period in a sale or trade, Islamic finance Islamic Finance Essentialsalways limits the institution to an actual asset. All banking products can largely be divided into the following 4How could Islamic finance have fulfilled Nick’s need for a home? categories:Based on a Diminishing Musharakah. 1. EquityMusharakah refers to partnership. In a Diminishing Musharakah, 2. Tradingthe bank’s equity keeps decreasing throughout the tenure of thefinancing, while the client’s ownership keeps increasing through a 3. Leasingseries of equity purchases. Eventually, the client becomes the 4. Debtsole owner.At no time does the homebuyer pay any interest and at no timedoes any payment compound. The homebuyer just pays for two Some important Islamic finance transactions:things: the house, in small payments, little by little. And the rent, • Equity based - Mudarabah, Musharakah, and Sukukfor the portion of the house he doesn’t yet own. • Trade based - Murabaha, Salam, and Istisna
 • Lease based - IjarahsFaisal the Student – ExampleFaisal took a student loan. His university cost him $120,000 for 
four years. He began borrowing $30,000 at the beginning of eachyear. Three years after graduation he began paying off his studentloans at the rate of $20,000 a year. 12 © 2012-2015 Ethica Institute of Islamic Finance
  • 14. Islamic banking transaction must:1. Be Interest free2. Have risk sharing and asset and service backing: Based on the Islamic concept of “no return without risk”. An Islamic bank takes a direct equity position, or buys a particular asset and charges a premium through a trade or a lease. It uses risk mitigants, but not without first taking ownership risk.3. Have contractually certainty: Contracts play a central role in Islam and the uncertainty of whether a contractual condition will be fulfilled or not is unacceptable in the Shariah.4. Be ethical: There is no buying, selling, or trading in anything that is, in and of itself, impermissible according to the Shariah for instance dealing in conventional banking and insurance, alcohol, and tobacco. 13 © 2012-2015 Ethica Institute of Islamic Finance
  • 15. This page has been intentionally left blank for taking notes
  • 16. CIFE02, 03, 04Understanding Musharakah – 
Islamic Business PartnershipsYouve heard of joint-stock companies. Now learn about theIslamic variation. We look at Musharakah, the Islamicbusiness partnership where partners pool together capital,expertise or goodwill to conduct business or trade. We look atthe basic features of a Musharakah and its types, their modeof operation, duration and the various forms of capitalcontribution. We discuss the management of the Musharakahbusiness and take you through some practical applications ofhow Islamic banks use Musharakah. We also look at profitand loss sharing ahead of the subsequent modules profitcalculation exercises. We complete our discussion on generalaspects of Musharakah, including how banks handlenegligence, termination, and constructive liquidation. Weround our discussion with some practical examples ofMusharakah calculation, a quick review of financialstatements and how exactly profit gets calculated.
  • 17. www.EthicaInstitute.com
  • 18. CIFE02, 03, 04: Understanding Musharakah A Musharakah is a partnership that is set up between two or more parties usually• Definition to conduct business or trade. It is created by investing capital or pooling together expertise or goodwill.• Types of Musharakah Partners share profit based on ownership ratios and to the extent of their• Musharakah duration participation in the business and share loss in proportion to the capital they invest. Profit cannot not be fixed in absolute terms such as a number or percentage of• Musharakah capital invested capital or revenue.• Musharakah management 
 Types of Musharakah:• Musharakah profit and loss • Shirkah tul Aqd• Negligence in Musharakah • Shirkah tul Milk• Musharakah termination 
 Shirkah tul Aqd is a partnership to enter into a joint business venture and trade. Partners enter into a contract to engage in a defined profit seeking business activity. Shirkah tul Milk is a partnership in the ownership of property or assets for personal use. Every Shirkah tul Aqd has a Shirkah tul Milk imbedded in it, namely joint ownership of assets and property. 17© 2012-2015 Ethica Institute of Islamic Finance
  • 19. Differences between Shirkah tul Aqd and Shirkah tul Milk intention of terminating or concluding the business venture at any point for instance equity participation. 1. Shirkah tul Aqd is a direct contract of partnership in a business or income generating activity whereas Shirkah tul Partners may exit the business at any point they want. This is Milk comes indirectly through contracts or arrangements usually done by the remaining partner(s) purchasing the share of unrelated to production or income generation. the individual exiting the Musharakah. 2. Shirkah tul Milk is a partnership of joint ownership as opposed Temporary Musharakah: Partnership created with the intention of to a commercial venture (Shirkah tul Aqd). It may serve as terminating it at a given time in the future at which point source of income for one party but not for both. Musharakah assets are sold and distributed along with any remaining profit on a pro-rata basis. 3. In a Shirkah tul Milk ownership proportions cannot be specified however a Shirkah tul Aqd cannot be formed unless It is used to meet working capital needs of businesses, other the respective capital contribution shares of the parties are examples being private equity followed by planned exit. specified. 

 Musharakah CapitalTypes of Shirkah tul Aqd: All Shariah–compliant items of material value may be used as • Shirkah tul Wujooh: Partnership where subject matter is capital in a Musharakah. bought on credit from the market based on a relationship of It may be in the form of cash or it may be in kind, for instance goodwill with the supplier. contributing assets to the business in which case it is necessary • Shirkah tul Aa’mal: Partnership in the business of providing to ensure the assets are valued at the time of Musharakah services. There is no capital investment, instead partners execution. enter into a joint venture to render services for a fee. Partners’ capital investment ratio must be determined at • Shirkah tul ‘Amwaal/Shirkah tul ‘Inaan: Partnership Musharakah inception or before the business generates profit. between two or parties to earn profit by investing in a joint In case of a Musharakah investment in different currencies, business venture. partners must agree upon the numeraire, i.e. one particular
 currency to serve as the standard of value in the business whichMusharakah Duration is usually the currency of the country where the business is located.Ongoing Musharakah: Most common form also referred to asopen-ended or permanent. Partnership where there is no Debt may not constitute Musharakah capital. 18 © 2012-2015 Ethica Institute of Islamic Finance
  • 20. Musharakah Management For instance, $1000 of profit cannot be stipulated as a fixed number at the time of the contract’s execution because the profitAll partners possess the right to be involved in the administration itself is not yet known.of the business. Or, for instance, if a person invests $100,000 and their profit isPartners who opt for limited partnership are silent partners. Since guaranteed to be 10% of their investment amount. This wouldthey do not participate in the business unlike the working result in an absolute positive number, or $10,000, regardless ofpartners, according to Shariah, they cannot be allocated a profit whether the business gains or loses money.share greater than their capital contribution ratio. Similarly, profit rates cannot be set as a percentage of theThe working partner is responsible for running the Musharakah revenue either as if there’s no revenue; how can there be anybut cannot receive separate remuneration for his services profit? And what if the revenue is unexpectedly high; why shouldalthough he may receive an increased profit share as a reward for investors be denied higher profits.his management role. In a Musharakah:Unlike for the silent partner, the working partner’s profit share mayexceed his capital contribution ratio. • Profit may not be guaranteed or fixed in absolute terms for any of the Musharakah partners.In case an individual who is not a business partner serves asbusiness manager, he is paid a fixed wage for his services but • Profit may not be set as a percentage of capital.does not share business profit or loss. • Each partner whether minority or majority shareholder mustThe business manager is liable for loss in case of his proven be allocated a profit share.negligence. • One partner cannot guarantee any part of the profit or capitalIf the business manager invests in the Musharakah business by of another partner.means of a separate contract, his capacities of manager and • Silent partner’s profit ratio may not exceed his investmentpartner are independent of one another. He earns remuneration ratio.for his managerial role and shares profit and loss based on hisbusiness partnership. • During the Musharakah, a partner may surrender all or part of his profit share to another provided doing so is not agreed at
 the time of Musharakah execution.Musharakah Profit and Loss • Profit sharing mechanism and profit ratios must be clearlyIt is important to remember that profits are not fixed in absolute determined at Musharakah inception.terms, such as a number, or as a percentage of the investedcapital or the revenue. 19 © 2012-2015 Ethica Institute of Islamic Finance
  • 21. • Musharakah may only announce an expected return for the 3. The client’s contribution to the Musharakah is the business he business, actual returns are declared only after they are owns, while the bank’s contribution to the Musharakah are the known. running facility funds.
 4. After a certain period, the client and the bank share theProfit Calculation business’s operating profit based on a predetermined ratio.Profit is calculated by subtracting costs and expenses from 5. Eventually, one partner, the bank, sells shares to the remainingrevenue. partner, the client, and exits the Musharakah.Loss can only be shared by capital contribution ratios. Unlike interest-based financing, where the bank is only interested in the repayment of a debt, in a running Musharakah, the bank
 has actual equity ownership in the client’s business.In Practice 
Many Islamic banks base profit and loss sharing investment or Negligence in Musharakahsavings accounts on Musharakah. The bank is the workingpartner and the account holders are silent partners. Negligence refers to loss resulting from the violation of contract conditions, willful or intentional damage to the Musharakah.Modern ijtihad has enabled a profit calculation system based on acombination of tiers of investment amounts, investment duration, 
minimum and average balance. Musharakah TerminationMany businesses need running finance, but are unwilling to opt If partners have not agreed on a Musharakah term, one of themfor finance on interest. In a conventional running finance facility may terminate his partnership unilaterally at any time.the bank offers credit to a client over a certain period and charges Alternatively a condition may be stipulated at contract executioninterest. To address this, the bank and its client enter into a that no partner can terminate the contract without the consent oftemporary Musharakah. the other partners.
 In case of Musharakah termination, if assets are realized as cash,In a Shariah-compliant running Musharakah facility: they are distributed based on partnership ratios. In case a profit 1. The bank and the client agree to a financing limit. has been earned, it is distributed based on predetermined profit ratios. 2. The bank opens a current account to hold the client’s sale proceeds and also to allow him to utilize the finance facility. Tangible assets may be liquidated by granting them to existing partners in exchange for the profit they have earned or they may be sold in the market and the income from them distributed. 20 © 2012-2015 Ethica Institute of Islamic Finance
  • 22. This page has been intentionally left blank for taking notes
  • 23. CIFE05, 06, 07 Understanding Mudarabah –
 Islamic Investment PartnershipsWhere Islamic banks meet conventional private equity typeinvesting. Here you learn Mudarabahs, the Islamic businesspartnership where one partner supplies capital for thebusiness and the other provides management expertise. Weexplain the Mudarabah structure and contrast it withMusharakah and Wakalah, explaining how they differ inbanking practice. How is an investment partnership differentfrom an agency contract? We discuss the relative merits ofthe Mudarabah and the Wakalah structure in differentsituations. We also describe the Mudaribs role, the durationof Mudarabahs and the forms of capital contribution by theinvestor and in some cases even the Mudarib. We discussthe Mudarabahs management and the rules for sharingprofit and loss. We also look at some practical examplesshowing how Islamic banks use Mudarabahs.
  • 24. www.EthicaInstitute.com
  • 25. CIFE05, 06, 07: Understanding Mudarabah A Mudarabah is a partnership between two or more parties usually to conduct• Definition business or trade. Typically, one of the parties supplies the capital for the business and the other provides the investment management expertise.• Types of Mudarabah The financier or the Rabb al Maal provides all the investment capital for the• Investment of Mudarabah capital business. The investment manager or the Mudarib is entrusted with the Rabb al Maal’s• Differences and similarities capital, invests it in a Shariah-compliant project and takes full management responsibility. • Mudarabah and Musharakah The Rabb al Maal and Mudarib share profit based on pre-agreed ratios. • Mudarabah and Wakalah 
 Types of Mudarabah• Mudarabah duration With respect to scope of business activity, Mudarabahs may be unrestricted or• Mudarabah capital restricted. Unrestricted Mudarabah• Mudarabah management The Mudarib is free to invest capital in any Shariah-compliant project of his choice.• Mudarabah profit sharing Restricted Mudarabah• Loss in a Mudarabah The Mudarib’s investment of capital is restricted to specific sectors and activities and/or geographical regions only. Here too all investments must be Shariah-• Mudarabah termination compliant.• Mudarabah - At the bank 24© 2012-2015 Ethica Institute of Islamic Finance
  • 26. Investment of Mudarabah Capital 3. Rabb al Maal bears any loss to the business provided it is not due to the Mudarib’s negligence however in a Musharakah all 1. More than one Rabb al Maal partners bear loss pro-rata to their capital contributions. 2. Mudarib also contributes capital 4. Mudarabah costs that relate to tasks that pertain to the 3. Mudarib invests business capital in different project Mudarib’s domain are not billed to the Mudarabah business, only running costs are whereas in a Musharakah, partners
 bear all costs as they are subtracted from revenue prior toMore than one Rabb al Maal profit distribution.Multiple capital providers pool in their contributions to the same 5. The Mudarib may only receive amount of capital that heproject and hire an investment manager as Mudarib. requires to invest in the business whereas in a Musharakah,Mudarib also Contributes Capital when the business project concludes the partners retain the right to receive Musharakah capital according to capitalThe Mudarib is permitted to contribute capital to the Mudarabah contribution ratios.provided that the Rabb al Maal/Arbaab al Maal approve. 
Mudarib invests business capital in different project Similarity between Mudarabah and MusharakahThe Mudarib as business manager is responsible for investingand managing the Rabb al Maal’s funds however the Shariah 1. The Mudarib is permitted to surrender all or part of his profitpermits him to use the capital for parallel investment, i.e. receive to the Rabb al Maal provided it is not pre-agreed. Similarly incapital for Mudarabah and invest in a different venture. a Musharakah, a partner may give up his profit in favour of another on the strict condition that it is not predetermined.
Differences Between Mudarabah and Musharakah 
 Differences between Mudarabah and Wakalah 1. In a Mudarabah, the Mudarib is solely responsible for managing the business whereas in a Musharakah all partners 1. The Mudarib in a Mudarabah receives a share in profit have the right to participate in the business. whereas the Wakeel or agent in a Wakalah receives a fixed fee for services. 2. The Rabb al Maal provides the business capital and only on the condition that the Rabb al Maal agrees can the Mudarib 2. The Mudarib gets paid his profit share only if there is profit contribute capital to the Mudarabah whereas in a Musharakah whereas the Wakeel receives a fee in any case.
 all partners must contribute capital. 25 © 2012-2015 Ethica Institute of Islamic Finance
  • 27. Similarity between Mudarabah and Wakalah For the Arbaab al Maal, the ratios of capital contribution may help them in developing their profit sharing ratios but in practice these 1. Both Mudarabah and Wakalah are principal-agent contracts profit sharing ratios differ from capital contributions ratios. and profit is not guaranteed in either case. Example:
Mudarabah Duration A furniture business is set up between one Mudarib and one Rabb al Maal.Ongoing: Partnerships where there is no intention of concludingthe business venture at any known point however partners have The Rabb al Maal contributes $5,000 cash. There are no otherthe option of exit provided they give prior notice to the other assets at this point.partners. The annual profit sharing ratios are agreed at 60% for the Rabb alTemporary: Partnerships created with the specific intention of Maal and 40% for the Mudarib.terminating them at a given future point in time. When the time is The profit in the first year is $10,000 which is distributed asover, the Mudarabah assets are sold and distributed with any $6,000 for the Rabb al Maal and $4,000 for the Mudarib.remaining profit on a pro-rata basis. 

 Mudarabah ManagementMudarabah Capital Only the Mudarib possesses the right to manage the business.All Shariah-compliant items of material value may serve asMudarabah capital. The capital may be cash or in kind. In case it The Rabb al Maal/Arbaab al Maal serve in the capacity of silentis kind it is important to ensure that the assets are valued at the partners.time of Mudarabah execution. While restricted Mudarabahs are permitted, no conditions thatPartners’ capital investment must be established at Mudarabah may restrict or impede the Mudarib’s management of businessexecution or at the latest before the business generates any are allowed.profit. If partners are investing in different currencies it is As business manager, the Mudarib receives a profit share for hisimportant to agree upon one particular currency or numeraire to effort however he is not entitled to a fixed remuneration for hisserve as a standard value for the business. services.Debt cannot serve as Mudarabah capital. If the manager wants to receive a fixed wage he must bePartners may agree on individual profit shares. employed under a Wakalah contract as Wakeel, in which case he does not receive a profit share. If the Mudarib is permitted by the Rabb al Maal/ Arbaab a Maal to invest in the business, then by means of a separate contract he 26 © 2012-2015 Ethica Institute of Islamic Finance
  • 28. may make an investment contribution and become a Rabb al At termination, business assets in the form of cash are distributedMaal. It is important to remember that his roles as Mudarib and based on capital contribution for cash and profit sharing ratio forRabb al Maal are independent of one another. profit. If the business capital is in illiquid form, it is realized in cash. Next after calculating accrued profit, the cash and profit are
 distributed as per capital contribution and profit sharing ratios.Mudarabah Profit Sharing 
The profit sharing mechanism and mutually agreed profit ratios Mudarabah – Practical Applications at the Islamic Bankmust be clearly defined for all the partners at the Mudarabah’sinception or before profit or loss is generated. Islamic banks collect money from their depositors on a Mudarabah (or Musharakah) basis and then form a Mudarabah (orProfit amount cannot be guaranteed or fixed in absolute terms for Musharakah) pool.any of the Mudarabah partners and neither can it be a percentageof capital. The bank serves as Mudarib to manage the pool.A partner may voluntarily surrender all or part of his profit share to Based on its contractual agreement with its account holdinganother partner provided it is not pre-agreed at contract customers, the bank retains the right to invest in the Mudarabahexecution. (or Musharakah) pool if it wants to.
 The bank uses the capital to make a range of Shariah-compliantLoss in a Mudarabah investments.The Rabb al Maal/Arbaab al Maal bear(s) the entire loss based on Operationally there is one difference, where normally profit incapital contribution ratios. partnership based ventures like Mudarabah are shared after costs have been deducted from the revenue, since it is difficult forMudarib does not beat any loss except that caused by his proven Islamic banks to identify and allocate costs to different pools andnegligence. projects, they absorb the costs and instead share gross profit.
 Mudarabah accounts are usually offered through savings or termMudarabah Termination deposit accounts where normally a longer duration of depositA Mudarabah may be terminated by any party at any time corresponds to a higher expected profit rate.provided the terminating party gives prior notice however a ‘lock- Such accounts have ‘expected’ profit rates attached with them.in’ clause may be established for a certain period that the These are the rates the account holders can expect to receive.Mudarabah must remain in operation unless unexpectedcircumstances such as death or injury materialize. It is important to remember that the bank cannot guarantee its rates of return. 27 © 2012-2015 Ethica Institute of Islamic Finance
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  • 30. CIFE08, 09 Understanding Ijarah –
 Islamic LeasingWhats an Islamic lease? This modules helps you find out.We introduce Ijarah, the Islamic lease, and look at pre-requisites for their execution, legal title, possession,maintenance, earnest money, default, and insurance. Webegin answering the question "How does an Ijarah work?"with step-by-step practical explanations. You learn the rightsand obligations of the lessor and the lessee and focus ondefective assets, sub-leases, extensions and renewals,transfer of ownership, and termination.
  • 31. www.EthicaInstitute.com
  • 32. CIFE08, 09: Understanding Ijarah Ijarah is the lease of a specific asset or service to a client for an agreed period of• Definition time in exchange for rent which at the end of the lease period may result in transferring the subject matter’s ownership to the lessee.• Types of Ijarah 
• Ijarah classification Types of Ijarah• Prerequisites • Ijarah tul Aamaal • Ijarah tul Manafaay• Subject matter 
• Rent and remuneration Ijarah tul Aamaal: A lease contract providing services in exchange for agreed rent.• Default For instance the services of a lawyer purchased by a client in return for a fee.• Rights and obligations of Lessor and 
 Lessee Ijarah tul Manafaay: A lease contract executed to transfer the benefits of an asset in exchange for an• Renewal agreed price.• Transfer of asset ownership For instance an apartment leased for a year in exchange for a monthly rent. A part of the year’s rent may be paid in advance and the remainder be paid as monthly• Negligence installments, mutually agreed upon between the lessor and lessee. 
• Termination 31© 2012-2015 Ethica Institute of Islamic Finance
  • 33. Usufruct lease categorized as: Ijarah - Key Elements • Specific Asset Lease: A particular asset. For instance a car Subject Matter identified by the lessee, a red fully loaded, automatic sedan. All Shariah-compliant assets or services may be used as Ijarah • Lease of asset based on specifications: An asset not subject matter. specifically identified by the lessee but one required to meet Legal Title certain conditions. For instance any sedan. Generally the lessor owns the leased asset and it should be in his
 name however for regulatory reasons the asset may be registeredIjarah classification based on transfer of ownership to lessee in the lessee’s name.Standard Ijarah PossessionA lease contract where the lessee benefits from the asset for a Ijarah may only be executed for subject matter the lessor ownsspecific time period but it does not result in the eventual transfer and possesses.of ownership of the asset to the lessee. MaintenanceIjarah wa Iqtina Periodic Maintenance: The lessee is responsible for regularA lease contract conducted solely to transfer ownership of the maintenance of the leased asset.leased asset to the lessee at the end of the lease period. Major Maintenance: The lessor is responsible to meet all
 requirements to ensure the leased asset continues to provideIjarah prerequisites intended use.The client and lessor enter into a promise to execute an Ijarah for Earnest Moneythe usufruct of a particular asset or service. The institutionundertakes to provide the asset or service and the client A sum of money the lessee deposits with the lessor. The lessorundertakes to enter into a lease contract for it. maintains it as compensation for actual loss in case the client goes back on his word about executing an Ijarah.The asset or service must be owned by the lessor and madeavailable to the lessee before the Ijarah commences. The lease If the client fulfills his undertaking to lease and enters into anperiod commences once the subject matter of the lease is made Ijarah contract, the lessor returns him the earnest money.available to the lessee. Insurance The Ijarah asset can be insured by means of Shariah-compliant Takaful insurance. 32 © 2012-2015 Ethica Institute of Islamic Finance
  • 34. Ijarah Rent and Remuneration 2. Lessor takes care of major maintenance expenses and insurance costs. The lessor may include insurance costs atRent the time rentals are determined however once rentals are 1. Rent must be clearly defined, it may in the form of cash or established, they may not be adjusted to accommodate a kind or an asset’s usufruct. change in expenses. Lessor may appoint client as agent to deal with the insurance company. 2. Different rentals may be established for different periods. 3. Lessor is obliged to deliver the asset and all associated 3. Rent for the initial Ijarah period must be established and leased items necessary to transfer usufruct to the lessee. The received in advance from the lessee and rent for the remaining lessor must rectify any problem that prevents the lessee from period may be linked to a well known benchmark. utilizing the usufruct. 4. Rent begins to accrue as soon as the subject matter of the 
 lease is made available to the lessee. Lessor’s RightsRemuneration 1. In case the lessee defaults on lease payments, the lessor isRemuneration for a service is established in relation to time. within his rights to reclaim the leased asset or grant respite for a time. He may also charge late payment fee which includes
 administrative charges that belong t the lessor and lateDefault in Ijarah payment penalty that is given to a designated charity.Default in an Ijarah is a failure on the lessee’s part to make a 2. In case of excessive damage to leased asset, the lessor mayrental payment. rescind the Ijarah.If the lessee defaults on lease payments, the lessor may reclaim 3. Lessor may contract an Ijarah with more than one lessee forthe asset or grant him respite until his financial condition the same asset for different time periods.improves. 4. Lessor may rescind contract if he becomes aware of the
 lessee’s intent to use Ijarah asset for unlawful purposes.Lessor’s Rights and Obligations 
Lessor’s Obligations Lessee’s Rights and Obligations 1. Lessor bears all the risks associated with the leased asset Lessee’s Obligations during the lease term. 1. Lessee must utilize the Ijarah asset according to customary practice by which similar assets are used. He must take necessary measures to preserve it from damage or defect and 33 © 2012-2015 Ethica Institute of Islamic Finance
  • 35. benefit from the usufruct as provided in the contract and not In this document the lessee undertakes to purchase the Ijarah in any way beyond its scope. asset at the end of the Ijarah period for a mutually agreed amount at the time of Ijarah contract execution. 2. The lessee is obliged to pay rentals once the Ijarah’s subject matter is made accessible to him. If the Ijarah asset is The price may be the actual cost of the leased asset or any other available to the lessee only for a part of the contract’s nominal value. Alternatively the lessor may gift the leased asset to duration, the lessee in not obliged to pay rentals for the period the lessee at the end of the Ijarah period. the usufruct is not at his disposal In some cases, with the lessor’s consent, the lessee may even
 purchase the asset during the lease period by making completeLessee’s Rights payment of rentals due or paying for the market value of the asset at the time. 1. The lessee is within his rights to rescind the Ijarah contract if the lessor refuses to repair the Ijarah asset’s defects that The asset is sold to the client at the end of the lease period based occur after the contract date or exist on the contract date on a separate sale contract that represents the transfer of unbeknownst to the lessee. ownership.
 
Sublease Negligence in IjarahThe lessee may sublease the Ijarah asset to third party with the Negligence is the loss that results from the violation of contractlessor’s consent. conditions.
 If the Ijarah asset is damaged as a result of the lessee’sIjarah Renewal negligence, he must bear repair expenses. However the lessee is not liable for rent for the period the asset remains out of use.The Ijarah may be extended when it reaches maturity and thelessee still wants to continue benefitting from it. A new Ijarah is 
not required. Ijarah Termination
 The Ijarah is terminated:Transfer of Ijarah Asset Ownership • Based on contractual termsIn order to transfer the Ijarah asset’s ownership to the lessee at • One of the party’s rescissionthe end of the lease term, a separate document independent ofthe original Ijarah contract is prepared. • Due to the theft or destruction of the Ijarah asset’s usufruct. 34 © 2012-2015 Ethica Institute of Islamic Finance
  • 36. As a general rule, contracts cannot be terminated unilaterally butonly by mutual consent, however there are some conditions as aresult of which contracts are automatically terminated: 1. If the lessee fails to meet lease terms 2. If the lessee loses his sanity during the lease period 3. If case of the lessee’s death
Lessee can terminate Ijarah:If the Ijarah asset contains or develops defects. He may returnasset to the lessor and demand compensation for the period ofdefect.The lessee may not rescind the contract if the defect does nothinder usufruct utilization or the lessor ensures its immediatereplacement.Remember that the lessee can exercise rights of rescission in anIjarah of a specific asset only. 35 © 2012-2015 Ethica Institute of Islamic Finance
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  • 38. CIFE10, 11, 12 Understanding Murabaha –
 Cost Plus FinancingLearn about the most widely used Islamic finance product:buy an asset for the customer; sell the asset at a premium ininstallments to the customer. Thats a Murabaha. In thesemodules we introduce Murabahas and walk you through thefirst 5 of the 7 important steps necessary for a Murabahasvalid execution. Wrap up the 7 steps to executing aMurabaha: we cover steps 6 and 7 and go on to discusscommon mistakes bankers make when executingMurabahas and how to avoid them. We also look at riskmanagement, default, early repayment, and profit calculationin Murabahas. So how does it work in the real world? Welook at 6 practical examples of Murabahas based oninstallment repayments, bullet repayments, advancepayments, and credit and import Murabaha.
  • 39. www.EthicaInstitute.com
  • 40. CIFE10, 11, 12: Understanding Murabaha A Murabaha is a sale in which the seller’s cost of acquiring the asset and the profit• Definition earned from it are disclosed to the client or buyer.• Murabaha prerequisites Islamic banks offer the Murabaha to fulfill asset purchase requirements and not as a liquidity financing facility. • Subject matter 
 Murabaha Prerequisites • Price Subject Matter• Steps of Murabaha execution 1. Murabaha subject matter or the Murabaha asset must exist at the time of contract execution. For instance a Murabaha can be executed for a car that• Mitigating Murabaha risks exists not for one that is to be manufactured. 2. The bank must own the asset and have either physical or constructive• Default in a Murabaha possession. 3. The subject matter must be an item of value and Shariah-compliant.• Prohibitions in a Murabaha 4. The subject matter must be a tangible good, clearly identified and quantified.• Calculating profit in a Murabaha 
 For instance if the buyer wants to purchase rice, its exact quality and quantity in terms of weight must be clearly specified in the Murabaha contract to avoid gharar or uncertainty that leads to dispute between contracting parties. 
 Price 1. Murabaha asset cost must be declared to the client. 2. The cost refers to all expenses involved in the asset’s acquisition. 39© 2012-2015 Ethica Institute of Islamic Finance
  • 41. 3. The asset’s price includes all direct expenses where the bank 3. The client’s unilateral promise to purchase the Murabaha pays for all indirect expenses. goods and the financial institution’s acceptance of collateral 4. Parties to the contract establish a profit rate by mutual At this stage the bank in order to safeguard its rights in case consent or in relation to a specific and known benchmark. the client backs out from entering into a Murabaha, requests the client to furnish a security or earnest money called 5. The Murabaha price may be charged at spot or be deferred Haamish Jiddiah. and paid as a lump sum at the end of the contract or in installments on fixed dates during the term. In case the client backs out from entering into a Murabaha, the bank makes up for the actual loss from it and returns the 6. The Murabaha profit must be disclosed as a specific amount. remainder to the client.
It is important to remember that Murabaha execution must adhereto a certain sequence of procedures in order to ensure Shariah- 4. The agency agreement between the financial institution andcompliance. the client or a third party
 Since banks do not possess the expertise or manpower to Steps of Murabaha Execution purchase the asset, they appoint the client as the agent to procure the asset from the supplier on their behalf. 1. The client’s submission of a purchase requisition for Murabaha goods Agency agreements are of two types: Based on the requisition the bank approves the credit facility Specific Agency Agreement: Agent is restricted to 
 before entering into an actual agreement.
 purchase a specific asset from a specific supplier Global Agency Agreement: Agent may purchase the asset 2. The master Murabaha facility agreement between the financial from any source of his choice. Such an agreement also lists institution and the client a number of assets which the agent may procure on the 
 bank’s behalf without executing a new agency agreement 
 It includes: each time.
 i. An approval of the client’s credit facility 
 Key point to remember about the agency
 ii. The terms and conditions of the Murabaha contract iii. Murabaha asset specification • During the agency stage, the bank’s exposure to asset risk is iv. Client’s undertaking to purchase the Murabaha asset highest and it is in the bank’s interest to shorten this period as once the bank acquires it (if not included in the MMFA, it much as possible. constitutes step 3) • Bank may also minimize risk by ensuring the supplier receives payment for the Murabaha asset. 40 © 2012-2015 Ethica Institute of Islamic Finance
  • 42. • Bank must also ensure that the Murabaha asset to be Mitigating Murabaha Risks purchased is not already in the client’s possession. To maintain correct sequence, the bank must disburse the • Shariah validity of a Murabaha is strongly sensitive to money to the agent before the agent purchases the goods. following the designated steps in the correct sequence. • The agency agreement is not a prerequisite but motivated by • A deferred Murabaha may not be executed for mediums of logistical ease. exchange, i.e. commodities such as gold, silver and currencies, only a spot Murabaha may be executed for them. • Banks can procure Murabaha goods directly or establish a third party agency. • The bank must seek Shariah-compliant Takaful insurance for Murabaha goods to cover transit period risk, i.e. the risk posed to the bank once it purchases the goods from the supplier and has their possession and before it sells them to 5. The possession of the Murabaha goods by the agent on behalf of the financial institution the client.
 After the agency agreement the client completes the 
 purchase order form. The bank disburses the money to the 
 Default in a Murabaha client, who as agent pays it to the supplier and receives 
 There is no concept of a late payment penalty in a Murabaha possession of Murabaha goods. contract however a charity clause is established at contract execution to serve as a deterrent to default. In case of a default in payment, based on the charity clause, the 6. The exchange of an offer and acceptance between the client client is obliged to pay a predetermined amount to a designated and the financial institution to implement the Murabaha sale charity. Either party can make the offer; the client may offer to buy 
 
 the Murabaha goods or the bank may offer to sell them. The 
 Murabaha Prohibitions Murabaha sale is completed at the time of offer and 
 acceptance. A roll-over is the provision of an extension in return for an increase in the original payable amount and is impermissible in a Murabaha. 7. The transfer of possession of Murabaha goods from the It constitutes repricing and rescheduling: financial institution to the client Repricing is prohibited because the Shariah does not permit an The client is the owner of goods and all the associated risk increase in debt once it is fixed. and rewards however his obligation does not conclude until he makes complete payment of Murabaha price. Rescheduling is only permissible when the creditor provides an
 extension to ease the burden of a debtor, so a roll-over where the bank increases the debt in return for an extension is 41 © 2012-2015 Ethica Institute of Islamic Finance
  • 43. impermissible as the resulting amount of debt is analogous to riba In case the client as agent is unable to purchase the asset on theor interest which is prohibited in Islam. 1st of June due to some unavoidable circumstances such as a supply shortage and the Murabaha is terminated, the bank is
 entitled to receive only the capital back and nothing more.Calculating Murabaha Profit This is the key difference between a loan on interest and aFrom an accounting perspective, there are two stages in a Murabaha.Murabaha:1st stage: The investment stage: Begins after the bank and clientsign the agency agreement. It is the time period where the bankhas disbursed money for the purchase of the asset from thesupplier but has not yet acquired possession in order to sell it.2nd stage: The financing stage: This stage begins when the bankreceives the good and goes ahead with the exchange of offer andacceptance with the client. It ends once the bank receives theMurabaha payment from the client. It is during this time that thebank has the right to accrue profit.
ExampleA bank extends an advance for Murabaha to the client on the 1stof March, knowing that he will not purchase the asset until the 1stof June.The client purchases the asset on the 1st of June and theMurabaha sale takes place between him and the bank on thesame day.If the tenure of the Murabaha is 4 months, it will commence onthe 1st of June and last until the 1st of October.The bank will begin calculating profit on the 1st of June and notthe 1st of March so that no income accrues to the bank between1st of March and 1st of June. 42 © 2012-2015 Ethica Institute of Islamic Finance
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  • 45. CIFE13, 14, 15 Understanding Salam and Istisna –
 Forward Sale and Manufacturing ContractsWhat makes a forward contract Islamic? Learn here. In thismodule on Salam, the Islamic forward sale, and Istisna, theIslamic manufacturing contract, we begin with Salam. Welook at the goods for which a Salam may be executed, thepre-requisites, and the use of a Parallel Salam. We discusssecurity, replacement, and default before explaining how itspricing is calculated. We then look at Istisna and discuss themajor differences between it and the Salam. We also discussdelivery, default, and termination an Istisna. We conclude the3 module series with a practical product structuring exercisewhere you get to choose the appropriate financing tools in agiven scenario.
  • 46. www.EthicaInstitute.com
  • 47. CIFE13, 14, 15: Understanding Salam and Istisna Salam is a sale where the price of the subject matter is paid in full at the time of• Salam definition the contract’s execution while the delivery of the subject matter is deferred to a future date.• Salam prerequisites and essentials It is not necessary that the subject matter exist, and be owned and possessed by• Salam term and termination the seller at the time of the Salam’s execution as is the customary requirement of a standard sale, provided it meets the other criteria specific to it.• Security in a Salam Salam is a mode of finance that helps the seller generate and utilize liquidity and at the same time allows the buyer to purchase commodities for a price lower than the• Replacement of subject matter spot market price.• Delay in delivery and default in a Salam A Salam may be executed for homogeneous commodities but not for specific commodities and mediums of exchange.• Istisna definition Homogeneous commodities, also termed fungible, are similar to one another and are sold as units. The difference between them is negligible. Since they are• Istisna essentials homogeneous, in case of loss, one unit may be replaced by another.• Istisna term 
 Salam Prerequisites• Parallel Istisna 1. The quantity and quality of Salam goods must be specified in order to avoid any ambiguity that may lead to dispute between contracting parties.• Delay in delivery and default in an Istisna Salam goods must be readily available in the market so that at the time of 
• Rebate, Prohibition of buy-back delivery if they do not meet specifications the seller can procure them easily and supply them to the buyer.• Istisna termination 46© 2012-2015 Ethica Institute of Islamic Finance
  • 48. 2. Salam price must be paid at spot. The price is fixed and Salam Essentials cannot be increased due to an increase in the price of Salam goods in the market during the contract’s term. Price The seller must deliver the goods without demanding any 
 Most things established as the price for an ordinary sale may also excess money as the Salam goods become the property of be established as Salam price, i.e. cash, goods and usufruct. the purchaser once the contract is signed. It is important to remember that goods may serve as the Salam 3. The place of delivery of Salam goods must be specified and price provided they do not fall into the Amwaal e Ribawiya they must be delivered in their entirety on a fixed future date category. or in installments on predetermined dates. Usufruct refers to the benefits received from a particular asset. 4. Salam goods cannot be sold to a third party before receiving The buyer in a Salam may offer the seller an asset’s usufruct for a possession however a parallel Salam may be executed for specific time period as the Salam price. them. The Salam price is determined based on the number of days the
 bank’s funds remain invested in the Salam transaction.Parallel Salam 
A transaction executed simultaneously with the original Salam. Subject MatterThe buyer of goods in the first Salam is the seller of goods in the 1. Salam subject matter must fall into the category ofsecond or parallel Salam. homogeneous goods and be easily available in the marketFor instance, a buyer makes a payment for the subject matter to throughout the contract’s term or at the time of delivery.be delivered at a date, three months in the future. 2. The Salam subject matter must be clearly specified in terms ofAt the same time, as a seller, he executes another Salam for a quantity and quality.higher price with a third party for the same goods to be received 3. The subject matter must not be a commodity for which valueby him in the future. This way the money disbursed to purchase cannot be established. For instance precious stones.goods in the first Salam is retrieved as price payment and profitfrom the parallel Salam. Once the goods of the original 4. The Khayar al Aib (option of defect) may be exercised fortransaction are delivered they are transferred to the buyer in the Salam subject matter however not the Khayar al Rooyatparallel Salam. (option of refusal).A parallel Salam is permitted with a third party only. 47 © 2012-2015 Ethica Institute of Islamic Finance
  • 49. The Khayaar al Aib is an option that a buyer may exercise to Security in a Salamreturn goods to the seller if they are found to be defective Since Salam is based on advance payment, the buyer is withinaccording to the specifications at the time of delivery. 
 his rights to obtain a form of security from the seller. In case of
 default, the buyer liquidates the security and makes up for theThe Khayaar al Rooyat is an option of refusal based on which the actual price paid for the subject matter.buyer may decline from accepting the goods as a result of non-conformity to specifications. 
 Alternatively at the time of contract execution, the buyer may establish that in case of default, he will sell the security in the market and purchase the goods that the seller was supposed toDelivery of Salam goods provide at their going rate. The seller will then make up for the 1. Date of delivery of subject matter must be clearly established price difference if any. at the time of contract execution. 
 2. Place of delivery of Salam goods must also be clearly Replacement of Salam Subject Matter specified. Salam subject matter cannot be replaced before the delivery date 3. Delivery of subject matter implies the complete transfer of its however it may substituted for another commodity based on ownership. mutual consent and the observance of some conditions.
 
Salam Termination Delay in delivery of Salam Subject MatterOnce executed, a Salam may not be revoked unilaterally by either In case the seller is unable to deliver the subject matter on time,party. It is a sale contract binding on both parties and may be the buyer may not charge a penalty however a charity clauseterminated completely or partially by mutual consent by returning established at the time of contract execution serves as athe actual or proportionate amount of the price paid. deterrent against a delay in delivery.
 
Salam TermA Salam may be executed for any length of time mutually agreedupon between the buyer and the seller. 48 © 2012-2015 Ethica Institute of Islamic Finance
  • 50. Default in Salam IstisnaDefault in a Salam may be intentional or unintentional. An Istisna is a transaction used to acquire an asset manufactured on order. It may be executed directly with the supplier or anyUnintentional other party that undertakes to have the asset manufactured.If the seller is unable to meet delivery due to unavailability of There are usually two parties involved in an Istisna contract; thegoods or a price rise: Istisna requestor, or orderer, and the manufacturer. 
 • The buyer may wait for the commodity to return to the market An Istisna takes place when one party agrees to manufacture a or product for another party at a specific price. This agreement involves an exchange of an offer and an acceptance which • Both parties can mutually agree to terminate the contract and completes the contract. the buyer may be reimbursed the entire payment or 
 • Both parties may mutually agree to replace the original Subject Matter in an Istisna subject matter with another commodity 1. The subject matter of an Istisna need not exist, be owned orIntentional Default possessed by the manufacturer at the time of contractIn the case where the seller deliberately does not purchase the execution.commodity from the market to avoid a personal loss, he must be 2. It must be an item that is manufactured as customary marketcompelled to follow through with the original commitment or else practice and undergoes processing to convert from one formthe buyer may liquidate the security to make up for loss. to another.
 3. The manufacturer cannot execute a pre-agreed Istisna forSalam: Practical Application goods that he already possesses.The price of goods in a Salam may be fixed at a lower rate than 4. The Istisna subject matter must be clearly specified.the price of goods delivered at spot. The difference between thetwo prices earns the financial institution a legitimate profit. 5. The manufacturer and not the Istisna requestor must procure the subject matter.The Islamic bank after purchasing the commodity may sell itthrough a parallel Salam contract for the same delivery date. 6. Unless the requestor stipulates otherwise, the manufacturer may also have the goods produced from another source.If a parallel Salam is not feasible, the Islamic bank may obtain apromise to purchase from a third party. 7. The quantity or quality of Istisna subject matter can be changed by mutual consent of the contracting parties. 49 © 2012-2015 Ethica Institute of Islamic Finance
  • 51. 8. The Istisna requestor reserves the right to exercise the Khayar Parallel Istisna al Aib after receiving the delivery of Istisna goods within a A parallel Istisna is a second Istisna contract executed alongside certain time limit the manufacturer specifies. the first Istisna. The manufacturer in the original contract serves
 as the Istisna requestor in the parallel contract and profits from aIstisna Essentials difference in price. The parallel Istisna is completely separate and independent of the original Istisna contract. 1. Cash, goods and usufruct may serve as the Istisna price. For instance a client places an order for the manufacture of Goods may be established as the Istisna price provided they goods with an Islamic bank, the bank enters into an Istisna with do not fall into the category of Amwaal al Ribawiya. the manufacturer. 2. Istisna price may be paid at the time of contract execution, in Once the bank receives the goods, it transfers them to the client. fixed installments over the contract’s term or as a lump sum at the end of the contract’s term. As the client is the ultimate buyer, the bank may appoint him as an agent to supervise the production of the Istisna goods. 3. The Istisna price is mutually agreed upon between the Istisna requestor and manufacturer at the time of contract execution. It is important to remember that the bank may not enter into an existing Istisna contract between two parties. 4. The Istisna price may not be established on a cost plus profit basis like a Murabaha but as a lump sum. 
 Default in Istisna The manufacturer need not pass on the benefit of a lower 
 manufacturing cost to the requestor and conversely if the 
 The Islamic bank may demand security in its capacity as manufacturing cost turns out to be greater than the 
 requestor or manufacturer. Such a security is called Arbun. Arbun estimate, he must bear it. is a refundable down payment that the seller/manufacturer receives from the buyer/requestor, in order to secure the
 purchase of goods.Istisna Term 
An Istisna may be executed for a time period mutually agreedbetween the Istisna requestor and Istisna manufacturer. In case atime period is not agreed upon, the goods may be manufacturedand delivered within a reasonable period of time as is the marketnorm for those goods. 50 © 2012-2015 Ethica Institute of Islamic Finance
  • 52. Delivery of Istisna Goods Rebate in an Istisna 1. The buyer may not consume Istisna goods before they are The manufacturer is permitted to grant the Istisna requestor a delivered. The buyer must first assume physical or rebate in the price at his own discretion. A rebate may not be constructive possession of the goods. stipulated at contract execution. 2. If Istisna goods do not meet specifications and are of an inferior quality, the buyer can reject them however if they are Prohibition of Buy-Back of superior quality he must accept them unless he requires them as raw material. The Istisna must not involve a buy-back at any stage. Before the Istisna is executed it is important to ensure that the contracting 3. The buyer may accept Istisna goods of an inferior quality if the parties are separate and independent legal entities. manufacturer agrees to reduce their price. 
 4. In case of early delivery, the buyer may accept it provided it does not adversely affect his prior arrangements. Istisna Termination 5. If the buyer delays accepting goods delivered on time, the Either of the two contracting parties may terminate the Istisna manufacturer may charge him for the expense for holding unilaterally provided the manufacturing process has not them on his behalf. commenced. If manufacturing has begun then the contract is binding on both parties and can only be terminated by mutual 6. If the buyer refuses to accept goods, the manufacturer may consent. sell the goods as agent on the buyer’s behalf. Any amount above the original price is returned to the buyer and if goods 
 sell for a lower price, the buyer is expected to pay the Istisna: Practical Applications difference. An Istisna can be used to finance construction, export and
 infrastructure development.Shart al JazaiA penalty established at the time of contract execution that allowsfor a reduction in the price of manufactured goods in case of adelay in their delivery. Such a penalty is only permitted inmanufacturing contracts as the buyer requires the goods at afixed time and in the absence of a deterrent a delay in deliverycould have serious consequences with respect to follow-oncommitments. 51 © 2012-2015 Ethica Institute of Islamic Finance
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  • 54. CIFE16Understanding Islamic InsuranceYou learn the difference between Islamic and conventionalinsurance and the essentials that make Islamic insuranceunique.
  • 55. www.EthicaInstitute.com
  • 56. CIFE16: Understanding Islamic Insurance Islamic Insurance is based on mutual assistance and co-operation through• Definition voluntary contributions to a common fund that provides its members mutual indemnity in the event of loss. 
• Prohibition of conventional insurance • Gharar Prohibition of Conventional Insurance Conventional insurance is prohibited as it possesses the following elements: • Maisir • Gharar: Contractual uncertainty that leads to dispute. • Riba - Gharar exists in conventional insurance as one party in the contract, the insurer, has a right to profit from the investment of insurance premiums and• Differences between conventional and the other party, the insured, does not have access to its funds. Islamic cooperative insurance • Maisir: The element of speculation in a contract. - In conventional insurance, the insured pays a premium expecting a much• Speculative risk greater amount in case of loss, but loses the entire premium when an uncertain event does not occur.• Pure risk • Riba: Any amount that is charged in excess which is not in exchange for a due• Islamic insurance essentials consideration. 
• Types of Islamic insurance Conventional insurance possesses the element of riba in two ways: • It involves direct riba in terms of the excess that is involved in an exchange• Duration between the insured’s premium and the insurer’s payment against a claim.• Re-Insurance • It involves indirect riba based on the interest earned on interest based investments made by the insurance company with the insured’s premium. 55© 2012-2015 Ethica Institute of Islamic Finance
  • 57. Differences between conventional insurance and cooperative Speculative RiskIslamic insurance Speculative risk is the risk that involves the possibility of loss, no loss or gain. For instance, the risk involved in a new business Conventional Insurance Islamic Insurance venture.The conventional insurance contract is a The Islamic insurance contract is basedpurely financial contract involving uncertainty. on co-operation and seeks mutual benefit It is prohibited to insure speculative risk as it entails gharar with through contributions to a common fund. respect to the probability of gain as well as that of loss.The insurance company executes the contract The insurer serves as the insured’s agentin its own name. to manage operations and invest 
 premiums based on Mudarabah. The Pure Risk insured has equity in the pooled funds.The insurer owns the premiums in return for The co-operative insurance account is the Pure risk involves the possibility of loss. For instance damage tobeing obliged to pay insurance claims owner of funds. property due to a fire. Such risk can be insured Islamically as itAll the premiums after deduction of insurance Any surplus after deduction of expenses does not involve uncertainty with regard to the probability of gainexpenses are considered the insurer’s from the premiums is distributed amongrevenue. the members of the insurance fund as well as loss. based on their contribution ratios or any other method agreed upon in the 
 insurance policy. Islamic Insurance EssentialsAll returns from investment transfer to the The Mudarabah based return frominsurer. investment of premiums, after deduction 1. Islamic insurance offers risk protection based on Shariah of the Mudarib’s share, belong to the principles of mutual co-operation. fund members.The insured and the insurer are two separate The insurer and the insured are the 2. It is offered on the principles of good faith where bothentities; the seeker of insurance and its same; members of a mutual fund seeking 
 contracting parties make full disclosure of all relevant materialprovider. to indemnify each other against loss. The participants pool together their risk and facts without intending to manipulate, cheat or disadvantage their premiums to share them. each other.Provides protection against speculative risk in Only provides protection against pureaddition to pure risk. loss exposures. 3. Based on three main relationships, the Musharakah between participants of the joint fund, the Wakalah between the Islamic insurance company and the insurance policy holders and aThe amount left over in the insurance The amount left over in the insurance Mudarabah between the insurance policy holders and theaccount at the time of liquidation is kept by account is disbursed to charity.the insurance company. fund itself. 4. The insurer in his capacity as the agent cannot guarantee premiums and can only be liable in case of his proven negligence. 56 © 2012-2015 Ethica Institute of Islamic Finance
  • 58. 5. The insurer and the insured must fulfill their responsibilities in Islamic Insurance - Duration the contract. This may include conditions that do not affect Islamic Insurance requires both the insurer and the insured to the co-operative nature of the agreement. adhere to certain time limits. 6. The insurance company may charge a fee for its services as • The insured must make timely payment of premiums, if he agent of insurance operations. However, the returns from the doesn’t, the insurer is within his rights to withhold indemnity, investment of premiums in Shariah-compliant endeavours cancel the contract or alternatively take legal action and based on the Mudarabah must be distributed between the pursue due payment from him. insurer and the insured according to their investment ratios. • The insured must provide evidence for a claim within a 7. In case of loss to members, the Islamic Insurance company stipulated period of time. On the other hand, the insurer must may demand indemnity from the party responsible for follow through with providing timely and agreed upon damage. Additionally, it may take all necessary action to indemnity for loss to him. receive the insurance amount on behalf of its participants. Alternatively, the participants of the Islamic Insurance • The insurance contract runs its course for a specified term company and the party causing the damage may even before it expires. It is also terminated upon damage to insured reconcile with one another according to Shariah principles. property or death of the insured, as in such cases the object of commitment ceases to exist. 8. A Shariah advisory board must be established to supervise insurance operations and ensure Shariah-compliance 

 Islamic Insurance OverviewTypes of Islamic Insurance Islamic Insurance funds are invested in a joint pool created to share risk and provide its members mutual guarantee andThere are two types of Islamic Insurance: protection against it. • Property insurance; or insurance against injuries or mishaps The fund is managed by one of its members in exchange for a such as fires, earthquakes, car accidents and so on. payment of a fixed fee or alternatively a manager is hired for the • Personal insurance; which refers to indemnity against the risk job. of disability or death, also known as Takaful. The operator manages the funds in the pool, maintains a part of the funds to pay for claims and invests the rest in Shariah- compliant business ventures. In case a loss is experienced by any member of the pool it is distributed equally amongst all its participants and is made up for from the funds within the pool. 57 © 2012-2015 Ethica Institute of Islamic Finance
  • 59. In the event of a profit from business investments, it is distributedamong the investors according to their investment ratios.After the fulfillment of claims, if any, the operator is remuneratedfor his services from the amount in the pool and the remainingbalance is distributed among its members.
Re-insuranceA new insurance arrangement consistent with Islamic Insuranceprinciples and guidelines provided by the Shariah board. It isenacted in the event that the amount in the original fund isinsufficient to meet the needs of its members. 58 © 2012-2015 Ethica Institute of Islamic Finance
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  • 61. CIFE17, 18Understanding Sukuk –
Islamic SecuritizationYouve read about them. Now learn about them. Sukuks areIslamic shares and we show you the main features walkingyou through the 8 step structuring process concluding with astudy of Ijarah Sukuk. We continue our discussion on Sukukwith a look at Musharakah and Mudarabah, Sukuk and thelimitations of issuing using Murabaha, Salam and Istisna. Weclose with a case study of the IDB Sukuk.
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  • 63. CIFE17, 18: Understanding Sukuk Sukuk is the Arabic plural of the word Sakk which means certificate. Sukuk are• Definition certificates of equal value representing undivided shares in ownership of tangible assets, usufruct and services.• 8 Steps of Sukuk execution For instance, six partners invest in a business venture worth $60,000 by making an• Ijarah Sukuk investment of $10,000 each. In order to represent their shareholding they create certificates to divide the • Prerequisites business into 60,000 units. • Advantages Each partner is allotted 10,000 shares. Securitization is the process of issuing certificates of ownership against an asset• Equity-based Sukuk or business. Securitization turns an ordinary asset into a tradable security. • Musharakah If the securities represent a proportionate share of ownership in tradable assets, the trade of such securities is permissible. • Mudarabah Important to remember:• Sale-based Sukuk The asset portfolio comprises 25% tangible assets because if the majority of assets are liquid and sold for any amount other than their face value, the • Murabaha transaction is analogous to riba. The core contract used in the process of securitization to create Sukuk is the • Salam and Istisna Mudarabah, based on a predetermined profit sharing ratio, where one party serves as an agent on behalf of the principal who is the capital owner. The Mudarabah contract creates the Sukuk with the establishment of an independent legal entity known as a Special Purpose Vehicle or SPV. 62© 2012-2015 Ethica Institute of Islamic Finance
  • 64. In the case of Sukuk, the SPV acquires Shariah-compliant assets Ijarah Sukuk issuance prerequisitesand issues ownership certificates against them. 1. Ijarah Sukuk must represent the holders proportionate
 ownership of the leased asset.8 Steps of Sukuk Issuance 2. The Sukuk-holder must assume the rights and obligations 1. The identification of assets to be securitized; proper to a lessor to the extent of his ownership. 2. The creation of the SPV; 3. As the owner, the Sukuk-holder has the right to receive rent proportionate to his ownership in the asset. 3. The transfer of the assets to the SPV; 4. It is essential that the Ijarah Sukuk is designed to represent 4. The issuance of participation certificates against the identified real ownership of leased assets, and not only a right to receive assets; rent. 5. The lease of the assets back to the seller; 
 6. The provision of a guarantee by an investment bank for future Ijarah Sukuk Advantages payments or to replace assets if and when required; 
 7. Periodic payments to investors where there is income from Pricing the securitized assets; Rentals amounts that are eventually transferred to Sukuk-holders 8. The termination of the SPV at maturity by the sale of the may be fixed or benchmarked against a known standard. assets to the original seller at a pre-determined price and after 
 paying any dues owed to the certificate holders or investors Reassignment Ijarah Sukuk may be reassigned or sold to those seekingIjarah Sukuk ownership in the secondary market provided the underlying assets represent a considerable portion of tangible assets.A Sukuk al Ijarah may be issued for 3 purposes: 
 1. To securitize ownership of a leased asset Maturity 2. To securitize ownership of the usufruct of an asset The Ijarah may be executed for any length of time mutually 3. To securitize ownership of the right to receive benefits from decided between the lessor and the lessee provided the subject services matter of the Ijarah continues to exist. 63 © 2012-2015 Ethica Institute of Islamic Finance
  • 65. Timing Sale Based Sukuk
 
The asset represented by the Ijarah Sukuk need not exist at the Murabaha Sukuktime of contract execution. • Sukuk investors provide issuer with funding to purchase
 assetsEquity Based Sukuk • Asset is purchased from supplier
Musharakah Sukuk • Asset is sold to the issuer for a deferred price • Used to create new projects, develop existing projects and • Profit earned is distributed proportionately among the finance business activity on the basis of a partnership investors contract. 

 Important to remember:Mudarabah Sukuk These Sukuk represent the investors’ shares in receivables from • Based on the Mudarabah contract for which capital is the purchaser. And since these receivables are a debt, they received from investors to finance a project. cannot be traded in the secondary market. • Sukuk are issued to investors to represent their proportion of 
 ownership in the investment activity. Salam Sukuk and Istisna Sukuk • The investors earn profit from the business venture and may Salam and Istisna Sukuk are a useful investment tool for a variety even sell their ownership share in the secondary market. of short, medium and long-term financings
 For the issuance of Salam or Istisna Sukuk:Both Musharakah and Mudarabah Sukuk are bought and sold in • An SPV is created, which buys a commodity such as crude oilthe market where Sukuk-holders share profits by an agreed ratio in a Salam, or constructs infrastructure such as a highway inand losses in proportion to investment ratios. In a Mudarabah the an Istisna.principal bears all loss. • The SPV pays the price of the crude oil, or cost ofTo allow tradability, the asset portfolio of Musharakah and construction of the highway at the time of the contract’sMudarabah Sukuk should include 25% tangible assets. Sukuk execution with the income generated from the sale ofissuer cannot guarantee profits. certificates to investors. 64 © 2012-2015 Ethica Institute of Islamic Finance
  • 66. • After executing the Salam or Istisna, a promise is obtained from the ultimate beneficiary of the deliverable to buy it from the SPV on the date that it is due.• Since Salam Sukuk represent a debt in the form of Salam goods to be delivered at a specified date in the future, they may not be sold in the secondary market. Istisnas, on the other hand, gradually transform from a pure debt to a manufactured item, so once the item is substantially created, where the timing depends on the asset and the opinion of the Shariah board, the certificates are tradable. 65© 2012-2015 Ethica Institute of Islamic Finance
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  • 68. CIFE19, 20Liquidity Management In 
Islamic FinanceWhat do Islamic banks do with excess capital in the short-term? How do they access capital for the long-term? Youlearn the answers to these and other questions in thismodule. We discuss how Islamic banks manage liquidity andbegin by explaining an inter-bank Mudarabah, walking youthrough how a weightage table works; useful information forother Islamic banking products. We close the module with alook at the application of Sukuk in liquidity management. Youlook at filters for stocks, shares, Musharakah investmentpools, and the use of agency contracts to manage liquidity.We also look at local and the foreign currency CommodityMurabahas.
  • 69. www.EthicaInstitute.com
  • 70. CIFE19, 20: Liquidity Management In Islamic Finance Liquidity management refers to the financial management of an excess or shortage• Definition of funds. In order to maximize returns and to ensure that funds are used efficiently,• Liquidity Management Tools banks place their excess liquidity somewhere for the time they do not require the funds, (sometimes even for a night) and when they have a shortage of liquidity,• Mudarabah they tap markets and other financial institutions for access to funds. 
• Sukuk Liquidity Management Tools• Shariah-compliant Equities 
• Musharakah Investment Pools Mudarabah A Mudarabah is a business partnership between two or more parties, where one• Agency or Wakalah party supplies capital and the other provides management expertise.• Foreign Currency Commodity Murabaha The objective of the Mudarabah deal is to provide a Shariah-compliant structure to conduct permissible transactions in order to meet business needs and reserve• Local Currency Commodity Murabaha requirements. The basic structure for inter-bank dealings for managing liquidity is the implementation of the master Mudarabah agreement conducted for a maximum period of 180 days, which discloses the profit and loss sharing ratios between the partners as well. 69© 2012-2015 Ethica Institute of Islamic Finance
  • 71. In this way the master Mudarabah agreement serves as the basis Sukukfor money market transactions provided: Sukuk are certificates of equal value representing undivided • The investor and working partner mutually agree on a profit shares in the ownership of tangible assets, usufruct and services. sharing ratio at the time of contract execution They are equity stakes in assets and companies, so unlike conventional bonds, which are debt instruments, they are directly • The investor is held liable for loss to the business venture affected by profits and losses. when not caused by the working partner’s negligence The process of issuing tradable certificates of ownership against
 assets, investment goods and businesses is referred to asIt is a Shariah requirement to establish profit and loss sharing securitization.ratios at the time of Mudarabah execution. The underlying instrument used in Sukuk ranges from commonlyFor the appropriate allocation of profit, weightages are assigned used Ijarah and Musharakah to Mudarabah and hybrids thatto each investment category, whereas loss is shared in proportion include Murabaha, Salam, and Istisna.to investment amounts. These Sukuk are floated on the capital markets and are availableWeightages are profit ratios. The longer the term of the deposit, or to institutions seeking a relatively liquid means to park theirthe higher the balance, the greater the weightage allocated to it. capital while also receiving attractive returns.
 Alternatively, in case of a shortage of funds, financial institutionsSteps of an interbank Mudarabah transaction sell Sukuk to generate the liquidity necessary to meet • Step 1: After the Mudarabah deal between the bank and requirements. investor the transaction is reported to the financial institution’s 
 treasury operations department. Shariah-compliant Equities • Step 2: The treasury department verifies the deal between Like investment in Sukuk, Islamic financial institutions also make both parties, confirms the weightages, their conversion to investments in Shariah-compliant equities in general provided expected profit rate and contract maturity date. they meet the Shariah-compliance criteria for stocks. • Step 3: Based on the Mudarabah contract, the Islamic bank as working partner pays regular profit to investors during the contract’s term.At maturity the Mudarabah closes out the balance of profits andlosses. 70 © 2012-2015 Ethica Institute of Islamic Finance
  • 72. Musharakah Investment Pools When disbursed from the general pool, the assets must be appropriately assigned to a specific investment pool.In order to handle a shortage of funds, Islamic banks createinvestment pools consisting of financing assets based on The proper allocation of financing assets ensures that the profitMurabahas, Ijarahs and Diminishing Musharakahs. earned from them is properly attributed to the specific pool.When necessary, these assets are transferred from the general 
pool to the specific investment pool to fulfill short-term liquidity Agency or Wakalahrequirements. In a Wakalah, the bank possessing excess liquidity as principal,
 appoints another bank as its agent to invest its money in variousMusharakah pool creation checklist profitable, Shariah-compliant ventures. 1. In order to ensure Shariah compliance, the pool must consist The invested funds become a part of the treasury pool of the of at least 33% tangible assets. bank receiving the investment. 2. The Islamic bank accepts funds in the capacity of working Before investing the funds in a business venture, the agent partner and investors serve as silent partners. presents the principal with an offer for a probable investment opportunity where it discloses the amount to be invested, and the 3. The tenure of the pool must be less than or equal to the tenure and profit to be expected from the investment. tenure of the financing assets it comprises. If the principal accepts the agent’s offer, the deal is executed. 4. The pool must consist of those assets expected to earn a profit greater than the profit required by the financial An agency fee is fixed for each deal between the agent and the institutions making the investment. principal and when the realized profit is greater than the amount expected, the agent is entitled to retain the amount that is in 5. The profit and loss sharing ratio established between the excess in addition to the pre-agreed agency fee. financial institution and the Islamic bank must be the same that could be availed for an investment of an equivalent If the business venture suffers a loss as a result of the agent’s amount of capital in another financial concern. negligence, the principal is entitled to the profit and any compensation for actual costs, expenses and the original 6. At maturity, the pool must be dissolved and the assets investment. transferred back to the general pool. 71 © 2012-2015 Ethica Institute of Islamic Finance
  • 73. Foreign Currency Commodity Murabaha • The bank short of funds receives the price of the metal in foreign currency from the second broker and, after 90 days,The foreign currency commodity Murabaha is commonly used for the selling Islamic bank recovers the foreign currency principalinvesting excess funds and is available for maturities ranging from amount in addition to a profit linked to LIBOR.overnight to a period of a year. 
In a commodity Murabaha, the Islamic bank purchases a Local Currency Commodity Murabahacommodity on spot and sells it based on a deferred paymentensuring that the transaction is used only to manage liquidity. The process involved here is different from a foreign currency commodity Murabaha because an organized asset exchange• The Islamic bank with the surplus funds through a broker market is not used. procures a metal listed on a metal exchange in order to sell it to the Islamic bank short of funds. Commodities like sugar, cotton and fertilizer are physically identified before a sale takes place.• After purchasing the metal from the broker the Islamic bank maintains the amount payable to him as foreign currency in a • The Islamic bank appoints an agent who takes possession of separate account. the commodities on the bank’s behalf. Whenever instructed, the agent sells out or issues a delivery order for the• The metal is now sold to the bank in need of funds in commodities in favour of another person or party. exchange for a deferred payment through a Murabaha sale. Having purchased the commodity, the bank in need of funds • The bank purchases a commodity from a broker at a spot pays the Murabaha price in foreign currency within 90 days. cash price.• The selling Islamic bank discloses its cost for purchasing the • Another commodity broker representing a financial institution foreign currency, the cost of the metal from the broker, and requiring liquidity, issues a delivery order to the Islamic bank’s the profit earned over the 90 days. The profit is linked with a agent. The agent checks the availability of the commodity money market benchmark such as LIBOR. required by the delivery order and informs the Islamic bank.• The bank short of funds sells the metal to a different broker • After taking delivery of the commodity from the agent, the than the one used earlier and receives payment in foreign Islamic bank sells it to the financial institution on deferred currency. payment. The price of the commodity is fixed based on a benchmark for a matching tenure.• This broker then sells the metal to the first broker. • The commodity is received by the financial institution and the• The Islamic bank makes the payment of metal’s price owed to buyer, now having taken constructive possession of the the first broker in foreign currency and this broker pays the commodity sells it. second broker. 72 © 2012-2015 Ethica Institute of Islamic Finance
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  • 75. CIFE21, 22Risk Management In 
Islamic FinanceSome have said "Banking is risk management." If you dontknow anything about risk management this is the module foryou. You learn the basics about risk management in Islamicfinance and discuss the most common risks facing Islamicbanks and the mitigation techniques used to address them.Now you learn about how risk relates to each specific Islamicfinance product. We go through each major Islamic bankingproduct, namely Murabaha, Salam, Istisna, Ijarah,Musharakah and Mudarabah, and explain the specific risksassociated with each.
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  • 77. CIFE21, 22: Risk Management In Islamic Finance Risk is defined as exposure to the likelihood of loss, where this loss takes on many• Definition forms depending on the kind of risk involved.• Forms of risk It is the possibility that the outcome of an action or event could bring an adverse impact to the bank.• Risk mitigating tools Some of the many threats to a financial institution are low profitability, bankruptcy, fraud, false financial reporting and mismanagement.• Risks in Murabaha For a transaction to be Shariah-compliant, the main principle with regard to risk is• Risks in Salam that in order to benefit, liability must be assumed. Risk management is the process of evaluating and responding to the exposure• Risks in Istisna facing an organization or an individual. It is a structured and disciplined approach employing people, processes and technology for managing the many uncertainties• Risks in Ijarah faced by an organization.• Risks in Musharakah and Mudarabah 
 Forms of Risk • Credit risk: Refers to the possibility of a counter party failing to meets its financial obligations according to agreed terms. It represents 80% of the risk linked to a bank’s asset portfolio. • Equity investment risk: Arises from entering into a partnership to finance a specific business activity. Mudarabah, Musharakah and most Sukuk are susceptible to equity investment risk. • Market risk: Represents the market’s volatility and its effects on an investment’s value 76© 2012-2015 Ethica Institute of Islamic Finance
  • 78. • Liquidity risk: Refers to the potential risk of loss to financial Earnest Money institutions arising from the inability to meet financial Security the client deposits with the bank as security to serve as obligations. compensation in case he backs out from entering into a contract. • Rate of return risk: Financial institutions are exposed to rate 
 return risk in the context of their overall balance sheet Promises exposures. Increased benchmark rates may result in investment account holders having increased expectations of The client undertakes to purchase goods from the financial higher rates of return. institution in order execute a contract. • Operational risk: Refers to the risk of direct or indirect loss 
 resulting from inadequate or failed internal processes, people Agency Agreements and systems. In order to ensure goods are procured according to specifications • Legal or Shariah non-compliance risk: Relates to the financial institution may appoint the client or a third party as operational risk given the Shariah sensitivity to mistakes in agent for the job. operations • Specific agency agreement
 • Global agency agreementRisk Mitigating Tools 

 Advance PaymentPersonal guarantees An amount paid at the time of contract execution and consideredGuarantees of different types, such as a guarantee for timely a part of the asset’s price if client makes all payments within thepayment, a guarantee for supplying goods at a specific time etc. agreed time period.
 
PledgesA form of security, an asset or cash, taken from the client andmaintained by the financial institution.
 77 © 2012-2015 Ethica Institute of Islamic Finance
  • 79. Options Risks in Murabaha
Several options can be granted or possessed in order to mitigaterisk in contracts. • Credit riskFor instance: - Client backs out from purchasing the goods
 • Khayar al Shart – Optional Condition • Market risk • Khayar al Rooyat – Option of Inspection - Exposure to fluctuating market price of goods
 • Khayar al Aib – Option of Defect • Khayar al Wasf – Option of Quality • Supplier risk • Khayar al Ghaban - Option of Price - Supplier is unknown to the bank which may cause a delay
 in delivery time of goods and non-conformity toTakaful specifications
An Islamic alternative to conventional insurance. Based on theconcept of mutual indemnity in case of loss • Operational/Ownership Risk
 - Client as agent gains possession of goods from theShart al Jazai supplier without informing the bank
A penalty that allows for a reduction in price of manufacturedgoods in case of a delay in their delivery. Such a penalty is • Transit period Riskpermitted in manufacturing contracts. - The risk associated with goods after the bank purchases
 from the supplier and before the client purchases themCharity Clause from the bank
The charity clause serves as a deterrent to default, based on itthe client undertakes to give a certain amount to charity in case of • Documentation Riskdefault in payment. - The risk that the counter party does not provide sufficient documentation. 78 © 2012-2015 Ethica Institute of Islamic Finance
  • 80. Risks in Salam
 Risks in Istisna
• Holding risk • Risk of hidden defects - The risk of holding goods until the time of delivery
 - Risk of defects inherent in the manufactured products 
• Shariah non-compliance Risk • Shariah non-compliance Risk - Arises if goods are sold before receiving their physical or - Arises as a result of not specifying the characteristics of constructive possession
 goods, the time or place of delivery or lack of information about the supplier 
• Settlement and Delivery Risk • Settlement and Credit Risk - Arises in the event goods are not delivered on time and do not conform to specifications
 - Arises when the customer in unable to honour deferred payments
• Risk of Early Termination • Price Risk - Arises in the event the client terminates the contract before delivering the goods
 - Bank’s exposure to the risk of selling goods to a third party for a lesser price as a result of contract cancellation
• Rate of Return and Price Risk • Delivery Risk - The risk that a decrease in the commodity’s price after contract maturity will result in a lower rate of return - The risk of not being able to make a scheduled delivery of manufactured goods for a parallel Istisna
 • Legal Risk - Litigation costs for claims against Istisna requestor that terminates the contract 79 © 2012-2015 Ethica Institute of Islamic Finance
  • 81. Risks in Ijarah
 Risks in Musharakah and Mudarabah
 • Risk associated with security that sells for a lower price in the • Shariah non-compliance Risk market as a result of which the bank cannot cover its loss
 - Debt cannot be used as a substitute for equity - One partner cannot guarantee other partner’s principal or • Asset Risk profit - Asset is stolen, damaged
 - Risk of the funds being from a prohibited source
 • Price Risk • Credit Risk - Banks exposure to changes in costs during the Ijarah’s - Managing partner manipulates reports to show lower term. The longer the term the greater the bank’s exposure returns to price fluctuations
 - Silent partner opts out of partnership while still owing money • Risk that the customer will back out from his promise to lease, the bank may have to sell the asset at a price lower than its - Working partner takes a percentage of vendor’s payment in market price
 return for awarding the vendor a mandate. - Prohibition of any collateral to secure bank’s investment • Legal Risk poses additional risk. - Litigation costs against the client who refuses to compensate the bank for losses resulting from unfulfilled promises.
 80 © 2012-2015 Ethica Institute of Islamic Finance
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  • 83. Glossary –
Commonly Used Industry Terminology
  • 84. AAOIFI: Accounting and Auditing Adil: Trustee; an honest and trust worthy Ajeer e Khas: An employee for aOrganization for Islamic Financial individual specified term, who only serves oneInstitutions. beneficiary. Afw: Surplus wealth.Advance against Murabaha: The Akl al-Suht: Illegal acquisition of wealth Agency Agreement: An agreement byamount disbursed by the financial means of which a third party whether an Al-ajir al-mushtarak: A worker who mayinstitution for the purchase of goods individual or a financial institution is concurrently serve or be contracted by afrom the supplier. established as an agent to carry out an number of clients, for instance a lawyer.Amwaal e Ribawiya: Goods which, activity such as make an investment, on Al-ajr al-mithl: The prevalent price; thewhen exchanged with one another, result behalf of the principal. standard rate for a particular service.in the accrual of interest by either of the Ahadith: (pl.hadith) Reports of thecontracting parties. Six items have been Al-akl bi-al-batil: Wrongful acquisition of attributes, words and deeds of theclassified as such by a Hadith of the wealth. Prophet Muhammad (PBUH)Prophet Muhammad (God bless him andgive him peace): gold, silver, wheat, Al-amin al-amm: Trustee for property Ajr: Remuneration or compensation. In abarley, salt and dates. These items may other than that granted for safe-keeping service Ijarah, the ajr is the price paid toonly be exchanged for each other in such as the lessee in an Ijarah or the the employee by the employer inequal measure and at spot. mudarib in a Mudarabah. exchange for services rendered.Adadiya: Countables - items which are Al-amin al-khas: Trustee for property Ajeer: Employeemeasured as units and not by weight, granted for safe-keeping as in thelength or volume, i.e. eggs sold as units Ajeer e Aam: An employee who is not wadi’ah (safe-keeping) contract.(dozen or half a dozen) restricted to the employment of a single Al-ghunm bi-al-ghurm: An Arab proverb employer but in fact is free to work forAdl: Justice, impartiality, fairness. according to which profit may lawfully be another person or persons as long as he earned provided risk is shared for an fulfills his duties responsibly towards each of them. 83 © 2012-2015 Ethica Institute of Islamic Finance
  • 85. economic activity that ultimately Amwal: (pl. maal); goods Arkan: (lit. pillars) Fundamentals of acontributes to the economy. contract Aqar: Real estate; immovable property,Al-hisab al-jari: Current account i.e. land, buildings etc. Asil: AssetsAl-sanadiq: Marketing investment funds Aqd: Contract Average Balance: A formula for determining the eligibility of profit aAl Shafi`i: Muhammad b. Idris, late 2nd/ Aqd al-bay: A sale contract partner or Musharakah account holder8th century eminent faqih after whom the Arbaab al Maal: Partners who contribute can receive on his invested amount.Shafi`i madhhab is named. capital to the business, plural for rabb ul Essentially, it is the minimum amountAmanah: Property in the safe-keeping of maal. that must remain invested at all times inanother (the ameen) that must be an account over a period of time, for thepreserved and protected; deposits Arbun: A non-refundable down payment account holder to be eligible to receivemaintained as trusts on a contractual received from the buyer or the Istisna profit.basis requestor securing the purchase of manufactured goods. Ayah: Sign; a verse from the HolyAmeen: Trustee Quran. Ard: LandAmil: A worker entitled to remuneration, Ayn: Currency or ready money, i.e. gold,i.e. the mudarib in a Mudarabah contract Ariya: A contract in which one party silver, coins, notes or any other form ofor a zakat collector. loans another the use of an item for an ready cash. indefinite period of time.Amoor e Mubaha: Commodities that are Bai/Bay: Contract of salenaturally available and may be benefited Arif: An expert who is consulted in matters requiring an informed and just Bai al Dayn biaddayn: An exchange offrom by all. For instance, water from a decision. debt, i.e. sale of securities or debtriver or the wood from the trees of a certificates.forest. 84 © 2012-2015 Ethica Institute of Islamic Finance
  • 86. Bai Muajjal: A deferred sale, where one sold to the client for a profit. The buyer is exchange for an increase on theof the considerations of the contract usually permitted to complete payments principal.such as its price or the delivery of its in installments. Bay’ al-Muajjal: A credit sale wheresubject matter is delayed to a future Bai` `ajal bi al-`ajil: (syn. bai al salam) A payment is delayed and delivery of thedate. type of sale in which the price is paid contracted goods is immediateBai ul muzayadah: The sale of an asset upon signing the contract and the Baytul Mal: The Muslim community’sto the highest bidder in the market. delivery of goods is delayed to a future treasury. It was established as an date.Bai’ al-salam: A sale where the price of institution by the early caliphs, the fundsthe subject matter is paid in full at the Bai’atan fi bai: Two sales in one also contained in which were used to fulfill thetime of the contract’s execution while the referred to as "safaqatan fi safaqah." peoples needs.delivery of the subject matter is deferred Bai al Inah: A buy-back transaction that Benchmark: A known andto a future date. is prohibited in Islam. acknowledged standard that may alreadyBatil: Void, invalid; refers to a exist or alternatively be identified by Bai al istijrar: A contract where thetransaction, a contract governing a means of expert appraisal. supplier agrees to provide a particulartransaction or an element in a contract, product to the client on an ongoing basis Benchmarking: A method by which thewhich is invalid. for an agreed price based on an agreed rent for the remaining period of an IjarahBai al-wafa: A sale where the seller is mode of payment. is based upon a known andallowed to repurchase property through a acknowledged standard that may already Bai` al-kali bi al-kali: (kali. syn. debt)purchase price refund. It is a transaction exist or alternatively be identified by Sale of debt for debt, specificallyprohibited by a majority of scholars. means of expert appraisal. prohibited by the Prophet. In such aBai bi-thaman ‘ajil: (syn. bai muajjal) A transaction, the creditor grants an Bond: A certificate of debt based ondeferred payment sale, where requested extension in the repayment period in which the issuer agrees to pay interest ifgoods are purchased by the bank and 85 © 2012-2015 Ethica Institute of Islamic Finance
  • 87. any in addition to the principal, to the Business partnership: A joint venture or Compound Interest: The accrual ofbondholder on specified dates. project between two or more parties, additional interest on existing interest entered into with the aim of making a payments due on the principal.B.O.T or Build, Operate and Transfer: profit.A contract by which the government Commercial Interest: The excess paidhires a contracting company to assist it Capital Recovery Risk: The risk of the in exchange for a loan taken for thein the development of infra-structure. inability to regain capital from the establishment of a commercialUsufructs for a fixed period of time are security maintained by the financial enterprise.established as the price of the contract institution in case of a loss.after which ownership is transferred to Commutative contract: A contractthe government free of cost. Catastrophic Risk: The risk arising from involving an exchange the possibility of the occurrence of aBringing forward future installments: Conditional agency agreement: An natural disaster causing loss of orBy the establishment of this option, in agency agreement where the agent is damage to goods.the event that the client defaults on his limited by certain conditions andpayment, all the installments for the Charity Clause: A stipulation made at restrictions with respect to the executionentire term of the contract fall due the time of the execution of the contract of a required task such as the purchaseimmediately. which establishes a certain amount of of an asset. payment to a designated charity in theBuy-back: The same as bai inah, a Constructive liquidation: Evaluating the event of a default.prohibited type of sale in which one sells capital value of a business, withoutan item on credit then buys it back for a Commodity Murabaha: A transaction actually liquidating or selling it off.lesser price. where the Islamic bank purchases a Constructive possession: Any form of commodity on spot and sells it for a documentary evidence that proves deferred payment for the purpose of rightful ownership of an asset thereby managing liquidity. sanctioning the seeking of gain from it; where the one possessing the asset is in 86 © 2012-2015 Ethica Institute of Islamic Finance
  • 88. a position to use the item for which it is Dayn: A debt which comes into ownership of it through a series ofintended. existence as a result of a contractual property share purchases. obligation or credit transaction.Contract: A commitment to something Dinar: A gold coin used by Muslimsenjoined by the association of an Dhaman: A contract of guarantee throughout Islamic history. Its standardacceptance with an offer. whereby a guarantor underwrites any mass was app. 4.25 grams. claim or obligation to be fulfilled by theConventional insurance: The Displaced Commercial Risk: Islamic owner of the asset.conventional form of providing indemnity financial institutions manage the funds ofagainst loss. Deal Ticket: A form of documentation investment account holders on a profit- evidencing the acceptance of funds by and-loss-sharing basis. However, inCredit risk: The possibility of a counter one bank from another based on a order to maintain competitiveness withparty failing to meet its financial contract of Musharakah. conventional banks which offer fixedobligations in accordance to the terms returns, IFIs typically surrender part (oragreed upon in the contract. Default: A contracting party’s failure to all) of their profit share in order to allow make a due payment. their depositors to receive their expectedCredit stage: This stage begins once thegoods for a Murabaha are received by profit allocation. This effectively means Dhimmah: Liabilitythe financial institution and the that the risk attached to depositors’documents of offer and acceptance are Dhulm: A comprehensive term used to funds is partially or wholly transferred tosigned and ends once the Murabaha refer to all forms of injustice, exploitation, the IFI’s capital, which increases thepayment is recovered from the client. It is or inequity through which a person overall risk for IFIs and is referred to asduring this period that the bank has the deprives others of their rights or does not DCR.right to accrue profit. It is also referred to fulfill his obligations towards them. Diyah: The compensation paid by oneas the financing stage. Diminishing Musharakah: A temporary who commits manslaughter to theDaftur al-tawfir: Savings account partnership where an asset or property is relatives of the deceased. jointly purchased by two partners and one partner eventually acquires 87 © 2012-2015 Ethica Institute of Islamic Finance
  • 89. Earnest Money: A sum received from Falah: To be happy and successful; Financing stage: This stage begins oncethe client as security that serves as refers to success both in this world and the goods are received by the financialcompensation in the event the lessee in the hereafter based on the belief in institution and the documents of offerbacks out from entering into or one God, belief in the Prophethood of and acceptance are signed and endscontinuing an Ijarah. The lessor makes Muhammad (PBUH) and the Akhirah as once the Murabaha payment isup for the actual loss from it and returns well as conformity to Shariah recovered from the client. It is during thisthe remainder to the client. requirements. period that the bank has the right to accrue profit.Equity: The ownership share in a Faqih: Muslim juristbusiness. Fiqh: Practical Islamic jurisprudence. Faqir: A poor person.Equity Investment Risk: The risk arising Fiqh al Muamalat: The Islamic discipline Fasid: Voidable, usually said of afrom entering into a partnership in order governing the jurisprudence of financial contract or an element within a contractto finance a particular or general transactionsbusiness activity, where the manager of Faskh: Cancellation of a contract, Foreign Currency Commodityfinance also shares the business risk. usually based on one of the contracting Murabaha: A transaction commonly parties exercising an option, i.e. theEquity Market: The equity market is the used for investing excess funds which is option of return in case of a defectiveplace where company shares are traded available for maturities ranging from asset or the option of refusal to purchasethereby providing viable investment overnight to a period of one year. The an assetopportunities to individuals, other commodity used in the transaction existscompanies and financial institutions Fatwa: An authoritative legal judgment with a foreign asset exchange company.seeking to avail them. based on the Shariah Fuduli transaction: A transaction with FI pool: A Musharakah based financial anothers property without the investment pool created by the Islamic permission of the Shariah. For instance, financial institution for the purpose of selling property before contracting an liquidity management. 88 © 2012-2015 Ethica Institute of Islamic Finance
  • 90. agency agreement with its owner is a purchase the required asset from any Hajj: (The fifth pillar of Islam) Pilgrimage“fuduli” transaction. source of his choice. Such an agreement to the House of Allah, which is obligatory also lists a number of assets which the upon every able Muslim at least once inFungible Goods: Goods that are similar agent may procure on the bank’s behalf his lifetime.to one another and are sold as units, any without having to execute a new agencydifference between them is considered Halal: Anything permitted by the Shariah, agreement each time.negligible. one of the five major Shariah Guarantee: A risk mitigating technique categorizations of human actsGharar: Contractual uncertainty that may that serves as a form of security inlead to major dispute between Haamish Jiddiah: The Islamic financial contracts and is provided by a thirdcontracting parties which is otherwise term for a sum of earnest money party. For instance, a guarantee for thepreventable or avoidable received from the client as security that supply of specific goods at a specific time or a guarantee for a timely payment. serves as compensation in the event theGharim: A debtor who does not possess lessee backs out from entering into orthe funds to repay his debts. The gharim Haba al-habala: A sale practiced by the continuing an Ijarah. The lessor makesfalls into the classification of one of the Arabs in the pre-Islamic era which was up for the actual loss from it and returnseight groups mentioned in the Quran as prohibited by the prophet owed to the the remainder to the client.legitimate recipients of zakat. According gharar (contractual uncertainty leading toto the Maliki and Shafi’i jurists there are Hand-to-hand sale (Mu’ata): A sale dispute) involved. The sale depended ontwo types of gharim: 1) one whose debt where the seller hands the asset over to a she-camel giving birth to a female calfwas incurred in his own benefit and 2) the buyer in exchange for a price without who would subsequently mature andone whose debt was incurred benefiting any verbal expression of offer or become pregnant itself.others. acceptance Hadith: A report of the attributes, wordsGhasb: The misappropriation of property Hanifite laws: Laws formulated by one and deeds of the Prophet Muhammad (PBUH). of the four Islamic schools ofGlobal agency agreement: An jurisprudence founded by Iman Abuagreement where the agent may Hanifa. 89 © 2012-2015 Ethica Institute of Islamic Finance
  • 91. Haq: Right Holding Risk: The risk that accompanies determined by the extent to which the the possession of assets by the financial buyer could throw the pebbles.Haq dayn: Debt rights institution before they are delivered to Hybrid Sukuk: Certificates of ownershipHaq maliy: Rights over financial assets the buyer. representing trust assets for more Homogeneous Commodities: contracts than one.Haq tamalluk: Ownership rights Commodities that are similar to one Ibaha: Forgoing a right, i.e. forgoing aHaram: Anything prohibited by the another and are sold as units. The claim to a debtShariah, one of the five major Shariah difference between them is negligiblecategorizations of human acts. ICD: Islamic Corporation for the Hukm: Shariah ruling Development of the Private SectorHawala: A contract that allows a debtorto transfer his debt obligation to a third Huquq: (Pl. haq) Rights IDB: Islamic Development Bankparty. Husah: (lit. pebbles) A sale practiced by IFI: Islamic financial institution; i.e. bankHawl: The amount of time that must the Arabs in the pre-Islamic era, which or financial organization operatingelapse before a Muslim in possession of was prohibited by the Prophet (PBUH) commercially within the limits prescribedfunds equaling or exceeding the based on the involvement of gharar by Shariah.exemption limit (nisab) is required to pay (contractual uncertainty leading tozakat. Typically, one Islamic year i.e. a dispute). The sale was determined by the IFSB: International Financial Standardslunar year of approx. 354 days. casting of pebbles in three ways: 1) Board where once the seller threw the pebbles,Hiba: Gift the deal would be binding 2) where the Ihtikar: Hoarding; the prohibited practice seller would sell the buyer the of purchasing essential commodities,Hijrah Year: The year of the emigration such as food and storing them in commodity that the pebbles thrown byof Prophet Muhammad (PBUH) and his anticipation of an increase in price. the buyer would hit, 3) where the sellerfollowers to Medina. would sell the buyer an amount of land Ijab: Offer, in a contract 90 © 2012-2015 Ethica Institute of Islamic Finance
  • 92. Ijarah: A form of lease which seeks to Ijarah Sukuk: Certificates representing Messengers, His Angels, the Hereafterprovide the benefits of an asset or a the ownership of leased assets, the and Divine Will.service to the lessee in return for a ownership of the usufruct of leased Inaan: (A type of Shrikah) A form ofpayment of an agreed upon price or rent. assets or the ownership of the rights to partnership in which each partner receive benefits from services.Ijarah tul Amaal: A contract of lease contributes capital and has a right toproviding services for an agreed upon Ijarah wa Iqtina: An Ijarah conducted work for the business.rental. solely for the purpose of transferring the Infaq: Spending in Allah’s way, i.e. ownership of the leased asset to theIjarah tul Ashkhaas: A contract of lease spending on ones family, in preparation lessee at the end of the period of lease.providing services for an agreed upon for jihad, in caring for orphans and therental. Ijma’: Juristic consensus on a specific destitute. issue. It is recognized as one of the fourIjarah tul Manaafay: A contract of lease Infisakh: Cancellation of a contract sources of Shariah.executed for the transfer of the benefits without the will of the contracting parties,of an asset in exchange for an agreed Ijtihad: Juristic reasoning based on the i.e. based on the destruction of the saleupon price. Quran and the Sunnah. asset or the death of a party to the contract.Ijarah mawsoofah fi dhimma: A lease Iktinaz: Hoarding wealth by not payingagreed upon and based on a deposit, for zakat. Informational Asymmetry: A situationthe future use or delivery of an asset. where important relevant information is Illah: The attribute of an event requiring a known by some parties, but not by all.Ijarah muntahiya bi-tamlik: An Ijarah specific ruling in all cases possessingbased on the lessor’s undertaking to that attribute; analogies are drawn based In-kind: Where instead of cash, paymenttransfer the ownership of the leased on it to determine the permissibility or or capital contribution is made in theproperty to the lessee at the end of the prohibition of an act or transaction. form of tangible assets, goods orlease or by stages during the term of the services. Iman: Belief, faith; the acceptance andcontract. affirmation of Allah, His Books, His 91 © 2012-2015 Ethica Institute of Islamic Finance
  • 93. Interest: Any addition or increment Istihsan: Judicial preference for one contract completion; it is a pre-requisiteinvolved in an exchange between legal analogy over another with a view to to the bai muzayadah.contracting parties. public welfare. Joa’ala: A contract involving a reward forInvestment stage: This is the stage that Istijrar: A contract where the supplier a specific service or achievement.begins after the execution of the agency agrees to provide a particular product to Jadwala: Reschedulingagreement. It is the time period during the client on an ongoing basis for anwhich the bank has disbursed the money agreed price based on an agreed mode Jahiliyyah: Days of ignorance; particularfor the purchase of the asset from the of payment. reference to the pre-Islamic era.supplier but has not yet acquired Istisna: A transaction used for the Jihalah: Ignorance; inconclusiveness in apossession of it in order to sell it. purpose of acquiring an asset contract leading to gharar.Iqtisad: (Lit. moderation) Generally, a manufactured on order. It may beterm used to refer to the field of executed directly with the supplier or any Kafalah: Taking responsibility for debtEconomics. other party that undertakes to have the repayment; a standard Islamic financial asset manufactured. transaction where one undertakesIshara: A gesture made by a person’s responsibility for the debts of another.head or hand taking the place of speech Istisna Requestor: The party placing the Similar to, but not identical to hawalah.in expressing the will of two contracting manufacturing order.parties. Kafil: The party assuming responsibility Istisna Sukuk: Certificates representing for repayment of another’s debt in aIsraf: Immoderateness and wastefulness proportionate ownership of kafalah contract. manufactured goods.Istighlal: Investment Kali bil Kali: The exchange of debt for Ittifaq dhimni: A sale and re-purchase of debtIstihlak: Consumption the underlying asset for which the price is agreed between parties prior to 92 © 2012-2015 Ethica Institute of Islamic Finance
  • 94. Kharaj: The share of the produce from Khayaar e Taaeen: The purchaser’s Lien: A charge, claim, hypothecation oragricultural lands collected by the option to return an asset to the seller in mortgage, pledging an asset to acaliphate and added to the bayt al-mal. case it does not meet specifications as creditor. established at the time of the executionKhayaar: Option or power to annul or Liquidity Management: The of the contract.cancel a contract. management of an excess or shortage of Khilabah: Fraud in word or deed by a funds by financial institutions throughKhayaar e Aib: The option of return in party to the contract with the intention of inter-bank treasury transactions to meetcase of a defective asset. inducing the counter party into entering day to day business needs and liquidityKhayar e Majlis: The option to annul a into a contract. reserve requirements.contract possessed by both contracting Khiraj bi ad daman: Gain accompanies Local Currency Commodity Murabaha:parties. liability for loss; a basic principle and In the absence of an organized assetKhayaar e Rooyat: The option of refusal legal maxim – (see Al- Ghunm bil exchange market, the LCC Murabaha isbased on which the buyer may decline Ghurm). conducted for the management of fundsfrom accepting the goods of a sale as a at financial institutions with the help of Khiyanah: Deception by withholdingresult of non-conformity to local commodities exempt from value information, or breach of an agreement.specifications. added tax. KYC: (Abb.) Know-Your-Client; the dueKhayaar e Shart: An option in a sale’s Luqta: An item misplaced by its owner diligence checks carried out oncontract concluded at the time of signing and found by someone else. customers to determine their creditthe agreement giving one of the two worthiness. Madd: A dry measure equal to 1/4 sa`parties to the contract a right to cancel used in Madinah during the time of thethe sale within a stipulated time. Legal Risk: The risk of having to resort Prophet, a part of the traditional Islamic to litigation for redemption of claims measurement system. arising from a contract. LIBOR: London Inter-Bank Offered Rate 93 © 2012-2015 Ethica Institute of Islamic Finance
  • 95. Madhab: (lit. way of going) (pl. Makruh: (lit. detested); said of an act value of a Murabaha asset and themadhahib) A school of jurisprudence which one is rewarded for avoiding, but fluctuating rates of foreign exchange.characterized by differences in the not punished for committing. Minimum balance: A formula formethods by which Shariah sources are Mal: Wealth; anything of value that may determining the eligibility of profit aunderstood forming the basis for be possessed. partner or Musharakah account holderdifferences in the Shariah rulings inferred can receive on his invested amount.from them. The four well-known Mal-e-Mutaqawam: Items that are Essentially, it is the minimum amountmadhahib among Sunni Muslims are lawful to use or consume by Shariah; or that must remain invested at all times innamed after their founders, Hanafi, wealth considered commercially valuable an account over a period of time, for theMaliki, Shafi`i and Hanbali. by Shariah. account holder to be eligible to receiveMahr: The obligatory gift given by the profit. Manfa’ah: Usufruct or benefit derivedgroom to the bride, forming an essential from an asset. Miskin: A poor, indigent person. One ofcomponent of the marriage contract. the recipients of zakah. Maqasid al-Shariah: The establishmentMaisir: 1)The act of gambling or playing of goals and objectives by Muslim jurists Mithli: (Fungible goods) Goods that cangames of chance with the intention of in a way that assists the investigation of be returned in kind, i.e. gold for gold,making an easy profit; 2)the element of new cases and the organization of prior silver for silver, wheat for wheat and thespeculation in a contract; 3)chance or rulings. like.uncertainty with respect to an outcome. Market risk: The current and future Moral Hazard: Risk of a party actingMajor maintenance: The fulfillment of all volatility of the market value of specific either in bad faith, or underperformingthe requirements that ensure that the assets to be purchased and delivered due to negligence and indifference,leased asset provides intended use. over a specific period of time such as the brought on by insulation from risk commodity price of a Salam asset, the market value of a Sukuk, the market Mu’amalah: A financial transaction Mu’ata: See hand-to-hand sale 94 © 2012-2015 Ethica Institute of Islamic Finance
  • 96. Mubah: Object that is lawful; an item of the harvest from the fruit orchard he Murabaha facility agreement: Anpermissible to use or trade. tends. agreement including the approval of the credit facility extended to the client, theMudarabah: A Mudarabah is a business Mughba: Favoritism terms and the conditions of the contract,partnership between two or more parties, Muwaada/ Mua’hida: A bilateral the specification of the Murabaha assetwhere, typically, one of the parties promise and the client’s promise to purchase.supplies the capital for the business, andthe other provides the investment Mujtahid: A highly qualified fiqh Musawamah: A general sale in whichmanagement expertise. Also known as specialist who engages in independent the price of the commodity to be tradedMuqaradah or Qirad. juristic reasoning. is bargained between the buyer and the seller and where no reference is made toMudarib: Partner responsible for Mukhabarah: An agreement between a the cost of acquisition of the sale assetmanagement in a Mudarabah, also landowner and a farmer, similar to a or the profit to be earned from it.defined as an investment manager. muzara’ah the only difference being that in a muzara`ah the seeds are provided by Musaqah/Musaqat: A type ofMudarabah Sukuk: Certificates the landowner whereas in a mukhabarah partnership in which the owner of anrepresenting the proportionate ownership they are supplied by the farmer. orchard agrees to share a portion of theof capital for specific projects produce with a farmer, in exchange forundertaken by an entrepreneur. Mumtaza: Excellent the farmer’s irrigation of the land.Mufti: A highly qualified jurisconsult who Muqassa: Setting off two debts at an Musharakah: A business partnership setissues fatawa or legal verdicts, in agreed exchange rate up to make profit, where all partnersresponse to issues posed to him. contribute capital and effort to help the Murabaha: A contract in which the costMugharasa: An agricultural contract business run. of acquiring the asset and the profit to besimilar to muzara`ah in which a land earned from it are disclosed to the client Musharik: A partner in a Musharakahowner agrees to grant the farmer a share or the buyer. 95 © 2012-2015 Ethica Institute of Islamic Finance
  • 97. Mutual Insurance: A form of insurance Muzara’ah: Share-cropping; an Numeraire: A basic standard by whichwhere a group of people exposed to a agreement where one party agrees to comparative values are measured, or asimilar risk, by mutual consent make allow a portion of his land to be farmed unit of account.voluntary contributions to a pool of funds by another in exchange for a part of its Offer and acceptance: The actualto share that risk and provide one produce. execution of a sale, where one of theanother with indemnity against loss. Najash: The practice of deceiving a contracting parties makes an offer to sellMuwakkil: The principal in an agency potential buyer during pre-sale dialogue, or purchase an asset and the otheragreement. through insincere bidding by a third party accepts it. (a party expressing insincere desire toMuzabana: Presently the term is used to Operational Risk: The risk of direct or purchase the commodity at a higherrefer to a sale where the volume or indirect loss resulting from inadequate or price) or false claims on the seller’s part.weight of the sale commodity is failed internal processes, people andunspecified. In the earlier Muslim era it Nasi’a: Delay. systems or from external events as wellwas a transaction where the owner of as non-compliance to Shariah Negligence: Loss resulting from thefruit trees agreed to sell his fruit for an regulations or a neglect of fiduciary violation of the conditions of a contract.estimated equivalent amount of dried responsibilities.fruit, i.e. grapes for raisins. Muzabana Nisab: The exemption limit for the Parallel Istisna: Another contract ofwas common practice amongst the payment of zakat. A Muslim who Istisna executed alongside the originalpeople of Madinah and was prohibited possesses wealth below the nisab is Istisna. The manufacturer in the originalby the Prophet owed to the element of exempted from paying zakat, whereas a contract serves as the Istisna requestorgharar involved. (contractual uncertainty Muslim who possesses wealth at or in the parallel contract and profits from aleading to dispute) above the nisab is obligated to pay difference in price. zakat. Periodic maintenance: Regular maintenance of the leased asset. 96 © 2012-2015 Ethica Institute of Islamic Finance
  • 98. Permanent Musharakah: Also referred established for the purpose of providing damage to property due to a fire thatto as an on-going Musharakah, a indemnity against loss. may or may not occur.partnership where there is no intention of Price risk: The risk arising from the Qabda: (lit. to seize) Take possession ofterminating or concluding the business fluctuating price of goods in the market, the exchange commodity in an exchangeventure at any point thereby affecting the value of the goods transaction.Physical Possession: The actual or of the contract. Qardh: Loancorporal possession of an asset and the Private equity: Shares in a business thatability to benefit from it. Qardh e Hasana: A good-will loan are not for sale to the general public but against which interest is not charged.Pledge: A form of security that is taken are sold exclusively through invitation to The debtor is required to return thefrom the client and maintained by the certain parties. principal amount in the future withoutfinancial institution. It may be in the form Project finance: The financing of large any increase.of an asset or cash. infrastructure and industrial projects Qimar: An agreement where thePLS: Profit and Loss Sharing; a term based on a comprehensive financial acquisition of an asset is contingentused to describe any one of several structure for operation. upon the occurrence of an uncertainfinancial schemes based on the principle Promise: An undertaking by the client to event in the future.of interest-free lending, characterized by enter into a contract with the financialthe use of Musharakah and Mudarabah Qirad: Alternative name for Mudarabah institution for the sale or lease of anas financing instruments. or Muqaradah asset in the future.Possession: The ownership of all the Qiyas: Drawing a comparison; the Provisional profit: The profit earned byrisks and rewards associated with an derivation of law through analogy from the investor for the period of time hisasset. an existing law if the basis (‘illah) for both funds remained invested. is the same; also one of the sourcesPremium: The amount of contribution Pure Risk: The risk that involves the Shariah.made by the insured to the pool of funds possibility of loss or no loss. For instance 97 © 2012-2015 Ethica Institute of Islamic Finance
  • 99. Qubul: Acceptance, in a contract. Restricted Mudarabah: A Mudarabah in commodity is postponed, is which the mudarib has to observe characteristic of rib al-buyu.Quran: The Holy Book of the Muslims. certain restrictions regarding how the Riba al-Fadl: The same as riba al buyuRa’s al-mal: Capital; the money or business may be run. Typically, thesecapital which an investor (rabb al-mal) restrictions may relate to sector, activity, Riba an nassiya: The predeterminedinvests in a profit-seeking venture and/or region in which the business may excess repayable on the principal be operated (various other restrictions extended as a loanRabb al Maal: The investor or the owner also may be inserted).of capital in a Mudarabah contract Riba al Quran: The same as riba an Re-Takaful: The re-Takaful is a new nassiyaRahn: Collateral; a pledge or the Takaful arrangement consistent withtransaction which governs such a Takaful principles and guidelines Ribawi: Goods subject to Shariah rulingspledge. provided by the Shariah board. It is with respect to riba in the event of their enacted in the event that the funds in the saleRate of return risk: The risk that a original Takaful are not sufficient to meetfinancial institution is exposed to as a Risk: An exposure to the likelihood of the needs of its members.result of an undetermined or variable loss, where this loss takes many formsamount of return on an investment. Riba: Any amount that is charged in depending on the kind of risk involved. It excess which is not in exchange for a is the possibility that the outcome of anReceiveable: An asset or cash that a action or event could bring an adverse due consideration. Conventionally it isbusiness is due to receive as a result of a impact resulting in a direct loss of referred to as interest and is prohibited inprior transaction. earning and capital or the imposition of Islam. constraints in the bank’s abilities to meet Riba al-buyu: The riba of exchange its business objectives. surplus. Any barter transaction where like commodities are exchanged in unequal Risk management: The process of measure, or the delivery of one evaluating and responding to the exposure facing an organization or an 98 © 2012-2015 Ethica Institute of Islamic Finance
  • 100. individual. It is a structured and Sak: (pl. Sukuk) Certificate of equal value in the future based on an advancedisciplined approach employing people, representing an undivided share in the payment of price.processes, and technology for managing ownership of a tangible asset, usufruct Sarf: Currency exchangeuncertainties faced by an organization. or service. Securitization: The process of issuingRishwa: Bribery Salaf: A loan that draws no profit for the certificates of ownership against an creditor. Salaf is also referred to asRoll-over: A roll-over is the provision of asset, an investment good or a business. Salam where the price of the subjectan extension in return for an increase in matter is paid in full at the time of the Shahadah: (lit. witnessing); to testify thatthe original payable amount. contract’s execution while the delivery of there is no god but Allah and ProphetRukn: (lit. pillar) Fundamental of a the subject matter is deferred to a future Muhammad is the Messenger of Allah bycontract. date. declaring, "Ashhadu an la ilaha illallah wa ashhadu anna Muhammadan abduhu waSa’: A dry measure in use in Madinah Salam: A sale where the price of the rasuluhu" (i.e. "I testify that there is noduring the time of the Prophet used to subject matter is paid in full at the time of god but Allah and that Muhammad is theweigh dates, barley and other similar the contract’s execution while the Messenger of Allah”).items. delivery of the subject matter is deferred to a future date. Share: A form of equity ownershipSadaqah: Voluntary charitable donations representing claims on earnings and Sale contract: The commitment to tradeSahih: (lit. sound, correct) 1) In reference assets. a commodity in a specific manner for ato a valid contract, 2) A hadith of the consideration in cash or kind, evidenced Shart: (pl. shurut) A necessary conditionhighest level of authentication. by the exchange of an offer and or stipulation, that must exist to ensure acceptance. the validity of a transaction. Salam Sukuk: Certificates representing Shart e Jazai: The Shart e Jazai is a financial claims arising from the penalty established at the time of the purchase of commodities to be delivered execution of the Istisna contract which 99 © 2012-2015 Ethica Institute of Islamic Finance
  • 101. allows for a reduction in the price of the Shirkah tul Aa’maal: A partnership means of investment in a joint businessmanufactured goods in the event of a based on the pooled provision of venture.delay in their delivery. services. Shirkat tul-Milk: Primarily a ‘partnershipShariah: Islamic law Sharikah al-Wujooh: A ‘partnership of of joint ownership’ which may come goodwill’ where the subject matter is about deliberately or involuntarily.Shariah Advisory Board: A panel of bought on credit from the market on theShariah scholars appointed by Islamic Shuf’ah: The right of pre-emption in a basis of a relationship of goodwill withfinancial institutions that supervises all sale transaction, for example, a real the supplier, with the aim of reselling at atransactions and ensures their Shariah estate sale where one party possesses profit to be shared.compliance. It’s role also includes the right to compel the other party to sellconducting regular and annual audits at Shirkat al-‘Aqd: A ‘business partnership’ him all or part of the real estate.IFI’s. established through a deliberate Shurut: see shart contract.Shariah-compliant: Permitted by the Sigha: Formulation of the contract, oftenShariah Shirkat al-Amwaal: The commonest referred to as ‘offer and acceptance’ type of Shirkah tul Aqd which refers to aShariah non-compliance risk: The risk partnership between two or more parties Silent partner: A partner in the businessarising from non-compliance to the for the purpose of earning profit by who only contributes capital but takes nostandards of Islamic law. means of investment in a joint business part in management of the business; alsoSharik: Partner venture. Also known as Shirkah tul referred to as the sleeping partner. ‘Inaan.Sharikah: The same as Shirkah Simple Interest: The excess or Shirkat al Inaan: It is the commonest increment that is charged over andShirkah: (lit. sharing); refers to different type of Shirkah tul Aqd and refers to a above the initial investment.kinds of business partnerships based on partnership between two or more partiessharing, of which Musharakah is one. for the purpose of earning profit by Sleeping partner: A partner in the business who only contributes capital 100 © 2012-2015 Ethica Institute of Islamic Finance
  • 102. but takes no part in management of the Standard Ijarah: A contract of lease Islamic debt assignment transactionbusiness; also called silent partner. executed for the provision of usufruct for referred to as hawalah. a fixed term at the end of which theSole proprietorship: A business fully Sukuk: Certificates of equal value ownership of the leased asset is notowned and managed by one person representing undivided shares in transferred to the lessee. ownership of tangible assets, usufructSpecific agency agreement: An Statement: A phrase that indicates the and services.agreement based on which the agent is intention of the parties to effectuate theunder restriction to purchase a specified Sukuk al Ijarah: Certificates contractasset from a specified supplier only. representing the ownership of leased Stock Company: A company in which assets, the ownership of the usufruct ofSpeculative Risk: The risk representing the capital is partitioned into equal units leased assets or the ownership of thepotential gain or profit, i.e. the risk of tradable shares and each rights to receive benefits from services.involved in a new business venture. shareholder’s liability is limited to his Sukuk al Mudarabah: CertificatesSPV: (Abb. Special Purpose Vehicle); an share in the capital; it also represents a representing the proportionate ownershipindependent entity created based on the form of partnership. of capital for specific projectsMudarabah contract for the purpose of Sublease: The lease of an already leased undertaken by an entrepreneur.generating funds by acquiring assets asset to a third party with the primaryfrom a company and issuing certificates Sukuk al Murabaha: Certificates lessor’s consent.of proportionate ownership against them. representing the investor’s shares in Suftaja: A debt transfer transaction, receivables from the purchaser of assetsSpecific commodities: These types of practiced in Muslim societies in the based on a deferred sale.commodities possess specific attributes Abbasid period where a creditor Xthat make them different from each other. Sukuk al Musharakah: Certificates authorized his agent or his debtor, to payOne may not be replaced by the other for representing proportionate ownership of a given amount to Z whom X owed ainstance livestock, precious stones. a Musharakah asset, be it a partnership debt. Suftajah is a special case of the 101 © 2012-2015 Ethica Institute of Islamic Finance
  • 103. for new projects or a partnership for the Takaful: A Shariah-compliant system of Time-sharing leasing contract: Theexpansion of existing projects. insurance based on the principle of lease of a single asset to multiple lessees mutual co-operation. The company’s role by means of different leasing contractsSukuk al-Salam: Certificates is limited to managing operations and for different time periods, with none ofrepresenting financial claims arising from investing contributions. them overlapping with one another.the purchase of commodities to bedelivered in the future based on an Takaful Operator: The manager of Trade finance: The financing ofadvance payment of price. Takaful funds international trade transactions, which involves satisfying the needs ofSunnah: The personal example Tawarruq: A mode of financing, similar importers and/or exporters.comprising words and deeds of the to a Murabaha transaction, where theProphet Muhammad (PBUH) commodity sold is not required by the Transit period risk: The risk that is client but is bought on a deferred posed to the bank for the time periodTa’awun: Co-operation payment basis and sold to a third party that ensues after having assumedTabburro: Gift or contribution for a lesser price, thereby becoming a possession of Murabaha goods from the means of liquidity generation. supplier and before they are sold to theTabzir: Immoderate/ wasteful spending client.on items prohibited by the Shariah. See Tawidh: Penalty agreed upon byalso Israf. contracting parties as compensation to Treasury Operations Department: The be claimed by the creditor in case of section of the financial institution thatTadlis al-ayb: Refers to the activity of a default on the debtor’s part deals with the maintenance of funds andseller concealing the defects of goods. capital reserves and their movement in Thaman: Price and out of the bank. Thaman al-bai: Sale price Two-tier business model: Where one Tijarah: Trade set of capital investments enables a stream of follow-on investments in multiple Shariah compliant ventures. 102 © 2012-2015 Ethica Institute of Islamic Finance
  • 104. Ujrah: Financial payment for the Urf: Market norm deposits or any part that remainsutilization of services outstanding in the accounts of Ushr: Islamic tax on agricultural produce depositors. The depositors are notUlema: Muslim scholars. entitled to any of the profits but the Usufruct: The benefit received from an depository may grant them a portion ofUmmah: The Muslim community. asset in a contract of lease. the returns at their own discretion.Unconditional agency agreement: An Usul al-Fiqh: Sources of law. Wakalah: An agency contract whichagency agreement where the principal Usury: An exorbitant amount of interest usually includes in its terms a fee for thedoes not stipulate any conditions or or any rate of interest or the excess paid agent.restrictions upon the agent’s in exchange for a loan granted forperformance of duties. The agent is Wakalah tul Istismaar: An investment personal use.allowed to exercise his own discretion management contractwith reference to the assigned task Voluntary contract: A contract based ontaking into consideration the market Wakalah Muqayyada: The same as the the mutual co-operation of contractingnorm. conditional agency agreement parties for which remuneration is neither granted nor received. Wakalah Mutluqqa: The same as theUnrestricted Mudarabah: A Mudarabahin which the mudarib has a free hand un-conditional agency agreement Wa’da: Promise; an undertakingregarding where and how to invest the regarding future actions. Wakalah tul Ujrah: Agency executed forcapital of the business. fee Wadi`a: Safe-keeping deposit.Uqud al’mu’wadat: Exchange contracts Wakeel: Agent Wadia yad dhaman: GuaranteeingUqud al-ishtirak: Partnership contracts goods or deposits granted for Wakeel bil Bai: The agent assigned to safekeeping. As wadia is a trust, the sellUqud al-tabbaruat: Charitable depository becomes the guarantor forcontracts. repayment on demand, of all the 103 © 2012-2015 Ethica Institute of Islamic Finance
  • 105. Wakeel bil Khasooma: The agent Working Partner: A partner who is community. Zakat is obligatory for allassigned to deal with common disputes responsible for the running of the Muslims who have saved the equivalent business of 85g of gold at the time when theWakeel bil Qabz: The agent assigned to annual Zakat payment is due.take possession of debt Wujuh: (Lit.face) Interpreted in financial transactions as goodwill or credit for Zakat ul Maadan: Zakat on mineralsWakeel bi’ Shara: The agent assigned to partnershippurchase Zakat ul Hubub: Zakat on grain / corn Zakat: A tax prescribed by Islam on allWakeel bi Taqazidain: The agent Zakat ul Tijarah: Zakat on profits from persons having wealth above anassigned to retrieve debt trade exemption limit at a rate fixed by theWaqf: A legal entity that has the potential Shariah. Its objective is to collect a Zakatur Rikaz: Zakah on treasure/to own, purchase and sell in addition to portion of wealth of the affluent members precious stones.grant and receive gifts. of society and distribute it amongst the underprivileged. It may be collected by Zar’: seed; crop to be sownWasiyah: Will, bequest. A Muslim’s the state or distributed by the individualtestimony in which he details the manner himself.in which his wealth is to be disposed ofafter his death. Zakat al-Fitr: A small obligatory tax imposed on every Muslim who has theWeightages: Ratios calculated for the means for himself and his dependants. Itappropriate allocation of profit and is paid once annually at the end ofassigned to investment categories at Ramadan before Eid al-Fitr.financial institutions. They are subject tochange with changes in market trend; Zakat Al-Maal: The Muslims wealth tax;the longer the term of deposit, the a Muslim must pay 2.5% of his yearlygreater the weightage assigned to it. savings above a certain amount to the less fortunate members of the 104 © 2012-2015 Ethica Institute of Islamic Finance
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