GLOSSARYDefinition of Major Islamic Finance InstrumentsAjr = commission or fee charged for servicesAmanah = reliability, t...
The principle governing open auctions, where the asset is awarded to the highest bidder.Bai Wafa = sale and buy-backThe sa...
result of the gamble.The prohibition on gharar is often used as the grounds for criticism of conventional financialpractic...
A gift voluntarily donated in return for a loan provided or a benefit obtained.Hila = forbidden structureA transaction whi...
A contract of acquisition of goods by specification or order, where the price is paid in advance, orprogressively in accor...
Alternative spellings = Muamalah, Muamalat, MuamalahThe lease of land or fruit trees for money, or for a share of the crop...
A contract in which the owner of agricultural land shares its produce with another person in returnfor his services in irr...
Alternative spelling = Qard HassanA loan contract between two parties for social welfare or for short-term bridging financ...
Riba al Diyun = usury of debtAlso known as usury of delay (riba al nasia).The usury of debt was an established practice am...
the compliance of the products and services with the Islamic lawShirkah = partnershipA contract between two or more person...
deferred payment basis and then immediately resells it for cash to a third party. In this way, theclient can obtain cash w...
•   Zakat al Maal is an annual levy on the wealth of a Muslim above a certain level. The rate    paid differs according to...
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Glossary islamic finance intruments

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Glossary islamic finance intruments

  1. 1. GLOSSARYDefinition of Major Islamic Finance InstrumentsAjr = commission or fee charged for servicesAmanah = reliability, trustworthiness, loyalty, honestyAlternative spelling = AmanaAn important value of Islamic society in mutual dealings. It also refers to deposits in trust, wherea person may hold property in trust for another.Bai al Arboon = deposit-secured sale ↑A sale agreement in which a security deposit is provided in advance as part payment towards theprice of the commodity. The deposit is forfeited if the buyer does not meet his obligation.Bai Bithaman Ajil = deferred payment saleAlso known as Bai Muajjal.The sale of goods on a deferred payment basis. Equipment or goods requested by the client arebought by the bank, which subsequently sells the goods to the client for an agreed price, includinga mark-up (profit) for the bank. The client may pay by installments within a pre-agreed period, orin a lump sum.This sale works in a similar way to a Murabahah contract, but with deferred payment.Bai Dayn = debt financingThe provision of financial resources required for production, commerce and services through thesale and purchase of trade documents and papers. Bai Dayn is a short-term facility with a year orless maturity. Only documents evidencing debts arising from bona fide commercial transactionscan be traded.Bai Inah = sale and buy-backThe sale and buy-back of an asset for a higher price than that for which the seller originally soldit.A seller immediately buys back the asset he has sold on a deferred payment basis at a price higherthan the original price. This can be seen as a loan in the form of a sale.Bai Istijrar = supply saleWhen a supplier agrees to deliver to a client on a regular basis at an agreed price and mode ofpayment.Bai Muajjal = see Bai Bithaman Ajil aboveBai Muzayadah = open bidding trading
  2. 2. The principle governing open auctions, where the asset is awarded to the highest bidder.Bai Wafa = sale and buy-backThe sale and buy-back of an asset within a set time, when the original buyer agrees to the originalsellers repurchase.Baitul Mal = treasuryBatil = null and voidDarura = necessity ↑In an emergency, Muslims may disregard aspects of Shariah laws in order to save their lives, or topreserve the Islamic community.Dirham = unit of currencyA unit of currency, usually a silver coin, used in the past in some Muslim countries and still usedin some Muslim countries today, for example Morocco and the UAE.Fard al Kifai = socially obligatory duties ↑Alternative spelling = Fard KifayaA collective duty of Muslims. The performance of these duties (for example funeral prayers) bysome Muslims absolves the rest from discharging them.This term covers functions which the community fails to or cannot perform and hence are takenover by the state, such as the provision of utilities, or the building of roads, bridges and canals.Fasid = unsound or unviableA forbidden term in a contract, which consequently renders the contract invalid.Fatwa = religious decreeAlternative spelling = FatwahFiqh = Islamic jurisprudenceThe science of the Shariah. An important source of Islamic economics.Faqih = Shariah juristPlural = FuqahaGharar = uncertainty ↑One of three fundamental prohibitions in Islamic finance (the other two being riba and maysir).Gharar is a sophisticated concept that covers certain types of haram uncertainty in a contract. It isan exchange in which one or more parties stand to be deceived through ignorance of an essentialelement of the exchange. Gambling is a form of gharar because the gambler is ignorant of the
  3. 3. result of the gamble.The prohibition on gharar is often used as the grounds for criticism of conventional financialpractices such as short selling, speculation and derivatives.Hadith = the Prophets sayings and commentary on the Quran ↑Hajj = pilgrimage to MeccaThere is a duty on every Muslim who is financially and physically able to carry out Hajj, the fifthpillar of Islam, at least once in his lifetime. The pilgrimage takes place in the week from the 8thuntil the 13th day of the 12th Islamic month of Dhul Hijjah.Hak Tamalluk = ownership rightA tradable asset in the form of ownership rights.Halal = lawful, permissibleThe concept of halal has spiritual overtones. In Islam there are activities, professions, contractsand transactions that are explicitly prohibited (haram) by the Quran or the Quran. All otheractivities, professions, contracts and transactions are halal.This concept differentiates Islamic economics from conventional economics. In western financeall activities are judged on economic utility. In Islamic economics, spiritual and moral factors arealso involved – an activity may be economically sound but may not be allowed in Islamic societyif it is not forbidden by the Shariah.Hanbali = Islamic school of lawIslamic school of law founded by Imam Ahmad Ibn Hanbal. Followers of this school are knownas Hanbalis.Hanifite = Islamic school of lawOne of the major Islamic school of law, founded by Imam Abu Hanifa. Followers of this schoolare known as Hanafis.Haram = unlawful, forbiddenActivities, professions, contracts and transactions that are explicitly prohibited by the Quran orthe Sunnah. See halal above.Hawala = bill of exchange, remittanceAlternative spelling = HiwalaA contract which allows a debtor to transfer his debt obligation to a third party who owes theformer a debt. The mechanism of Hawala is used for settling international accounts by booktransfers, thus obviating the need for a physical transfer of cash.Hibah = gift
  4. 4. A gift voluntarily donated in return for a loan provided or a benefit obtained.Hila = forbidden structureA transaction which appears permissible, but is in fact structured in an un-Islamic way.Ibra = rebate ↑When a person withdraws the right to collect payment from a borrower.Ijarah = leasingAlternative spelling = IjaraA lease agreement whereby a bank or financier buys an item for a customer and then leases it tohim over a specific period, thus earning profits for the bank by charging rental.The duration of the lease and the fee are set in advance. During the period of the lease, the assetremains in the ownership of the lessor (the bank), but the lessee has the right to use it. After theexpiry of the lease agreement, this right reverts back to the lessor.This is a classic Islamic financial product.Ijarah Thumma Bai = leasing to purchaseThe principle governing an Ijarah contract at the end of the lease period, when the lessee buys theasset for an agreed price through a purchase contract.Ijarah wa Iqtina = buy-back leasingA hire and purchase mode of financing where an Islamic bank finances equipment, a building orother facility for the client against an agreed rental, together with an undertaking from the clientto repurchase the facility at the end of the contract. The rental and the purchase price are fixed sothat the bank gets back its principal sum along with some predetermined profit.Ijtehad = effort, exertion, industryA faqhis endeavor to formulate a rule on the basis of evidence found in the Islamic sources.Inan = financial partnershipIstijrar = recurring saleDifferent quantities are bought from a single seller over a period of time. Sometimes it is alsoreferred to transactions whereby seller delivers different quantities in different installments tocomplete the full purchase. Some divergence among the scholars in terms of the timing of fixationand pricing.Istisnah = advance purchase of goods or buildingsAlternative spellings = Istisna, Istisnaa, Istisnaah
  5. 5. A contract of acquisition of goods by specification or order, where the price is paid in advance, orprogressively in accordance with the progress of a job. For example, to purchase a yet to beconstructed house, payments would be made to the builder according to the stage of workcompleted.This type of financing, along with Salam, is used as a purchasing mechanism, and Murabahahand Bai Bithaman Ajil are for financing sales.Ittifaq Dhimni = pre-agreed contractThe sale and repurchase of an underlying asset. Prices are agreed in advance, prior to the contract,to allow the bidding process to take place.Jualal = stipulated price for performing a service ↑Alternative spelling = JualaApplied by some in Islamic banking. Bank charges and commission have been interpreted to bejualal by the jurists and thus considered lawful.Jahl = ignorance (of morality or divinity)Kafalah = guarantee ↑Shariah principle governing guarantees. It applies to a debt transaction in the event of a debtorfailing to pay.Loan (with service charge) ↑Some Islamic banks give loans with service charges. The Council of the Islamic Fiqh Academyhas resolved that it is permitted to charge a fee for loan-related services offered by an Islamicbank, provided that the fee relates to service-related expenses.The service charge can only be calculated accurately after all administrative expenditure has beenincurred (at the end of the year). However it is permissible to levy an approximate charge on theclient, and then reimburse/claim the difference when the actual expenses are known.Maaliki = Islamic school of law ↑Islamic school of law founded by Imam Malik Ibn Anas. Followers of this school are known asMaalikis.Mansil = Shariah compliant property mortgage in the UKMaysir = gamblingOne of three fundamental prohibitions in Islamic finance (the other two being riba and gharar).The prohibition on maysir is often used as grounds for criticism of conventional financialpractices such as speculation, conventional insurance and derivatives.Muamalat = economic transaction
  6. 6. Alternative spellings = Muamalah, Muamalat, MuamalahThe lease of land or fruit trees for money, or for a share of the crop.Mudarabah = trust financing, profit sharingAlternative spellings = Mudaraba, Modaraba, ModarabahAn investment partnership, whereby the investor (the rab al maal ) provides capital to theentrepreneur (the mudarib ) in order to undertake a business or investment activity. While profitsare shared on a pre-agreed ratio, losses are born by the investor alone. The mudarib loses only hisshare of the expected income.The investor has no right to interfere in the management of the business, but he can specifyconditions that would ensure better management of his money. In this way Mudarabah issometimes referred to as a sleeping partnership.A joint Mudarabah can exist between investors and a bank on a continuing basis. The investorskeep their funds in a special fund and share the profits before the liquidation of those financingoperations that have not yet reached the stage of final settlement. Many Islamic investment fundsoperate on the basis of joint Mudarabah.Mudarib = entrepreneur in a Mudarabah contractThe entrepreneur or investment manager in a Mudarabah who puts the investors funds in aproject or portfolio in exchange for a share of the profits. A Mudarabah is similar to a diversifiedpool of assets held in a discretionary asset management portfolio.Mufawadah = equal, unlimited partnershipMurabahah = cost-plus financingAlternative spellings = Morabaha, Morabahah, MurabahaA form of credit that enables customers to make a purchase without having to take out an interest-bearing loan. The bank buys an item and sells it to the customer on a deferred basis. The priceincludes a profit margin agreed by both parties. Repayment, usually in installments, is specified inthe contract.The legality of this financing technique has been questioned because of its similarity to riba.However, the modern Murabahah has become the most popular financing technique amongIslamic banks, used widely for consumer finance, real estate, the purchase of machinery and forfinancing short-term trade.Musaqah = agricultural contract
  7. 7. A contract in which the owner of agricultural land shares its produce with another person in returnfor his services in irrigating the garden.Musharakah = joint venture, profit and loss sharingAlternative spelling = MusharakaAn investment partnership in which all partners are entitled to a share in the profits of a project ina mutually agreed ratio. L osses are shared in proportion to the amount invested. All partners to aMusharakah contribute funds and have the right to exercise executive powers in that project,similar to a conventional partnership structure and the holding of voting stock in a limitedcompany.This equity financing arrangement is widely regarded as the purest form of Islamic financing.The two main forms of Musharakah are:Permanent Musharakah: an Islamic bank participates in the equity of a project and receives ashare of the profit on a pro rata basis. The length of contract is unspecified, making it suitable forfinancing projects where funds are committed over a long period.Diminishing Musharakah: this allows equity participation and sharing of profits on a pro ratabasis, and provides a method through which the bank keeps on reducing its equity in the project,ultimately transferring ownership of the asset to the participants. The contract provides forpayment over and above the banks share in the profit for the equity held by the bank.Simultaneously the entrepreneur purchases some of the banks equity, progressively reducing ituntil the bank has no equity and thus ceases to be a partner.Muzaraa = agricultural contractA contract in which one person works the land of another person in return for a share in theproduce of the land.Nisab = exemption limit ↑Exemption limit for the payment of zakat, which differs for different types of wealth.Non Performing Financings (NPF’s) ↑The Islamic banking equivalent to non-performing-loans. NPF’s are based on a profit sharingbasis and not interest as are their conventional counterparts.Qard = loan ↑Qard Hasan = benevolent loan
  8. 8. Alternative spelling = Qard HassanA loan contract between two parties for social welfare or for short-term bridging finance.Repayment is for the same amount as the amount borrowed. The borrower can pay more than theamount borrowed so long as it is not stated by contract.Most Islamic banks provide interest-free loans to customers who are in need. The Islamic view ofloans (qard) is that there is a moral duty to give them to borrowers free of charge, as a personseeks a loan only if he is in need of it. Some Islamic banks give interest-free loans only to theholders of investment accounts with them; some extend them to all bank clients; some restrictthem to needy students and other economically weaker sections of society; and some provideinterest-free loans to small producers, farmers and entrepreneurs who cannot get finance fromother sources.Qimer = gamblingAn agreement in which possession of a property is dependant upon the occurrence of an uncertainevent. By implication it applies to those agreements in which there is a definite loss for one partyand a gain for the other, without specifying which party will gain and which party will lose.Quran = the holy scriptures of IslamRab al maal = the investor in a Mudarabah contract ↑Alternative spellings = Rab al malRahn = collateralAn arrangement whereby a valuable asset is placed as collateral for a debt. The collateral may bedisposed of in the event of a default.Riba = interestAn increase, addition, unjust return, or advantage obtained by the lender as a condition of a loan.Any risk-free or “guaranteed” rate of return on a loan or investment is riba. Riba in all its forms isprohibited in Islam.In conventional terms, riba and “interest” are used interchangeably, although the legal notionextends beyond mere interest.Riba al Buyu = usury of tradeAlso known as riba al fadl.A sale transaction in which a commodity is exchanged for an unequal amount of the samecommodity and delivery is delayed.To avoid riba al buyu, the exchange of commodities from both sides must be equal and instant.Riba al buyu was prohibited by the prophet Mohammad to forestall riba (interest) from creepinginto the economy.
  9. 9. Riba al Diyun = usury of debtAlso known as usury of delay (riba al nasia).The usury of debt was an established practice amongst Arabs during the pre-Islamic period. It canoccur as an excess increment on top of the principal, which is incorporated as an obligatorycondition of the giving of a loan.Alternatively, an excess amount is imposed on top of the principal if the borrower fails to repayon the due date. More time is permitted for repayment in return for an additional amount. If theborrower fails to pay again, a further excess amount is imposed, etc.Ruqa = payment orderA payment order to draw money from the bank; used in the early Muslim period.Sadaqah = voluntary charitable giving ↑Alternative spellings = SadaqatSalam = advance purchaseAlternative spellings = Al Salam, Bai al Salam, Bai SalamAdvance payment for goods which are to be delivered at a specified future date. Under normalcircumstances, a sale cannot be effected unless the goods are in existence at the time of thebargain. However, this type of sale is an exception, provided the goods are defined and the date ofdelivery is fixed. The objects of sale must be tangible goods that can be defined as to quantity,quality and workmanship.This mode of financing is often applied in the agricultural sector, where the bank advances moneyfor various inputs to receive a share in the crop, which it then sells.Samad = Shariah compliant property mortgage in the USAShafie = Islamic school of lawIslamic school of law founded by Abu Abdullah Ahmad bin Idris or Imam Shafie. Followers ofthis school are known as Shafies.Shariah = Islamic jurisprudenceAlternative spellings = Sharia, Sharia, Shariah, Syariah, Syaria, Syariah, SyariaIslamic cannon law derived from three sources: the Quran, the Hadith and the SunnahA “Shariah compliant” product meets the requirements of Islamic law.A “Shariah board” is the committee of Islamic scholars available to an Islamic financialinstitution for guidance and supervision in the development of Shariah compliant products.A “Shariah advisor is an independent Islamic trained scholar that advises Islamic institutions on
  10. 10. the compliance of the products and services with the Islamic lawShirkah = partnershipA contract between two or more persons who launch a business or financial enterprise to make aprofit.Suftajah = bill of exchangeAlternative spellings = Suftaja, SuftajalA bill of exchange between three parties (the payor, the payee and the transmitter), which wasused for the delegation of credit during the Muslim period, especially the Abbasides period. It wasused to collect taxes, disburse government dues, transfer funds by merchants and was commonlyused by traveling merchants. Suftajahs could be payable on a future fixed date or immediately.It differs from the modern bill of exchange in that a sum of money transferred by suftajah had tokeep its identity and payment had to be made in the same currency. Also it usually involved threepersons (A pays a certain sum of money to B for agreeing to give an order to C to pay back to A).Finally, a suftajah could be endorsed. The Arabs had been using endorsements (hawala) since thedays of the Prophet Muhammad.Sukuk = Islamic bondAn asset-backed bond which is structured in accordance with Shariah and may be traded in themarket.A Sukuk represents proportionate beneficial ownership in the underlying asset, which will beleased to the client to yield the return on the Sukuk.Sunnah = practice and traditions of the Prophet MuhammadTabarru = Takaful donation ↑A contract where a participant agrees to donate a pre-determined percentage of his contribution(to a Takaful fund) to provide assistance to fellow participants. In this way he fills his obligationof joint guarantee and mutual help should another participant suffer a loss. This concepteliminates the element of gharar from the Takaful contract.Takaful = Islamic insuranceBased on the principle of mutual assistance, Takaful provides mutual protection of assets andproperty and offers joint risk-sharing in the event of a loss by one of the participants. Takaful issimilar to mutual insurance in that members are the insurers as well as the insured.Conventional insurance is prohibited in Islam because its dealings contain several haramelements, such as gharar and riba.Tawarruq = reverse MurabahahIn personal financing, a client with a genuine need buys an item on credit from the bank on a
  11. 11. deferred payment basis and then immediately resells it for cash to a third party. In this way, theclient can obtain cash without taking out an interest-based loan.Ujrah = fee ↑The financial charge for using services, or manfaat (wages, allowance, commission, etc).Wadiah = safekeeping ↑Alternative spellings = Wadia, Al Wadia, Al WadiahThe safekeeping of goods with a discount on the original stated cost. An Islamic bank acts as thekeeper and trustee of depositors funds. It guarantees to return the entire deposit, or any part of it,on the depositors demand.The bank may give to the depositor a hibah in appreciation.Wakalah = agencyAlternative spellings = Wakala, Al Wakala, Al WakalahAbsolute power of attorney: where a representative is appointed to undertake transactions onanother persons behalf.In terms of Takaful operations, Wakalah refers to an agency contract, which may involve a feefor the agent.Waqf = charitable trustPlural = Awkaf, AwqafAn endowment or a charitable trust set up for Islamic purposes (usually for education, mosques,or for the poor). It involves tying up a property in perpetuity so that it cannot be sold, inherited, ordonated to anyone.Zakat = religious tax ↑Alternative spellings = ZakahAn obligatory contribution which every wealthy Muslim is required to pay to the Islamic state, orto distribute amongst the poor.According to Islam, zakat – the third pillar of Islam – purifies wealth and souls. Zakat is levied oncash, cattle, agricultural produce, minerals, capital invested in industry and business.There are two type of zakat: • Zakat al Fitr, which is payable by every Muslim able to pay at the end of Ramadan. This is also called Zakat al Nafs (poll tax).
  12. 12. • Zakat al Maal is an annual levy on the wealth of a Muslim above a certain level. The rate paid differs according to the type of property owned.

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