Islamic Finance Glossary
The following is a limited glossary explaining some of the main principles and functions of Islamic Banking & Finance.
Sharia'a
Islamic law derived from the Holy Quran, and Sunnah (practice and traditions of the Prophet Muhammad (pbuh)).
Sharia'a compliant
An activity that complies with the requirements of the Sharia'a, or Islamic law.
Riba
Riba can be defined as an increase of money using money as an asset and can be associated more conventionally with interest. Riba is strictly forbidden in Islam.
Gharar
Translated as uncertainty, Like Riba, this is also prohibited in Islam. A transaction that contains any type of uncertainty is forbidden.
Maysir
Defined as gambling, Maysir is one of three fundamental prohibitions in Islamic finance, along with Riba and Gharar.
Arbun
A non-refundable deposit paid by buyer to the seller upon concluding a contract of sale. The buyer has the right to either confirm or cancel the purchase, but loses his deposit if the purchase is not concluded.
Ijara
In conventional terms, Ijara can be defined as a lease agreement. A bank would charge a customer (lessee) rental for an asset they acquire. Most common use of Ijara transactions is for housing and car finance. Throughout the lease period the bank will own the asset, and the rental amount can be fixed for the entire period, or it can be renegotiated after short durations.
Istisna
A mode of financing used mainly in manufacturing or construction whereby a seller (manufacturer/constructor) sells goods by specification or order to a buyer and the specified cost is paid over a predetermined period of time.
Mudaraba
A partnership whereby a financier (Rabb-ul-Mal) provides funds to another party (Mudarib) for investment purposes. Both the Rabb-ul-Mal and the Mudarib will share any profits (the share being predetermined by both parties) from the investment, but any losses occurred in the investment are borne only by the Rabb-ul-Mal.
Murabaha
Defined as cost-plus financing, a Murabaha is a contract of sale between a seller and a purchaser whereby the seller will purchase goods on behalf of the purchaser, and then sell the same goods to the purchaser with a mark-up on the price. The seller needs to specify at the time of signing the contract with the purchaser what the mark-up will be and when the payment will take place (this can be in the form of instalments over a specified period).
Musharaka
Similar to a Mudaraba, but in this case all participating parties contribute funds towards the investment. In a Musharaka transaction all parties will share the profit or loss, and the percentage is predetermined depending on the proportion of the investment each party contributes.
Qard Hassan
An interest-free loan given for either welfare purposes or for fulfilling short-term funding requirements. The borrower is only obligated to repay back the principal amount of the loan.
Sukuk
Similar to shares and bonds; they represent a partial ownership in assets or business projects, where the performance of the sukuk is based on the performance of the underlying asset or project.
Takaful
Islamic insurance based on the principle of mutual assistance and is designed to avoid elements of conventional insurance which are forbidden in Islam e.g. Riba and Gharar.
Tawarruq
An alternative to interest-based loans. Used in personal financing where a client with a genuine need buys an item on credit from the bank on a deferred payment basis and then immediately resells it for cash to a third party.
Wakala
An agency agreement whereby a representative (the Wakil) is appointed as the agent to undertake transactions on the behalf of another person.