This is Islamic Finance

Islamic Finance Glossary

Amanah: a transaction in which assets are held in trust by another party. Also used to describe financial activities including custody of goods or deposit taking.

Arbun: a non-refundable deposit paid by a buyer once a contract of sale has been agreed. This will be lost if a transaction is not completed within a set period.

Gharar: Usually translated as Uncertainty, one of tne of three major prohibitions according to sharia’a law (see riba and maysir) Any kind of uncertainty or contingency is forbidden in a contract, such as the kind found in such conventional structures as short selling or derivitives.

Ijara: Defined as the Islamic equivalent of leasing. A bank leases an asset to a customer, charging a pre-determined rental over a certain period of time. The bank will typically retain ownership of the item throughout the lease period, although different types are possible in which a set proportion of payment is made towards a final purchase. Instead of interest, the bank will therefore earn rental profit.

Maysir: Translated as Gambling, a major prohibition in Islamic finance. Conventional products including insurance and derivatives would be considered to embody principles of maysir and as such are forbidden under sharia’a law.

Mudaraba: An investment partnership, or more generally, profit-sharing. The investor, referred to as the Rabb ul Mal, will provide funds; the other party, the Mudarib, will provide expertise in the investment of these funds. Profit is divided in accordance with a previously-agreed contract, but any loss is borne solely by the Rabb ul Mal (investor).

Mudarib: The investment manager in a Mudaraba contract

Murabaha: A contract for purchase and resale. Rather than lending money, a financial institution will purchase the desired asset and will re-sell it to the customer with the addition of an agreed profit margin. Technically, this allows the capital provider to make a profit without charging interest.

Musharaka: Translated as partnership or profit and loss sharing. An equity financing arrangement in which participating parties contributing towards an investment share both risk and reward. Parties will agree in advance on a ratio whereby profits will be divided; loss must be shared in proportion to the amount invested. Qard or Qard

Hassan: An interest-free loan, used in a personal banking context to describe current accounts (a customer’s loan to a bank which must be paid back in full on request). May also refer to a loan given by an institution to fulfil short-term funding requirements.

Riba: Translated as interest, whatever the type or rate. More generally, viewing money as having value in itself is strictly forbidden under sharia’a law, so money cannot be used as an asset. The prohibition of interest means that Islamic finance has an intrinsic preference for equity rather than debt.

Sharia’a: The law of Islam, taken from the Holy Qur’an, distinguishing what is Halal (lawful) and what is haram (forbidden). Sharia’a law provides firm guidelines as to the kind of economic activity which is Halal; investments involving alcohol, pornography, gambling, drugs or pork are forbidden and money should be used in productive and non-injurious investments. Interest (riba), uncertainty (gharar) and gambling (maysir) are the three main prohibitions.

Shariah advisor: A highly-qualified individual, usually an Islamic legal scholar, who provides independent advice to an organisation on the sharia’a-compliance of its products. Most Islamic banks have a committee of Shariah advisors called a Sharia’a board or committee.

Sukuk: literally, ‘financial certificates’, the term Sukuk is used to describe sharia’a compliant eqivalents of conventional bonds or shares. Fixed income bonds, due to their interest, are forbidden. Sukuk are therefore asset-backed securities, representing partial ownership in projects or assets. Performance is linked to that of the underlying assets. Sukuk are usually structured in one of three ways: using the principles of either ijara, musharaka or mudaraba.

Takaful: Islamic insurance, in which a fund is held centrally in order to provide mutual assistance. As this is a pool of funds, customers benefit if there is no claim, and the concept of uncertainty (gharar), and interest (riba) are avoided.

Tawarruq: The equivalent of an interest-free loan, used in personal finance. A customer buys an asset from a bank on a deferred payment basis and then resells it to a third party for cash. The reverse of a murabaha.

Wakala: An agency contract in which a representative (the Wakil) is appointed to act on behalf of another person. This usually includes a fee to cover the expertise of the Wakil

Zakat: Giving a proportion of earnings to charity in accordance with sharia’a law.

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