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Glossary
Glossary of Islamic Finance
Written by Dr. Taha Eltayeb Ahmed, Head of Product Structuring and Shariah Documentation
(About the Author)
Ajr: Fee or wage charged for delivering services or labour.
Al Aariyah: A loan of a piece of property without taking any material reward in exchange. It is a gift of the usufruct of a property for a fixed period of time. It involves a (non-consumable) asset which is a trust under the receiver during the term of the contract. The property must be returned on a mutually agreed date.
Al Ghunm bil Ghurm: This is a Shariah rule that stipulates that earning a profit is legitimized only by engaging in an economic activity which involves taking a risk. This important Shariah rule says that if you want to generate profit then you must take the risk to justify it.
Al Maal: Al Maal is the wealth an individual or an organization owns. It includes cash, tangible assets, intangible (usufruct) assets, consumable assets, goods in trade and debt receivables.
Al-Sarf: Sale of monetary value for monetary value; currency exchange. In Islamic law, foreign exchange is only spot exchange, which means immediate delivery of exchanged currencies at the prevailing rate.
Amanah: Reliability, trustworthiness, loyalty, and honesty. An important value of Islamic society in mutual dealings. It also refers to deposits in trust, where a person may hold property in trust for another.
Bai: An agreement between two parties whereby the supplier agrees to supply a product on an agreed price, on an agreed mode of payment.
Bai al Arboon: Deposit-secured sale. A sale agreement in which a security deposit is provided in advance as part payment towards the price of a commodity. The deposit is forfeited if the buyer does not meet his obligation. If the sale is completed Arboon deposit becomes part of the price.
Bai al Inah: The instant sale and buy back of an asset for a higher price than that for which the seller originally sold it. This type of transaction is considered void by Shariah scholars because it is considered to be a cover up for a Ribawi transaction.
Bai Bithaman Ajil: Deferred payment sale. Also known as Bai Mua'jal. The sale of goods on a deferred payment basis. Equipment or goods requested by the client are bought by the bank, which subsequently sells the goods to the client for an agreed price, including a mark-up (profit) for the bank. The client may pay by installments within a pre-agreed period, or in a lump sum at the end of the contract period.
Bai Dayn: Islamic term for sale of debt. Most Islamic scholars do not approve sale of debt because according to them this involves Riba and Gharar.
Bai Istisna'a: A sale contract for manufacturing of tangible assets, allowing cash payment in installments and future delivery of the product. For example, a manufacturer or a builder agrees to produce or build a well described asset for a given price and promises delivery on a date in the future.
Bai Mua'jal: A sale of commodity wherein the price is paid on deferred payment basis.
Bai Salam: A sale contract in which full payment is made in advance for goods to be delivered later. The seller undertakes to supply specific goods to the buyer at a future date in exchange for an advanced price paid at the time of signing the contract.
Darura: A necessity or emergency. This is a condition in which aspects of Shariah may be suspended in order to preserve life, or to assure safety of the Muslim community, or an individual.
Dayn: A debt which comes into existence as a result of commitment to pay later. It is incurred by way of rent, sale, purchase,marriage, etc., which leaves an obligation on an individual or an organization.
Diminishing Musharaka: This specific form of partnership, also known as Al-Musharaka Al-Mutanaqisa, allows equity participation and sharing of profits in a pre-agreed ratio, and sharing of losses on a pro-rata basis. This 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 for payment to purchase equity shares held by the bank, over and above the profit paid to the bank. Simultaneously the entrepreneur purchases some of the bank's equity, progressively reducing it until the bank has no equity and that results in ending the partnership.
Fatwa: A legal verdict given on a religious basis. The sources on which a fatwa is based are Holy Qur'an, Sunnah of the Prophet (peace and blessings of Allah be upon him), Ijma'a and Qiyas.
Fiqh: Fiqh is Islamic jurisprudence or Islamic law. It is an important part of Shariah. It is the set of rulings written down by well recognized Islamic Scholars since the time of Prophet Muhammad (peace and blessings of Allah be upon him).
Fiqh al Mu'amalat: Islamic commercial jurisprudence or the rules of transacting business in a Shariah-compliant manner.
Gharar: An exchange in which there is an element of ambiguity or deception, either through ignorance of goods or price, or through faulty description of goods. For example, selling goods you are not in a position to deliver, such as a runaway horse, would be Gharar.
Hadith: The sayings of Prophet Muhammad (peace and blessings of Allah be upon him) as narrated by his companions (may Allah be pleased with them).
Halal: Anything permitted by Shariah.
Haram: Anything prohibited by Shariah.
Hanafi: Islamic school of law founded by Imam Abu Hanifah. Followers of this school are known as Hanafis.
Hanbali: Islamic school of law founded by Imam Ahmad Ibn Hanbal. Followers of this school are known as Hanbalis.
Hamish Jiddiyah: A security deposit. An amount of money paid by a purchaser upon request of a seller to make sure that the purchaser is serious about the transaction. If the purchaser fails to carry out his promise to buy the asset, the seller can use the deposit to cover any losses incurred.
Hawala: Transfer or assignment of rights and responsibilities in a contract. It can also mean remittances of money.
Hawalat Dayn: It is an arrangement of assignment of debt to a third party whereby that third party accepts to pay or collect a debt.
Hibah: Gift (usually a property).
Hila: Forbidden structure. A transaction which appears permissible, but is in fact structured in an un-Islamic way. For example, Bai al Inah is a transaction which is considered as Hila.