Glossary of Islamic Finance

AAOIFI 

Accounting and Auditing Organization for Islamic Financial Institutions: Bahrain-based Islamic international standard setting body established in 1991 for Islamic corporations and the industry. Members include central banks, Islamic financial institutions and other industry participants. 

Akhirah 

The hereafter. 

Akhlaq 

Virtue, morality and manners in Islamic theology. 

‘Alim 

Shariah jurists. Alternative spelling: Ulema. 

Al-wa’d bi al-bai’ 

Promise to sell. 

Al-wa’d bi al-syira’ 

Promise to buy. 

Amanah 

Reliability, trustworthiness, loyalty, honesty. Alternative spelling:  Amana. 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. 

‘Amil 

Agent. Someone who deserves compensation for completing a task, such as a mudarib in a Mudarabah or a Zakat collector. 

Aqd 

Contract. 

Aqidah 

Set of beliefs. 

Bai Ajil bi Ajil 

Delayed-for-immediate sale. The sale price is paid immediately and delivery of the sale item is delayed. Synonymous with Bai al Salam. 

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 the commodity. The deposit is forfeited if the buyer does not meet his obligation. 

Bai al Inah 

Sale and buy-back. The sale and buy-back of an asset for a higher price than that for which the seller originally sold it. A seller immediately buys back the asset he has sold on a deferred payment basis at a price higher than the original price. This can be seen as a loan in the form of a sale. 

Bai al kali’ bi al kali’ 

Sale of debt for a debt. Prohibited sale, the most well-known of which is where a lender extends his debtor’s debt repayment period in return for an increase on the principal, that is, interest. 

Bai al Salam 

Future delivery. A contract whereby the payment is made in cash at the point of contract but the delivery of asset purchased will be deferred to a predetermined date.

Bai Bithaman Ajil 

Deferred payment sale. Alternative spelling: Bai Muajjal. 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. This sale works in a similar way to a Murabahah contract, but with deferred payment. 

Bai Muajjal 

Deferred payment sale. Alternative spelling: Bai Bithaman Ajil. 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. This sale works in a similar way to a Murabahah contract, but with deferred payment. 

Bai Wafa 

Sale and buy-back. The sale and buy-back of an asset within a set time, when the original buyer agrees to the original seller’s repurchase. 

Baitul Mal 

Treasury. 

Dayn 

Debt. Alternative spelling: Duyun. Wealth that one is required to pay back to another. 

Dha ‘wa ta ‘ajjal 

Creditor’s debt. A creditor’s forfeit on part of the debt when the debtor settles the balance of his debt earlier than scheduled. 

Dhaman 

Guarantee. A contract of guarantee whereby a guarantor shall under write any claim and obligation that should be fulfilled by an owner of the asset. This concept is also applicable to a guarantee provided on a debt transaction in the event a debtor fails to fulfill his debt obligation. 

Dhimmah 

Liability. The concept may be likened to a virtual liability container that every responsible person has, which is constantly being filled with rights and obligations, such as the obligation to repay someone. 

Dirham 

Unit of currency. A unit of currency, usually a silver coin, used in the past in some Muslim countries and still used in some Muslim countries today, for example Morocco and the UAE. 

Falah 

To flourish. Success as measured in this world and Akhirah. 

Faqih 

Shariah jurist. Alternative spelling: Fuqaha. 

Faqir 

Poor person. Alternative spelling: Fuqara’.

Fard al Kifayah 

Socially obligatory duties. Alternative spelling: Fard Kifaya. A collective duty of Muslims. The performance of these duties (for example funeral prayers) by some Muslims absolves the rest from discharging them. This term covers functions which the communities fail to or cannot perform and hence are taken over by the state, such as the provision of utilities, or the building of roads, bridges and canals. 

Fasid 

Unsound or unviable. A forbidden term in a contract, which consequently renders the contract invalid. 

Fatwa 

Religious decree. Alternative spelling: Fatwah, Fatawa. Islamic legal opinion based on Qur’anic, Sunnah and Islamic legal precedent or the Shariah.

Fiqh 

Islamic jurisprudence. The science of the Shariah. An important source of Islamic economics. 

Fiqh al-muamalat 

Islamic commercial jurisprudence. 

GCC 

Gulf Cooperation Council. A political alliance and trade bloc consisting of six states of the Arabian Gulf: Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the UAE. 

Ghalat 

Mistake. A negative element that can affect the validity of `aqad. In Arabic, it connotes error in perception. 

Gharar 

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 is an exchange in which one or more parties stand to be deceived through ignorance of an essential element of the exchange. Gambling is a form of gharar because the gambler is ignorant of the result of the gamble. The prohibition on gharar is often used as the grounds for criticism of conventional financial practices such as short selling, speculation and derivatives. 

Gharim 

Alternative spelling: Gharimun. A debtor who does not have the funds, after repayment of his debt, would not equal the nisab. The Shafi’i and Maliki jurists divide the gharimun into two types: (i) those whose debts were incurred in their own benefit; and (ii) those whose debts were incurred benefiting others. The gharimun are one of the eight groups mentioned in the Quran as legitimate recipients of zakat funds. 

Hadith 

The Prophet’s sayings and commentary on the Quran. Alternative spelling: Ahadith.

Hak Tamalluk 

Ownership right. A tradable asset in the form of ownership rights. 

Halal 

Lawful, permissible. The concept of halal has spiritual overtones. In Islam there are activities, professions, contracts and transactions that are explicitly prohibited (haram) by the Quran. All other activities, professions, contracts and transactions are halal. This concept differentiates Islamic economics from conventional economics. In western finance all activities are judged on economic utility. In Islamic economics, spiritual and moral factors are also involved – an activity may be economically sound but may not be allowed in Islamic society if it is not forbidden by the Shariah. 

Hamish Jiddiyyah 

Security deposit. Sum paid by a party who places an order to purchase, as security for his promise. 

Hanbali 

Islamic school of law. Islamic school of law founded by Imam Ahmad Ibn Hanbal. Followers of this school are known as Hanbalis. 

Hanifi te 

Islamic school of law. One of the major Islamic schools of law, founded by Imam Abu Hanifa. Followers of this school are known as Hanafi. 

Haqq 

A right which a party possesses, for example, the creditor’s right to payment. 

Haram 

Unlawful, forbidden. Activities, professions, contracts and transactions that are explicitly prohibited by the Quran or the Sunnah. See halal above. 

Hawala 

Bill of exchange, remittance. Alternative spelling: Hiwala. A contract which allows a debtor to transfer his debt obligation to a third party who owes the former a debt. The mechanism of Hawala is used for settling international accounts by book transfers, thus obviating the need for a physical transfer of cash. 

Hibah 

Gift. A gift voluntarily donated in return for a loan provided or a benefit obtained. 

Hisbah 

Regulatory duty. The necessary steps in order to maintain a fair and orderly marketplace. 

Ibra 

Rebate. 

IFSB 

Islamic Financial Services Board. A Kuala Lumpur–based international standard-setting organization that was set up in 2003 to promote the stability of the Islamic financial services industry by issuing global prudential standards and guidelines. The IFSB helps regulators govern Islamic financial institutions in compliance with Basel II and evolving global standards. 

Ihtikar 

Hoarding. The prohibited practice of purchasing essential commodities, such as food and storing them in anticipation of a price increase. 

Ijarah 

Leasing. Alternative spelling: Ijara. A lease agreement whereby a bank  or financier buys an item for a customer and then leases it to him 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 asset remains in the ownership of the lessor (the bank), but the lessee has the right to use it. After the expiry of the lease agreement, this right reverts back to the lessor. This is a classic Islamic financial product.

Ijma 

Consensus. The unanimous decision of all or the majority of leading jurists on a Shariah matter in a certain age. Ijma has traditionally been recognized as an independent source of law, along with the Quran, Sunnah and Qiyas. 

Ijtihad 

Effort, exertion, industry. A faqhi’s endeavor to formulate a rule on the basis of evidence found in the Islamic sources. 

Ikhtilaf 

Divergence of opinion among jurists. 

Iktinaz 

Hoarding wealth by not paying zakat on it. 

‘Illah 

Legal effective cause. Basis for applying analogy in determining the permissibility or otherwise of a transaction. 

Iman 

Conviction, faith, or belief. 

Islah 

Reform. 

Israf 

Wastefulness. Lawful spending but exceeding moderation in quality  or quantity; includes spending on objects that are incompatible with  the economic standard of the majority of the population and spending on superfluous objects while necessities are not met. (Also see Tabzir.) 

Istijrar 

Recurring sale. Different quantities are bought from a single seller over a period of time. Sometimes it is also referred to transactions whereby seller delivers different quantities in different installments to complete the full purchase. Some divergence among the scholars in terms of the timing of fixation and pricing. 

Istisnah 

Advance purchase of goods or buildings. Alternative spelling: Istisna’a, Istisna’ah. A contract of acquisition of goods by specification or order,  where the price is paid in advance, or progressively in accordance with  the progress of a job. For example, to purchase a yet to be constructed house, payments would be made to the builder according to the stage of work completed. This type of financing, along with Salam, is used as a purchasing mechanism, and Murabahah and Bai Bithaman Ajil are for financing sales. 

Jahiliyyah 

Pre-Islamic period. The era just before the coming of Prophet Muhammad (P.B.U.H.)* and, more generally, to the state of affairs which characterized this era, which was plagued by shirk (the crime of associating partners with Allah), infanticide, tribal strife and so on. 

Jahl 

Ignorance (of morality or divinity). 

Ju’alah 

Stipulated price for performing a service. Alternative spelling: Ju’ala. Applied by some in Islamic banking. Bank charges and commission have been interpreted to be ju’alal by the jurists and thus considered lawful. 

Kafalah 

Is a contract of guarantee or surety that provides assurance in terms of performance and value when the object of the transaction is exposed to adverse change due to varying outcomes. In trade financing, a bank guarantee is issued when the owner of goods discharges the liability for the goods on behalf of a third party. Such guarantees are often used in cases of goods being imported. The exporter knows that the goods will be paid for and can feel free to allow the goods to be uplifted by the importer. The importer may be required to offer some form of collateral as surety and will normally pay a fee for the service. The purpose of a Kafalah contract is to facilitate international trade. Khalif or khalifa Ruler, steward, custodian. Alternative spelling: khulafaa. *P.B.U.H.: “Peace Be Upon Him.”

Litera legis 

Literal rule.

Maaliki 

Islamic school of law. Islamic school of law founded by Imam Malik Ibn Anas. Followers of this school are known as Maalikis. 

Madhhab 

Way of going. Alternative spelling: Madhahib. A fiqh school or orientation characterized by differences in the methods and therefore in the Shariah rulings that are deduced from them. There are four well known madhahib among Sunni Muslims whose names are associated with the classical jurists who are said to have founded them (Hanafi, Maliki, Shafi’i and Hanbali). 

Mafsadah  

Evil and harm.

Maysir [Maysir] 

Game of chance.

Majallah al-ahkam al-adliyyah 

The Islamic Civil Code of the Ottoman Empire.

Makhatir

Risk which is integral in any business or commercial dealings.

Makruh 

Detested. An action that one is rewarded for avoiding, but not punished for committing. 

Mal 

Capital or wealth. Valuable item that can be gainfully used according to the Shariah. 

Maliki

Particular school of law.

Manfa’ah 

Beneficial ownership. Usufruct associated with a given property, especially in leasing transactions. In an automobile lease, for example, “manfa’ah” might be used to describe the benefit which the lessee derives from the use of the car for the duration of the lease (as opposed to the actual ownership of the vehicle). 

Maqasid 

General objectives of Islamic law. 

Maslahah 

Public good or benefit. 

Maslahah mursalah 

Benefit or interest / unrestricted public interest.

Maysir 

Gambling. One 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 financial practices such as speculation, conventional insurance and derivatives.

Mejelle 

English translation of Majallah al-ahkam al-adliyyah.

Muamalat 

Economic transaction. Alternative spelling: Mu’amalah, Mu’amalat, Muamalah. The lease of land or fruit trees for money, or for a share of the crop. 

Mudarabah 

Trust financing, profit sharing. Alternative spelling: Mudaraba, Modaraba, Modarabah. An investment partnership, whereby the investor (the rab al maal) provides capital to the entrepreneur (the mudarib) in order to undertake a business or investment activity. While profits are shared on a pre-agreed ratio, losses are born by the investor alone.  The mudarib loses only his share of the expected income. The investor has no right to interfere in the management of the business, but he can specify conditions that would ensure better management of his money.  In this way Mudarabah is sometimes referred to as a sleeping partnership. A joint Mudarabah can exist between investors and a bank on a continuing basis. The investors keep their funds in a special fund and share the profits before the liquidation of those financing operations that have not yet reached the stage of final settlement. Many Islamic investment funds operate on the basis of joint Mudarabah. 

Mudarabah muqayyadah

This type of contract is used in specific bank accounts known as restricted investment accounts (RIAs), where the bank acts as an agent for the investor(s) simply by acting upon their instructions. Here, the funds deposited based on the Mudarabah contract are never really under the control of the bank because the depositor(s) determine the manner as to where, how and for what purpose the funds are to be invested. Commingling of the funds raised under this type of contract with the bank’s shareholder and other deposit funds is usually restricted or prohibited. The returns distributed to restricted investment account holders (RIAHs) is based on an agreed profit sharing ratio confined to the returns earned on a designated specific investment portfolio involving the funds agreed upon by the RIAHs. Any distribution between the bank and the depositor will be in accordance with an agreed profit sharing ratio. Mudarabah profits or income distributable to RIAHs are derived from the performance of designated financing assets or investments managed by the bank.

Mudarabah mutlaqah 

Unlike Mudarabah muqayyadah, this contract relates to investment accounts where the account holder fully authorizes the bank to invest the funds without restrictions imposed by the account holder and is in accordance with Shariah principles and rules. The funds are pooled with the bank’s shareholder funds and other deposits to facilitate financing and investments by the bank. The returns depend on the level of profits earned, and are shared and distributed across the varying classes of investment account holders based on different investment horizons from one to 60 months or more. Usually, returns to investment account holders are computed and accrued on a month-to-month basis. The investment account holder must submit written notice to Islamic banks prior to the withdrawal of funds and a minimum notification period is required. Mudarabah profits or income distributable to unrestricted investment account holders are derived from the performance of the bank’s financing assets and investments.

Mudarib 

Entrepreneur in a Mudarabah contract. The entrepreneur or investment manager in a Mudarabah who puts the investor’s funds in a project or portfolio in exchange for a share of the profits. A Mudarabah is similar to a diversified pool of assets held in a discretionary asset management portfolio. 

Mufawadah 

Equal, unlimited partnership. 

Mufti 

Qualified professional who issues fatwa, usually in response to questions posed. 

Mu’ajjal 

Deferred (see Bay’ Mu’ajjal).

Mujtahid 

Legal expert or a jurist who expends great effort in deriving a legal opinion or interpreting the sources of the law.

Mumalah [mumalat] 

Financial transaction.

Muqasah 

Set-off.

Murabahah 

Cost-plus financing. Alternative spelling: Morabaha, Morabahah, Murabaha. A 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 price includes a profit margin agreed by both parties. Repayment, usually in installments, is specified in the 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 among Islamic banks, used widely for consumer finance, real estate, and the purchase of machinery and for financing short-term trade. 

Murabahah-tawarruq 

Contract to realise cash.

Murabahah li al-amir bi al-shira  

Murabahah to the purchase orderer.

Musharakah 

Joint venture, profit and loss sharing. Alternative spelling: Musharaka. An investment partnership in which all partners are entitled to a share in the profits of a project in a mutually agreed ratio. Losses are shared in proportion to the amount invested. All partners to a Musharakah 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 limited company. 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 a share  of the profit on a pro rata basis. The length of contract is unspecified, making it suitable for financing projects where funds are committed over a long period. Diminishing Musharakah: this allows equity participation and sharing of profits on a pro rata basis, 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 for payment over and above the bank’s share in the profit for the equity held by the bank. Simultaneously the entrepreneur purchases some of the bank’s equity, progressively reducing it until the bank has no equity and thus ceases to be a partner.

Musawwamah 

General sale. The price of the commodity in question is reached through bargaining. 

Musawamah 

Negotiated sale, a general kind of sale in which the price of the commodity to be traded is bargained between the seller and the purchaser without any reference to the price paid or cost incurred by the seller.

Musawamah, Tawliyah 

Negotiated sale at agreed price.

Musharakah mutanaqisah 

Partnership. One of the partners promises to buy the equity share of the other gradually until the title is completely transferred to him. 

Musharakah [Musyarakah] 

A Musharakah contract is a form of equity partnership investment. It is similar to equity investment in a conventional capital market but the investments made must be confined to stocks and financial securities or other assets that are consistent with the principles of Shariah. Note, partnership contracts come in three forms, namely Shirkah al-Amal (work partnership), Shirkah al Wujoh (partnership by reputation) and Shirkah al-Amwal (partnership by capital). Musharakah financing is based on Shirkah al-Amwal (partnership by capital). As a form of equity based financing, like Mudarabah investment financing, Musharakah financing is a commitment by the financier to participate in risks associated with business ventures. Musharakah also means a joint enterprise in which all partners share the profits or losses of the venture. While the profit sharing ratio may be negotiated, the loss sharing ratio must always be proportionate to capital contribution. It also allows the institution to be involved in the executive decision on administration, operations and management of the business activity. 

The financial institution would be able to mitigate any form of operational risks by assuming an element of control in the conduct of business. The Musharakah financing mechanism operates on a capital contribution basis for a defined existing or potential project or assets. The outstanding financing amount could increase or decrease depending on the demands for funding during the financing period. At any point in time, the outstanding capital contribution provides the basis for determining the profit or loss sharing ratio. As a profit and loss sharing arrangement, Musharakah takes various forms, depending on the parties’ capital contribution and their effort in managing the venture. Musharakah is considered as the most flexible form of equity financial claim that can be adopted for various economic sectors, including services, production and distribution. Musharakah mutanaqisah – is a variety of Musharakah contract, where the term Mutanaqisah means ‘to diminish’. Thus, Musharakah mutanaqisah, also referred to as Diminishing Musharakah, means a form of partnership which creates an avenue for the capital provider to reduce or be free of the joint ownership after the initial investment period has been satisfied. As mentioned above, a normal Musharaka contract allows for fluctuating levels of investment, but a Musharakah mutanaqisah contract specifically relates to a reducing investment. Diminishing Musharakah provides an avenue for the financial institution to systematically reduce its exposure over the financing period, with planned and scheduled redemption of the contribution amount. This form of finance is often used in the purchase of a house in the form of a joint venture. The financier contributes the bulk of the house price with the individual customer contributing the remaining balance. The joint venture accepts rental repayments from the individual who is now living in the house. The rental is split between the financial institution and the homebuyer with the homebuyer’s share going toward the redemption or dilution of the financier’s shareholding.

Parallel Istisna’ – see Istisna’ 

Two contracts operated in parallel.

Parallel Salam – see Salam 

Two contracts operated in parallel.

Praesentes 

Where the parties to the contract are present at time of agreement.

Nisab 

Exemption limit. Exemption limit for the payment of zakat, which differs for different types of wealth. 

Non Performing Financings (NPFs) 

The Islamic banking equivalent to non-performing-loans. NPF’s are based on a profit sharing basis and not interest as are their conventional counterparts. 

Qard 

Loan. 

Qard Hasan 

Benevolent loan. Alternative spelling: Qard Hassan, Qard al Hassan. A 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 the amount 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 of loans (Qard) is that there is a moral duty to give them to borrowers free of charge, as a person seeks a loan only if he is in need of it. Some Islamic banks give interest-free loans only to the holders of investment accounts with them; some extend them to all bank clients; some restrict them to needy students and other economically weaker sections of society; and some provide interest-free loans to small producers, farmers and entrepreneurs who cannot get finance from other sources. 

Qimar 

Gambling. An agreement in which possession of a property is dependent upon the occurrence of an uncertain event. By implication it applies to those agreements in which there is a definite loss for one party and a gain for the other, without specifying which party will gain and which party will lose.

Qiyas 

Analogical deduction. Derivation of the law on the analogy of an existing law if the basis or Illah of both is the same. 

Qiyas al-tard 

Extension of a legal rule from one case to another due to a material similarity.

Qu’ran 

The holy scriptures of Islam. 

Ra’s al-mal 

Capital. The money or property that the Rab al maal invests in a profit seeking venture, often in a partnership such as a Mudarabah or Shirkah. 

Rab al maal 

The investor in a Mudarabah contract. Alternative spelling: Rab al mal. 

Rahn 

Collateral. An arrangement whereby a valuable asset is placed as collateral for a debt. The collateral may be disposed of in the event of a default. 

Ra’y 

Personal opinion

Riba 

Interest. An 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 is prohibited in Islam. In conventional terms, riba and “interest” are used interchangeably, although the legal notion extends beyond mere interest. 

Riba al Buyu 

Usury of trade. Also known as riba al fadl. A sale transaction in which a commodity is exchanged for an unequal amount of the same commodity 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 (P.B.U.H.)* to forestall riba (interest) from creeping into the economy. 

Riba al Diyun 

Usury of debt. Also known as usury of delay (riba al nasia). The usury of debt was an established practice amongst Arabs during the pre-Islamic period. It can occur as an excess increment on top of the principal, which is incorporated as an obligatory condition of the giving of a loan. Alternatively, an excess amount is imposed on top of the principal if the borrower fails to repay on the due date. More time is permitted for repayment in return for an additional amount. If the borrower fails to pay again, a further excess amount is imposed, etc. 

Riba al-fadl

The concept of Riba al-fadl refers to exchange or sale transactions in trade which effectively result in the charging of ‘interest’ through the exchange of the same commodity, but of a different quality or quantity. ‘A’ may give ‘B’ ten tons of hay now in exchange for ‘B’ giving ‘A’ eleven tons when the harvest has been completed. In order to avoid Riba-al-fadl goods should be exchanged in equal quantities at the same time.

Riba al-nasiah
Interest-based lending that results from the exchange not being immediate. A previously acceptable practice similar to conventional lending today where the borrower pays the lender more than the original amount lent to reflect the delay in repayment. The practice is now specifically prohibited.

Ribawi 

Goods subject to fiqh rules on riba. 

Rishwah 

Bribery. 

Sadaqah 

Voluntary charitable giving. Alternative spelling: Sadaqat. 

Sadd al-dharai’

Blocking the means.

Sahih 

Sounds correct. Opposite of Batil. Hadith of the highest level of authentication. 

Salaf 

Loan for short, intermediate or long term. Also a synonym for Salam.  Unlike Qard, however, the amount given as Salaf cannot be called back before it is due. 

Salam 

Advance purchase. Alternative spelling: Al Salam, Bai al Salam, Bai Salam. Advance payment for goods which are to be delivered at a specified future date. Under normal circumstances, a sale cannot be effected unless the goods are in existence at the time of the bargain. However, this type of sale is an exception, provided the goods are defined and the date of delivery is fixed. The objects of sale must be tangible goods that can be defined as quantity, quality and workmanship. This mode of financing is often applied in the agricultural sector, where the bank advances money for various inputs to receive a share in the crop, which it then sells. 

Sarf 

Currency sale. Refers to buying and selling of currencies.

Shafi ’e 

Islamic school of law. Islamic school of law founded by Abu Abdullah  Ahmad bin Idris or Imam Shafi e. Followers of this school are known  as Shafi ’es. 

Shariah 

Islamic jurisprudence. Alternative spelling: Sharia, Shari’a, Shari’ah, Syariah, Syaria, Syari’ah, Syari’a. Islamic cannon law derived from three sources: the Quran, the Hadith and the Sunnah A “Shariah compliant” product meets the requirements of Islamic law. A “Shariah board” is the committee of Islamic scholars available to an Islamic financial institution 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 the compliance of the products and services with the Islamic law. 

Shirkah 

Partnership. A contract between two or more persons who launch a business or financial enterprise to make a profit. 

Sukuk 

Islamic bond (Plural. Also see Saak.) An asset-backed bond which is structured in accordance with Shariah and may be traded in the market. A Sukuk represents proportionate beneficial ownership in the underlying asset, which will be leased to the client to yield the return on the Sukuk. 

Sukuk al-Ijarah

Certificates of investment in leased assets

Sukuk al-Intifa’a 

Sukuk for use or services.

Sukuk Istithmar 

Certificates in investment.

Sunnah 

Practice and traditions of the Prophet Muhammad (P.B.U.H.).

Ta’awun 

Cooperation

Tabarru’ 

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 obligation of joint guarantee and mutual help should another participant suffer a loss. This concept eliminates the element of gharar from the Takaful contract. 

Tadawul 

Saudi Stock Exchange

Takaful 

Islamic insurance. Based on the principle of mutual assistance, Takaful provides mutual protection of assets and property and offers joint risk-sharing in the event of a loss by one of the participants. Takaful is similar 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 haram elements, such as gharar and riba. 

Takharuj 

Exit from a partnership by selling the shares to another party.

Tanazul

Is an act to waive certain rights of claim in favour of another party in a contract. In Islamic finance, it is applied where the right to share some portion of the profits is given to another party. For example, in a Mudarabah contract, the capital providers may agree to limit the rate of return to a defined percentage whereby the excess can be given to the manager as an incentive or performance fee. The decision of the investors to waive their right to the profit is based on the principle of Tanazul that is specified as a condition of the contract to waive such a right.

Taskeek 

Securitisation.

Tawarruq 

Reverse Murabahah. In personal financing, 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. In this way, the client can obtain cash without taking out an interest-based loan. It has two forms: Tawarruq Munazzam (organized Tawarruq), in which the client simply seeks credit and has no interest in the original asset for sale; and Tawarruq al Asli, where the client buys goods on credit and then sells them to get cash. 

Tawliyah 

Sale at cost price.

Tijarah 

Private commercial transactions.

Ujr 

Fees paid in lieu of service to be provided by the service provider (not the same as Ujrah, which is rent).

Ujrah 

Fee. The financial charge for using services, or manfaat (wages, allowance, commission, etc.). 

Ummah 

The Muslim community. 

‘Umum balwa 

Common plight. An unfavorable widespread situation affecting most people which is difficult to avoid. 

‘Urf 

Customary practice

‘Urbun 

Is essentially a down payment made by a buyer to a seller after both parties have entered into a valid contract. The down payment represents the commitment to purchase the goods. If the buyer is able or decides to pay the remaining outstanding payment during a prescribed period, the amount paid as down payment will be counted as part of the purchase price. Otherwise, the down payment will be forfeited by the seller. This is the original version of ‘Urbun in Islamic commercial law. This feature is often used to mirror the behaviour of conventional options by providing an opportunity to the buyer (the person making the down payment) to benefit from the market up-side (call option) of the underlying asset and by limiting the potential loss to the amount paid under the down-payment scheme.

Usufruct 

The right to use.

Usul al-fiqh 

Islamic legal theory providing principles and guidelines on interpretation Wadhi’ah sale – sale of goods at a discounted price Wadiah [Wadi’ah] – safe custody.

Wadiah Yad Dhamanah 

Savings or deposits with guarantee. Goods or deposits entrusted to the care of a person, who is not the owner, for safekeeping. The depository becomes the guarantor, thereby guaranteeing repayment of the whole amount or any part of the deposits that is outstanding in the account of depositors, when so demanded. The depositors are not entitled to any share in the profits but the depository may provide returns to the depositors as a token of appreciation. 

Wa’d

Is a feature attached to a contract and is a unilateral promise made by one party to another, binding on the party that makes the promise. In financing transactions this feature provides assurance that the transaction will be executed as per the specifications of the contract. For example, an importer who has foreign exchange transaction exposure in terms of payment of imports in foreign currency upon delivery of goods might hedge the risk of appreciation of foreign currency by undertaking a promise to buy the foreign currency in the future that matches the real exposure to currency risk of import transaction upon delivery.

Wakalah 

Agency. Alternative spelling: Wakala, Al Wakala, Al Wakalah. Absolute power of attorney: where a representative is appointed to undertake transactions on another person’s behalf. In terms of Takaful operations, Wakalah refers to an agency contract, which may involve a fee for the agent. 

Wakalah fi al-istithmar

A Wakalah investment

Wakil

Agent

Waqf 

Charitable trust. Alternative spelling: Awkaf, Awqaf. An 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, or donated to anyone. 

Wasiyyah 

Will or testament. Document detailing the manner in which a Muslim’s wealth is to be disposed of after his death. 

Zahiris

Literalists i.e. those adhering to the literal meaning of the Qur’an.

Zakat 

Religious tax. Alternative spelling: Zakah. An obligatory contribution which every wealthy Muslim is required to pay to the Islamic state, or to distribute amongst the poor. According to Islam, zakat – the third pillar of Islam – purifies wealth and souls. Zakat is levied on cash, cattle, agricultural produce, minerals, capital invested in industry and business. There are two types 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). 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.