Glossary

Adverse selection risk
Since borrowers or entrepreneurs have more information than lenders about a project, the bank could make an error in the selection of projects.
Ajr
Reward or wages for work done or services rendered.
Al Manfaah or usufruct
The right to enjoy the use and benefits of an asset belonging to someone else.
Al Masnu
The specific asset to be manufactured in the Istisna contract.
Al Musania
The seller of the Istisna contract.
Al Mustasni
The buyer of the Istisna contract.
Application of funds
An Islamic bank applies the funds it raises from depositors as well as its own funds to various financing transactions with the aim of earning a profit. The risk of loss is also there. The application of funds of an Islamic bank comprises its assets and includes a variety of products like Murabaha, Salam, Ijara, Istisna, Mudaraba and Musharaka contracts.
Aquila
The Muslims in Makkah and Medina practiced Aquila with the Prophet's approval. In this system, if anyone was killed by someone from another tribe, blood money was paid to the victim's family by the killer's tribe, who pooled together the required amount to ensure they did not suffer a loss of income from the death of the earner. Some Arab Muslim countries still use the blood money system.
Arbun
This is a non-refundable downpayment made by the buyer against the purchase price of an item in a sale contract. If the buyer finally buys the item, the downpayment would be part of the purchase price but if the buyer does not fulfil the purchase obligation, the downpayment would be lost.
Asset-backed Sukuk
Asset-backed Sukuk certificate holders rely on the underlying asset to generate yield and recover their investments, and in this case the asset is still in the ownership of the Sukuk holders and thus recourse to it is easier.
Asset-based Sukuk
Asset-based Sukuk involves purchase and sale of the asset, as in Murabaha or Ijara contracts, and in this case the asset was purchased and sold, and its deferred payments make payments to the Sukuk holders so if non-payment happens, ownership of the asset is no longer with the Sukuk holders, thus the main recourse is the creditworthiness of the customer who purchased the asset.
Bank–client relationship
In conventional banking this is a debtor–creditor relationship while in Islamic banking it varies with various contracts as seller–buyer, lessor–lessee, partners, etc.
Bedouin
Nomadic Arabs, living in the desert.
Beneficiary
Those participants who are going to benefit from the Takaful fund or else those people or institutions which have been identified or nominated by the insured to benefit from the Takaful fund in case the risky event happens.
Bilateral Mudaraba
In this type there are only two parties, one is the capital provider or Rab al Maal, while the other is the Mudarib or entrepreneur.
Binding promise
In Murabaha, when the two parties contract it is morally binding on both. However, if the bank – while relying on the promise – takes the necessary steps to acquire the property, the promise becomes legally binding.
Buy-back condition
In a Salam contract, the buyer cannot demand a buy-back condition from the seller that would require the seller to buy back the goods delivered. Shariah ruling does not allow the buyer to sell back the commodity to the original seller.
Capital market
Most instruments in this market have a maturity of more than one year. This market is further divided into the debt market (bonds), equity markets (shares) and markets for structured or hybrid products.
Central bank
The central bank is the supervisor of all banks and is involved in applying monetary policy, acts as the clearing house and is lender of last resort. Central banks are required to balance the impact of the public's preference to save or to spend.
Cheque clearing services
Central banks also provide cheque clearing services to both conventional and Islamic banks.
Classic economic problem
Classic economics states that wants can be unlimited while resources are limited, which leads to the classic economic problem of scarcity.
Clear financial segregation
Takaful companies are not the insurer, the participants themselves insure each other and the Takaful companies are operators of the Takaful fund on behalf of the participants. As such, it is imperative to manage clear financial segregation of the Takaful fund owned by the participant and the operational funds that belong to the Takaful operator on behalf of the shareholders; as such, it is also called the shareholder fund.
Close-ended fund
A close-ended unit trust or fund can issue a limited number of units only. Once the original investors have acquired these units, any subsequent buying and selling of units happens only on the secondary market, that is the stock exchange.
Commodity market
This special market allows investors to trade in commodities, including precious metals. This market is utilized by traders and hedgers, and operates both via the exchanges and over-the-counter.
Constant Musharaka or permanent Musharaka
In this kind of Musharaka, the partners' shares in the capital remain constant or permanent throughout the contract period. The partners can sell their shares in the Musharaka capital to a third party. Profit sharing is at a pre-agreed ratio and losses are borne in proportion to the capital contribution.
Conventional banking
The standard banking activities seen the world over, based on interest-based financial intermediation.
Conventional insurance
Insurance offered by the conventional insurance industry.
Conventional lease
The lease of any asset in conventional finance, where the lessor rents out the asset to the lessee for the designated period for a decided rental which is like an interest rate.
Cooperative savings banking
In this kind of banking, the depositors are members and together save in a cooperative society, for common good, and may borrow from the common fund.
Credit risk
The risk of non-payment by its customer for the bank. To deal with this, banks can ask for security or collateral from their customers, which can be used to recover any amounts that are not paid by the customer.
Current accounts
Current accounts are used by clients to pay and receive funds. Depositors can withdraw their money anytime. Islamic banks accept the funds in these accounts as Amanah or as Wadia, which involves safekeeping.
Debt-based Sukuk
Debt-based Sukuks are based on receivables like those arising from Murabaha or Salam.
Declaratory rulings
These are rulings that make it easy to implement the obligatory rulings by describing causes, conditions and obstacles related to the obligatory rulings.
Default after delivery
In Istisna, default after delivery can be caused by the seller when they fail to meet commitments related to after-construction or after-sales service, in such a manner that the asset cannot be used by the buyer as it was intended. The buyer can then terminate the Istisna and claim return of the purchase price from the seller as well as damages for any loss incurred. Such default can also be caused by the buyer if they fail to make repayments as they fall due. The seller cannot take the asset back since title has already passed to the buyer, but can claim damages and recover its dues from the collateral or security or through a court procedure.
Default before delivery
In Istisna, default before delivery can be caused by the seller not delivering on the due date or the delivered asset not matching the specification or being damaged. The buyer can then terminate the contract and demand return of any payments already made, and even damages if – due to the default – the buyer would lose. Default before delivery can be caused by the buyer failing or refusing to take delivery of the asset when the specifications are met by the seller. The seller can then claim damages from the buyer. In case the buyer has already partially paid, and the value of the instalments paid by the buyer is greater than the damages, the seller will deduct its damages and return the excess to the buyer; but if the value is less than the damages, the buyer needs to pay the additional amount.
Economics
The discipline that deals with the production, distribution and consumption of goods or services and wealth in general.
Equity-based Sukuk
Equity-based Sukuks are those that are modelled on partnership-based Islamic instruments, like Musharaka or Mudaraba.
Family Takaful
This is a substitute for conventional life insurance. Family Takaful needs to be structured carefully to be Shariah compliant. Shariah allows savings plan-type policies which have a maturity date with specified benefits and may also be designed to help the insured's family in case of death of the insured before the maturity period by compensating financially for loss of income.
Fidya
This was a form of ransom paid to free prisoners of war amongst the Arab Muslims.
Financial intermediation
The core business of banks is financial intermediation. This is the process by which banks match surplus units or savers with deficit units or borrowers and play the role of trusted intermediary.
Financial screening
This is the second stage of the Shariah screening process to evaluate shares for Shariah compliance. There are very few companies in the global markets that are fully Shariah compliant. The majority of Islamic scholars have identified a certain level of non-compliant financial activity as acceptable, provided the income earned from these companies is purified by donating the non-compliant proportion of income to charity.
Fiqh
The knowledge of Shariah is called Fiqh.
Foreign exchange market
Foreign currency transactions are conducted in this market, both spot and forward transactions. Foreign exchange transactions are only over-the-counter, and executed in a variety of global currencies.
General Takaful
General Takaful products are offered both to individuals and to commercial entities. Most common general Takaful products are for car or motor, home and contents, health, fire, burglary, marine, education, machinery breakdown, worker compensation, employers' liability, etc.
Gharar
Gharar means taking excessive risk or having unnecessary uncertainty in the contract. Islam requires all aspects of the transaction or contract to be transparent and known to all parties, thus significantly reducing conflict.
Global financial crisis
Global financial crises are when the finance industry in most countries of the world goes through crises and assets and investments are lost and financial institutions suffer losses or go bankrupt. The last such crisis was seen in 2007–2008. Islamic finance and banking weathered this global financial crisis better than its conventional counterparts, since many of the underlying causes for the crisis were forbidden in Islam as it is more conservative, requiring real asset backing for its products, not permitting short selling, etc.
Hajj
The pilgrimage to Makkah that is compulsory for all able-bodied Muslims once in their lifetime, provided they have the financial ability.
Hawala
This exchange involves the transfer of an amount from one person to another via an intermediary. The intermediary may charge a fee, but as per Shariah ruling this cannot be a percentage of the transfer amount and the transfer should happen at the earliest without any increase to the principal amount.
Hiba
This is a gift that can be revoked before it has been handed over.
Hybrid model
Based on a combination of Mudaraba and Wakala contracts. Usually the underwriting services of the Takaful operator are compensated by a Wakala fee, while for its management of the investment services the Takaful operator shares the profit or loss with the participants on a Mudaraba basis.
Ijara
A bilateral contract involving transfer of the use of an asset from the owner to a user for an agreed period for a consideration. The owner of the object temporarily transfers its usufruct to the lessee for the agreed period and the lessee should be able to derive benefit from it without consuming it.
Ijara fund
This fund is created by investing its money in purchasing a pool of suitable physical assets that can then be leased out to a third party, who would be the ultimate user. The rentals earned from the lease or Ijara constitute the income of the fund and are distributed amongst the investors of the fund after deducting all relevant expenses.
Ijara Muntahia Bittamleek or Ijara wa Iqtina or financial lease
When the ownership of the leased asset passes to the lessee at the end of the lease period, it is called Ijara wa Iqtina or Ijara Muntahia Bittamleek and this is comparable with a conventional financial lease or hire purchase. This transfer of ownership may be with or without additional payment at the end of the lease period.
Ijara Sukuk
This is the most common type of Sukuk, and is based on the Ijara contract. Mostly used for leasing and project finance.
Ijma
The third most important source of Shariah. The jurists were required to debate and provide opinions on Shariah issues not dealt with before from the very early days of Islam.
Inan
Also called limited Musharaka, it has two or more partners who contribute capital in varying amounts, which can be cash or kind, and may or may not contribute their labour, effort, skills and enterprise. Each partner is only the agent for all the others but is not a guarantor and thus has limited liability. Profit is shared according to a pre-agreed ratio, while losses are in proportion to the capital contribution.
Indemnity
This means that the insurance or Takaful contract will compensate the insured for actual loss that has happened.
Industry screening
This is the first stage of the Shariah screening process to evaluate shares for Shariah compliance. This stage weeds out, in general, the companies that are in a Shariah non-compliant industry or that are involved in activities that are against Shariah.
Insurance claim
Upon the occurrence of the risky event that was covered under the Takaful policy, the insured or participant claims the amount of compensation from the Takaful fund.
Insurable interest
Takaful contracts, as in the case of conventional insurance, are only carried out when the event for which Takaful is executed has significant insurable interest. Insurable interest means the possibility of causing loss to the insured who is being protected by the contract arising from an uncertain future event; the insured can then be financially compensated by the Takaful fund.
Insurance premium
The premium is the consideration paid by the insured to the insurer, which in case of conventional insurance is paid by the policyholder to the insurance company while in the case of Takaful is paid into the Takaful fund as a donation.
Insured
Those participants who face the risky event and who would be compensated or helped in case they suffer from any loss from the Takaful fund into which they have also contributed.
Insurer
The insurance company that provides the risk protection in case of conventional insurance, while in Takaful the policyholders themselves are the insurer also.
Investment accounts
These are the most important source of funds for the Islamic banks. The funds are accepted on a Mudaraba basis, where the customer and the bank enter into a joint-venture agreement and are in the true sense not liability but non-voting equity, where depositors are the Rab al Maal and the bank is the Mudarib, sharing profit at a pre-agreed ratio, while financial loss is that of the Rab al Maal.
Investment risk reserve
The allocation for this reserve from the Mudaraba profit is done after the share of the Mudarib has been allocated, and it aims to protect investment account holders from future losses.
Islamic asset management
The Islamic investment fund is a joint pool into which investors contribute their surplus money to be invested by professionals in accordance with Islamic Shariah guidance. The fund managers of an Islamic fund are responsible for ensuring the Shariah compliance of the instruments and processes used to build and manage the fund, avoiding non-Halal industries like alcohol, pork, gambling, uncensored media and entertainment, pornography and other things Shariah clearly forbids.
Islamic balanced fund
A mutual fund that invests its pool of money to purchase a combination of Shariah-screened shares, commodities and Islamic fixed-income instruments is called an Islamic balanced fund and provides investors – in one common fund – with the goals of both short-term income and long-term growth and capital gains.
Islamic commodity fund
In this case the fund manager uses the common pool of funds to purchase a variety of commodities that would be resold based on a deferred payment system and at a profit, which constitutes the main income of the fund and is distributed pro-rata amongst the investors after deducting all relevant expenses.
Islamic debt fund
The fund is invested in fixed-income Islamic instruments like a Murabaha, Ijara, Istisna or Salam, which are deferred payment sales contracts that yield fixed income over a given period, thus providing stability to the income generated by the fund and shared by investors of the fund after deducting all relevant expenses.
Islamic economics
Involves studying the rules provided in the Quran and the Sunnah pertaining to economic concepts, comparing and contrasting these with contemporary economics, identifying the gaps and finding ways to bridge these gaps.
Islamic equity fund
The assets of the fund are invested mostly in shares, while a small amount may be invested in cash and other fixed-income Islamic securities. The chosen shares would be Shariah screened, and this is the most common type of fund used by Islamic fund managers globally.
Islamic finance and banking
Modern Islamic finance and banking mostly follows the structure of conventional finance and banking, with the exclusion of interest-based transactions, replacing interest with a profit and loss sharing system and ensuring transactions and operations are Shariah compliant.
Islamic real estate investment trust (I-REIT)
A REIT is an investment vehicle which invests mostly in real estate. I-REITs usually use Ijara contracts or Ijara–Istisna contracts. These are often designed as equity REITs, where investors may get proportional ownership of the underlying real estate and earn stable rent income. I-REITs are structured by individual investors placing their funds into a common pool which is invested in a managed pool of real estate, generating income from renting, leasing and selling real estate.
Islamic window
When conventional banks participate in Islamic banking, they may do so through a window within their regular distribution channel for their conventional business, rather than setting up a separate subsidiary or branch network.
Istisna
This is a sales contract in which the buyer contracts with the seller to manufacture, produce, construct, fabricate, assemble or process any asset in accordance with given specifications, descriptions, quality and quantity identified, and within a specified period and at an agreed price.
Istisna Sukuk
This form of Sukuk uses the Istisna mode of Islamic finance to fund manufacturing, real estate development, large industrial projects, construction of major items like power plants, ships, aircraft, etc. To raise the requisite funds, the issuer or bank produces Sukuk certificates that provide the holders with proportional ownership in the asset to be manufactured or constructed. Once the asset is completed, its ownership may be passed on immediately to the ultimate client and the deferred payments made by the client are passed on to the Sukuk holders.
Kafalah
This is a third-party guarantee provided by a borrower against some obligation. If the borrowers fail to meet their obligations, the creditor or bank can recover their dues from the guarantor. The Arabic word means joint guarantee or guaranteeing each other in Takaful.
Lender of last resort
In case the interbank market is not able to meet the needs completely, the central bank acts as the lender of last resort and lends funds to the banks to meet their short-term needs.
Lessee or Mustajir
In a lease or Ijara, the party that uses the asset.
Lessor or Muajir
In a lease or Ijara, the party that owns the asset.
Majur
The asset involved in the Ijara contract that is given by the lessor to the lessee for use.
Markup or profit
This can be a fixed amount or a percentage of the cost of the Murabaha item. This amount will constitute the Islamic bank's profit and for the Murabaha client or buyer it is the extra cost incurred for the advantage of deferred payment. The markup or profit will be clearly stated and mutually agreed by the bank and the client, and cannot be changed later.
Maysir
This includes all kinds of games of chance or dealings where one can gain significantly or lose all depending on which way the deals moves, and are prohibited by Shariah law.
Medium of exchange
Something used as payment for buying and selling transactions, like money and in earlier times, gold, silver, animals, grains, etc.
Mismatch of quality and quantity
If the commodities specified in the Salam and parallel Salam contracts do not match completely, or the delivered goods do not match with the specifications, the supplier or manufacturer would be in default with the bank, but the bank still has to supply to the client by purchasing from the open market.
Money
The medium of exchange currently used globally.
Money market
Investors and borrowers access the money market to invest or borrow in the short term, and the period various from overnight to one year. The instruments have a maturity of one year or less.
Moral hazard risk
Only the borrower or entrepreneur has full information on the running of the business and may engage in activities that are harmful for the business, affecting the profit earned. The Islamic bank shares in the profit or loss of the business and is required to engage in thorough and careful monitoring of the business to ensure all operations are in the best interests of the enterprise.
Muamalat
Shariah or Islamic jurisprudence includes the rulings related to man-to-man relationships, called Muamalat. A major part of the Muamalat involves economic activities and commercial dealings, including Islamic finance and banking.
Muawadat
Contracts of exchange.
Mudaraba
In Mudaraba, one party provides the entire capital while the other provides the time and effort in the business venture. The capital provider is called the Rab al Maal while the entrepreneur who manages and runs the business using their time, expertise, management and entrepreneurship skills is called the Mudarib.
Mudaraba al Muqayyadah
Also called restricted Mudaraba, in this case the capital provider, the Rab al Maal, provides certain parameters or restrictions within which they would prefer the Mudarib to invest their funds. These restrictions usually relate to the type of investment, place or location of the investment, and the time of the business venture. Besides these restrictions provided at the beginning of the contract, the Rab al Maal does not interfere in the everyday operations of the business, which is completely the responsibility of the Mudarib.
Mudaraba al Mutlaqah
Also called unrestricted Mudaraba, with no restrictions imposed on the Mudarib. The Mudarib has complete authority and freedom to choose any type of project, provided it is Halal, Shariah compliant and legal. The location and time of the venture is also up to the Mudarib to choose.
Mudaraba model
This is based on the Mudaraba concept. The participants are the Rab al Maal, providing the capital and the Takaful operator is the Mudarib, providing the effort and skill; they share the profit in a pre-agreed ratio. In case of a loss, the participants lose their capital and the Takaful operator is not compensated for their work.
Mudaraba Sukuk
Equity based where one party, the Rab al Maal, pays the entire capital while the other, the Mudarib, provides the effort and entrepreneurship. The two parties share the profit according to a pre-agreed ratio, but the entire financial loss is borne by the Rab al Maal and the Mudarib loses their effort. When the Sukuk is structured it represents undivided ownership of units of equal value in the Mudaraba equity, and these units are registered in the names of the Sukuk holders who contribute their capital to a specific project to be managed by the issuer or the Mudarib.
Mufawada
In this kind of Musharaka all the partners or participants rank equally in every respect – in their initial contributions of capital, in their privileges, in their rights and liabilities. The partners have equal roles in management, and equal rights in the profits and disposition of the assets of the venture. The liabilities of all the partners are unlimited, unrestricted and equal. They are all the agent and guarantor for each other. The Mufawada form of Musharaka is not very common or popular in the Islamic banking industry.
Multilateral Mudaraba
In this case there are several capital providers whose funds are collectively provided to one Mudarib or entrepreneur.
Murabaha process
A client approaches the bank with a request to purchase a specific item or asset; this request could be a binding promise. The bank acquires the item and adds a markup to the costs, then sells to the client who is aware of the cost as well as the markup. The client pays the bank over the contract period either as a lump sum in the future or in instalments over the deferred period.
Murabaha or trust sale
The simplest Islamic banking instrument, and a widely used product. Islam prohibits charging fixed interest on money, but permits charging fixed profit on sale of goods. Islamic banks therefore use a sale-based transaction – Murabaha – instead of a term loan for financing. Murabaha is a sales contract where profit is made by selling at a cost-plus basis. It is an agreement where the bank purchases a specified item at the request of the customer, adds a pre-agreed profit to it and sells it to them at the marked-up price.
Murabaha sale with a promise
The client makes a promise to buy the item once the bank acquires it. More common than the simple Murabaha as Islamic banks want to guarantee the client buys what they asked the bank to acquire for them. In Murabaha with a promise the client has the risk of the goods not being delivered as per specification and at the contracted time, while in case of ordinary Murabaha the entire non-delivery risk is with the bank.
Murabaha Sukuk
Based on the Murabaha mode of financing, where a seller interested in acquiring assets to resell using the Murabaha mode may raise the cost to acquire the assets by issuing Sukuks. The Sukuk holders would own the assets till they are resold and will be entitled to the marked-up sales price in proportion to the shares in the Sukuk issue.
Musawama
This sale involves a purchase when the customer does not know the cost of the product, but is aware of the price and decides to buy or not at that price. The customer may also negotiate the price, and this includes all the purchases made at shops where customers are aware only of the price and not the cost.
Musharaka
A partnership of two or more, who put together their capital and labour based on mutual trust, share in the profit and loss of the joint venture and have similar rights and liabilities. The purest form of Islamic finance instrument.
Musharaka Al Milk
This is a Musharaka partnership which involves ownership of common property that the partners may have acquired through a specific contract or via inheritance.
Musharaka Mutanaqisa, Musharaka Muntahiya Bittamleek or diminishing Musharaka
This type of Musharaka is a joint-ownership contract at the very onset of which it is agreed that one party has the right to purchase the shares of the other partners over a prescribed contract period at a pre-agreed price. The repurchase can be at regular intervals or could be according to the financial convenience of the purchasing partner. Commonly, in Islamic banking, the borrower or entrepreneur is the party that gradually purchases the units in the Musharaka venture owned by the Islamic bank as partner. The result is that the Islamic bank's share in the Musharaka declines, finally becoming zero, while the other partner's share increases, reaching 100%, resulting in the latter owning all units of the venture and becoming the sole proprietor.
Musharaka Sukuk
Musharaka is based on an equity partnership where all parties provide the capital and the profits are shared in a pre-agreed ratio, while the losses are borne according to the capital contribution. Musharaka Sukuks are structured to raise funds for new projects, to extend an existing project or for a huge business activity based on a joint venture. The issuer or SPV are usually the active partners, while the Sukuk holders are the silent partners.
Muslam
The buyer of the asset in a Salam contract.
Muslam Ileihi
The seller of the asset in a Salam contract.
Muslam Fihi
The purchased asset or commodity in a Salam contract.
Muslim legal scholars
Scholars who are experts in Shariah law and Islamic jurisprudence.
Muslim population
All the world population belonging to the Islamic faith. Currently the Muslim population comprises more than a quarter of the estimated global population of 7.4 billion currently.
Mutual insurance
In both conventional mutual insurance and Takaful, the insured or policyholders create a pool of funds by contributing their premiums to it and this fund belongs to the policyholders who mutually insure each other. The fund is used to indemnify those policyholders who suffer any loss from the risks against which they have been insured.
Non-compliant stocks
These are shares that do not pass the Shariah screening process or were compliant earlier but for various changes in their business or financial activities are not Shariah compliant any more.
Non-tradable Sukuk
Non-tradable Sukuks are those that represent receivables such as cash or goods and hence are not tradable – for example Murabaha and Salam Sukuks.
Obligatory rulings
Rulings that need to be followed and are of five types. Wajib – which needs to be followed, Mustahabb – which are recommended, Mubah – which are permissible and neither rewarded nor punished, Makruh – which are discouraged and Haram – which are forbidden.
Oil boom and oil embargo
The importance of oil for the world and the economy of oil-producing countries became crucial with the formation of the OPEC and the application of the oil embargo in the mid-1970s, leading to a dramatic increase in oil prices and a sudden significant increase in the wealth of governments and the public of the OPEC countries, including the GCC countries.
Open-ended fund
An open-ended unit trust is that which has the authority to issue new units and to redeem existing units at any time.
Operating lease or regular Ijara
Regular Ijara are like conventional operating leases and can also be called true leases. These are contracts of rent only and do not end in the transfer of ownership of the leased asset from lessor to lessee. Rather, the asset is returned to the lessor at the end of the Ijara period. In this kind of Ijara, the Ujrah or rentals that are charged over the Ijara period are not sufficient to recover the full value of the asset.
Ordinary Murabaha
The client asks the bank to acquire an asset that they would like to purchase without making any promise to buy it.
Parallel Istisna
The second Istisna contract is drawn up between the bank and the assigned manufacturer, the bank is the buyer and the manufacturer is the seller. The bank approaches the manufacturer with the exact same order and specifications that the customer has provided to the bank in the first Istisna. When the bank receives the quote from the manufacturer, it adds its own profit and quotes to the customer for the first Istisna. If the customer agrees, then the first Istisna is contracted. The bank then goes back to the manufacturer and enters the contract of the second Istisna agreement, the parallel Istisna. The bank makes the payment to the manufacturer either in full when signing the contract or in instalments during the manufacture, or sometimes in full at delivery. The parallel Istisna can be called a sub-contract but to be Shariah complaint, the two Istisna contracts must be completely independent of each other with respect to rights and obligations.
Parallel Salam
The Islamic bank acts as the buyer of the asset or commodity in the first Salam contract and then enters into the second Salam contract, the parallel Salam, as a seller of the acquired asset or commodity from the first Salam that it will now sell and deliver to the buyer in the parallel Salam. Shariah rules require these two Salam contracts to be completely independent of each other. Parallel Salam is allowed with a third party only.
Participants
Those individuals who contribute to the Takaful fund, as a gift or donation under the Tabarru mechanism.
Performance risk
In the parallel Istisna contract the bank is exposed to the risk of the manufacturer not delivering the asset in the required specification, quality and quantity and at the designated time and price. To manage the manufacturer's performance risk, banks may demand performance bonds and warranties after delivery.
Profit and loss sharing
A major difference of the Islamic bank from its conventional counterpart is that instead of conducting financial intermediation with the interest-based method, it shares in the profit and loss of the projects it finances and then shares its own profit and loss with the depositors.
Profit equalization reserve
The allocation for this reserve from the Mudaraba profit is made before allocating any amount to the Mudarib. This reserve aims to maintain the level of return for investment account holders.
Purification of income distribution
Some scholars do not allow investment in stocks that involves any kind of conventional debt, while others allow such stocks with the condition that the income generated needs to be cleansed or purified in proportion to the Shariah-non-compliant activities. As such, any income that is from interest or any other non-compliant source is donated to charity.
Qard Hasan
This is a benevolent loan, where the borrower is required to return only the amount of the original loan.
Qiyas
The fourth most important source of the Shariah. Qiyas involves analogical deductions. It is the process by which any original ruling, or an existing case decision, is applied to a new matter with similar characteristics on the basis that the new case has the same effective cause as the former.
Quran
The holy book of the Muslim faith. For the Muslim population it supersedes all scientific methods or human decisions.
Rahn
The security or collateral provided as a pledge or mortgage on an asset owned by the borrower. If the borrower is unable to repay, the financier can sell the asset and recover their claims from the funds generated, though if any surplus remains from the sale value it will be returned to the borrower.
Ras al Maal
The payment for the asset in a Salam contract.
Regulatory environment
Ideally, the Islamic financial institutions operate best in a fully Shariah-compliant regulatory environment. Only countries like Iran and Sudan fall in this category, while most Muslim-majority countries operate under the dual banking system where mainly the conventional regulatory regime is in operation, but the Islamic financial institutions and their unique features are understood and the Shariah implications are tailored into the special regulations applying to these institutions. Non-Muslim countries operate under a fully conventional regulatory environment. The interaction between Shariah law and local law and regulations may lead to conflict and confusion, and in pure conventional environments the local regulations may make it difficult to introduce Islamic financial products and services with their unique characteristics.
Reinsurance
Insurance for insurance companies. Insurance companies deal with large portfolios of risk and to protect themselves they buy reinsurance from large insurance companies or companies specialized to provide reinsurance only. These companies are basically underwriting the risks of the smaller insurance companies.
Retakaful
The Islamic alternative to reinsurance. In case of Retakaful, the individual Takaful operators are the participants, who contribute their agreed premiums to a common pooled underwriting fund to mutually protect each other. The operator of this underwriting fund is the Retakaful company and all Retakaful contracts are required to be Shariah compliant and devoid of Riba, Gharar and Maysir.
Riba
In Islam, money is only a medium of exchange and not a commodity which can earn on its own. Riba or usury or interest is the premium paid by the borrower to the lender, it means the increase, addition, expansion or growth in the money that is owed.
Ribawi
Money-like items which can be exchanged only at spot, like gold and silver.
Sadaqah
Every Muslim has specified economic obligations towards society, of which Sadaqah is voluntary charity.
Salam
In case of a Salam contract, the payment is made fully in advance at the time of the contract and the delivery of the asset is deferred to a specific time in the future. A Salam contract is like a forward sale contract in conventional finance, with advance payment and deferred delivery.
Salam Sukuk
Based on the Salam mode of financing where the buyer pays the full price of the asset in advance on spot; usually the buyer gets a discount on the price for paying in advance. The seller would deliver at a mutually agreed future date. The contract is like a conventional forward contract. The majority of Salam Sukuks are short term.
Sarf
A form of exchange where one currency is sold for an equivalent amount of another currency. Here, one currency is the asset while the other is the payment. Shariah requires the currencies to be exchanged on spot. Similarly, metals originally used as currency (like gold, silver, etc.) can only be exchanged with each other on spot also. Future trading of either currency or these metals is not permitted by Shariah law.
Savings accounts
Islamic banks accept savings account funds based on Wadia (safekeeping), Wakala (agency), Mudaraba (trust financing) or Musharaka (equity financing). Banks use the funds in these accounts to finance borrowers and entrepreneurs. These accounts bear some risk and provide the depositors with some profit from the profit earned by the bank at a pre-agreed ratio.
Scarcity of resources
When wants are unlimited while resources are limited, there is a scarcity of resources.
Seller's default
The supplier manufacturer in the Salam contract may not deliver on the specified date and at the specified place, and this could force the bank to purchase from the market to deliver to its client in the parallel Salam contract.
Shariah compliance risk
Islamic bank operations need to follow the principles of Islamic economics and Shariah law. Any Shariah non-compliance can affect their reputation and lower the loyalty of their customers.
Shariah-compliant stocks
Equity or shares in a company is not debt and hence does not have the complication of Riba. Yet the shares of all companies are not acceptable as Shariah compliant. It is very difficult to find companies that are completely free from Shariah-non-compliant financial transactions. To deal with this significant investment challenge, the Shariah scholars and the international Islamic regulatory and standard setting bodies have developed more flexible procedures to be able to identify some companies that can be considered within reasonable Shariah compliance. This process is called the Shariah screening process for stock selection and involves a set of guidelines that are provided to select such companies and identify Shariah-compliant stocks.
Shariah governance
Corporate governance is a set of rules, laws, policies and processes by which a corporation is managed to safeguard the best interests of its stakeholders, including shareholders, creditors, customers, employees and government. The Shariah Supervisory Board is responsible for implementing Shariah governance in an Islamic financial institution.
Shariah law
Also called the Islamic law, dictates specific dos and don'ts related to all aspects of a Muslim's life, including commercial and financial transactions.
Shariah scholars or Fuqaha or Ulema
Those who are knowledgeable in Fiqh.
Shariah screening process
Not all company shares are Shariah compliant. It is very difficult to find companies that are completely free from Shariah-non-compliant financial transactions. To deal with this significant investment challenge, the Shariah scholars and the international Islamic regulatory and standard setting bodies have developed more flexible procedures to be able to identify some companies that can be considered within reasonable Shariah compliance. This process is called the Shariah screening process for stock selection.
Shariah Supervisory Board
The Shariah Supervisory Board is a body set up with a group of Islamic Shariah scholars or jurists to assist the Islamic financial institutions to operate in accordance with Shariah law.
Shirkah
Contracts of partnership.
Social responsibilities of Islamic finance
Shariah principles require Islamic banks to balance their profit motivation with social objectives; it is considered unjust if they are unable to provide sufficient returns to depositors and shareholders who have entrusted them with their money on the one hand, but on the other hand they should not make excessive profits at the expense of their customers or by neglecting their social responsibility.
Social welfare
All activities conducted by governments, other organizations or individuals to benefit society and communities within society.
Sources of funds
The sources of funds for an Islamic bank are the cash inflows and comprise the liability side of the bank. Islamic banks' liabilities or common sources of funds include current, savings and investment accounts.
Special purpose vehicle
The body set up to issue Sukuk certificates to investors and collect funds from them and distribute income to the Sukuk holders. The SPV ceases to exist after the Sukuk contract ends.
Sukuk
An Islamic alternative to a conventional bond. The AAOIFI defines Sukuks as certificates of equal value representing undivided ownership shares in tangible assets, usufructs, services, specific projects or a special investment activity.
Taawun
The mutual assistance, responsibility and protection of Takaful participants towards each other against risks from uncertain events. This is similar to conventional cooperative or mutual insurance, where participants pool their funds together to indemnify each other and share each other's risks. Policyholders or participants mutually guarantee each other; as a result, each of them is both the insured (protected against unforeseen losses) and the insurer (providing protection to others participating in the fund).
Tabarru
In Takaful the participants do not just pay a premium to purchase the risk protection against any uncertain risk, rather they contribute their premium as a donation or gift into the Takaful fund. Such a donation of the premium is aimed not only at providing loss protection for the participant but for others too in the group, thus including cooperative risk protection, social responsibility and caring for others in the process.
Takaful
A form of mutual help – the insured jointly guarantee each other.
Takaful model
In the case of a Takaful operator, its income and profit or loss scenario can be different depending on its operational structure.
Takaful operator
A registered and licensed body or corporation responsible for managing the operations of the Takaful fund on behalf of the participants.
Temporary Musharaka
This kind of Musharaka involves a single transaction or short-term financing, which concludes within one year. The Musharaka could be renewed each year if required. Common uses of temporary Musharaka are working capital financing.
Tradable Sukuk
Those Sukuks that represent ownership in tangible assets or in an enterprise that can be bought or sold at the Islamic capital market – for example Ijara, Mudaraba and Musharaka Sukuks.
Two-tier Mudaraba
In Islamic financial intermediation, the Islamic bank executes a Mudaraba contract with the depositors, where the depositors are the Rab al Maal while the bank acts as Mudarib or entrepreneur. On the other hand, the Islamic bank enters a second Mudaraba contract with the users of the funds, the borrowers or entrepreneurs. In this Mudaraba the bank acts as the Rab al Maal and the fund user is the Mudarib. This is called the two-tier Mudaraba of Islamic financial intermediation.
Two-windows model
This model is almost the same as the two-tier Mudaraba, the only difference being that it has a reserve requirement. The model divides the liability side of the bank balance sheet into two windows, one for demand deposits requiring 100% reserve and the other for investment deposits which have no reserve requirement.
Ujrah
This is the consideration or rent that the lessee pays to the lessor for the right to use and derive benefit from an object owned by the lessor.
Underwriting deficit
This is the shortfall of the contributions made by the participants to meet the deductions of all claims and all expenses and management fees for the Takaful operator.
Underwriting surplus
This is the excess that remains from the contributions made by the participants after the deductions of all claims and all expenses and management fees for the Takaful operator.
Usufruct
The right to the usefulness of an asset owned by someone else.
Utmost good faith
In case of all forms of insurance, all relevant information related to the uncertain risky event and its relationship to the insured is best known to the insured rather than the Takaful operator, and due to this imbalance in available information the parties need to have trust in each other. By law the Takaful operator accepts the information from the insured on good faith and it is the responsibility of the insured to be truthful and if they are not, all liability arising from the risky event is theirs.
Wad
A unilateral promise, made by one party to another, binding only on the promisor not on the promisee. According to the Islamic Fiqh Academy, promises in commercial transactions are binding even if they are one-sided and if they cause the promisee to incur some liabilities.
Wadia
Islamic banks accept the funds in demand deposits as Wadia (deposit), which involves safekeeping. Legally, Wadia authorizes the Islamic bank to keep the funds of the customer in their safe custody on explicit or implicit terms. In contemporary Islamic banking, the Wadia contract is combined with the contract of guarantee or Dhaman, to provide the same functionality as conventional current and savings accounts. In this case, the bank provides a guarantee of the deposited amount.
Wakala
These are agency contracts for a specific work to be done by one party on behalf of another. Examples of Wakala contracts include brokerage services, funds management, insurance underwriting, etc.
Wakala model
Based on the Wakala or agency concept. The participants are the principal and the Takaful operator acts as agent or Wakeel. The Takaful operator earns an agency fee for their services and may also earn an incentive in the form of a performance fee.
Waqf
This is a charitable endowment under Shariah law and involves donating an asset for the common good of Muslim society or for religious purposes, with no intention of reclaiming the asset.
Waqf model
A special Takaful model developed for non-profit Takaful activities for the government or other non-profit organizations. The Takaful fund's surplus is neither distributed to the participants nor taken by the Takaful operator; instead, it is held in the fund for social welfare activities benefiting the community.
Wassiyyat
The Will by which a person dictates how to distribute their assets amongst their beneficiaries.
Wujuh
In this type of Musharaka one or more of the partners do not contribute financially but they contribute their goodwill, brand name or track record. Wujuh Musharaka is very suitable for financing franchising projects.
Zakat
Every Muslim has specified economic obligations towards society, of which Zakat is compulsory charity imposed on Muslims who own above a certain minimum level of wealth.
..................Content has been hidden....................

You can't read the all page of ebook, please click here login for view all page.
Reset
52.15.129.253