Common terms used by shariah finance experts
All
| Term | Definition |
|---|---|
| Bai al Arboon |
This is an agreement between a Bank and a Depositor in which the latter deposits in Advance security to the bank for the commodity which he purchased from bank. Security will not be refundable if the depositor does not meet his obligations. |
| Bai Bithaman Ajil |
Under this concept, the Bank will purchase an asset at cost price and sell the same to the customer at cost plus profit, on deferred payment basis, at the time and price agreed to by both parties, payable by fixed instalments. |
| Bai Dayn |
This is Shariah principle that governs the sale and purchase of debt certificates. |
| Bai Inah |
This is contract for a buyback. Under this contract, a seller buys back the assets he or she sold on a deferred basis but at a higher price. |
| Bai Istijrar |
It is a Shariah principle governing a contract between a client and a supplier where the supplier agrees to deliver goods on a regular basis at an agreed price and mode of payment. |
| Diminishing partnership |
In this contract the fund supplier and business manager agrees on a contract where they start the business on the partnership as described in Mudarabha and Musharaka but the fund supplier (bank) gradually sells its capital share to the business manager at pre determined prices and schedule. |
| Hibah |
This term means gift. When somebody takes a loan from any Islamic bank, they do not charge any interest on it, but the person who borrows money gives some gift voluntarily, known as Hibah. |
| Ijarah |
This financial instrument is designed for financing vehicles, machinery and equipment, and airplanes. This is a lease agreement in which one party leases the asset to another at a pre determined condition and rent. Before that bank buys the item from market and leases it to the client, than at the maturity of the contract the lessee pays the amount (lump sum or installment decided at the time of contract) and if he wishes he can become the owner of the item (optional). The ownership risks are borne by the bank as well as the right to sell the asset in the market. (Lease to own When a lease contract creates the above said method, it obligates the lessee to purchase the item at the maturity, it is known as the lease to own contract. Another form of it can be discussed as hire purchase where bank buys on client behalf and hires the goods to client at pre determined rent and at maturity client automatically becomes the owner of the good.) |
| Istisna |
The literal meaning of the word is ‘asking someone to manufacture’. Such contracts are widely used for construction of buildings and related products, manufacturing of aircrafts, ship, machines etc. Such contracts also involve a sale contract between a buyer and a seller to sell an asset before it comes into existence. To fulfill the contractual conditions either the seller will manufacture the asset on his own or ask someone else to deliver it to the buyer on a pre determined date. |
| Ittifaq Dhimni |
This type of contract is a pre-agreed contract where the price for sales and purchase of assets is decided in advance. |
| Mudarabha |
This is a kind of partnership between two parties where one partner promises to provide the capital (rabb-ul-maal) and the other one promise to be an investment manager. Profit is distributed on pre-determined ratio while entering into the contract but in case of loss, only the capital investor (rabb-ul-maal) will bear it. The investment manager does not guarantee to earn profits unless it is a case of violation of contractual terms. |
| Murabahah |
These agreements allow Islamic banks to purchase specific commodity on the client’s behalf. In return the client promises the bank to purchase the commodity from bank at deferred price (which includes the cost plus profit margin). Hence it includes two contracts, one between bank and the seller (generally bank authorizes the ultimate buyer to receive the delivery of goods as its agent) and the other one is between bank and the client. |
| Musharaka |
Musharaka is quite similar to mudarabha with a small difference that in case of musharaka both parties are the capital owners and manager can participate in management as well as profit and loss. Profits can be distributed on pre determined ratio but the losses have to be borne in capital investment ratio only. |
| Qard al-Hasan |
No cost loans are designed for poor or needy people. These are mostly backed by collateral securities. Otherwise generally loans provided by banks do not charge any interest but they take service charges to cover up the costs. |
| Salam |
It is a kind of sale where a prepaid item is delivered at future pre determined time. Here the price is paid on the spot but the delivery is received in the future. This is an exception to Islamic law where existence of goods is necessary to enter in the contract but in case of salam it is not necessary that the goods sold are in physical existence while entering into the contract. |
| Shirkah |
This term is used to refer to partnership, or a contract where two or more parties launch a business to make profit. |
| Ujrah |
This term broadly refers to as fee or a financial charge for services. |
| Usury |
Charging of interests (ribah) on loans. Allah permits commerce, and prohibits usury (O you who believe, you shall not take usury) |
| Wadiah |
Wadiah is a kind of saving account facility. It works as a guaranteed trust where a depository guarantees to repay the whole or part of thesum whenever demanded. Such accounts are entitled to receive any sort of profits; some banks offers return as a token of appreciation. |
| Zakat |
Zakat refers to religious tax. This is an obligatory tax which every wealthy Muslim is required to pay to the Islamic state to distribute amongst the poor. |
