Islamic Finance Terms – Glossary

Islamic Finance Terms – Glossary

Amanah

Quick definition: trustworthiness, faithfulness and honesty. Amanah is also used to define a situation in which one party is keeping another person?s property in trust. This is the way in which the term is
most commonly applied, especially within the confines of Islam commercial law, and the term has a long history of use. The term is also applied when
referring to goods on consignment, custody or deposit taking.

Arbun

Quick definition: down payment.

This term describes the deposit that the buyer makes to the seller at the same time as making the agreement to complete payment by a set date.

Gharar

Quick definition: uncertainty.

Gharar is a conceptual term that refers to something that is not completely set in stone within a contract. It?s a fundamental disagreement between Islamic and conventional UK law and Islam does not recognise the need for related practices such as speculation, derivatives and short
selling contracts.

Islamic banking / Islamic financial services /

Islamic finance

Quick definition: financial services specifically designed to adhere to Islamic law or Shariah. Although these financial services are designed for Muslims, they are not
exclusively available to Muslims. Non-muslims can also provide and buy the services.

Ijara

Quick definition: Islamic leasing agreement. Because Islam forbids the charging of interest, Muslims get an Ijara which enables the bank to seek profit through the leasing of assets (house, car
etc) rather than by actually lending money. Ijarah wa iqtinah is an extension of the concept which is a hire purchase agreement.

Maysir:

Quick definition: gambling. Maysir is forbidden in Islam and as such the concept fundamentally disagrees with some standard financial practices such as speculation,
insurance and derivative contracts.

Mudarabah

Quick definition: investment partnership. This is the financial partnership between the investor (Rab ul Mal) and another party (Mudarib). The contract will set out how profits will be
shared, and losses are absorbed by the rab ul mal. The mudarib will lose some of the income they were expecting as a result.

Mudarib

Quick definition: investment manager or entrepreneur partaking in a mudarabah. It is the mudarib?s responsibility to ensure that the investor?s money is taken care of and is profitable in its investments. In turn the mudarib gets a share of the profits. The role is very similar to a Discretionary Managed investment portfolio that we recognise from conventional practice in the UK.

Murabaha

Quick definition: purchase and resale. As opposed to lending money, the capital provider purchases the required asset or product (for which a loan would otherwise have been taken out)
from a third party. The asset is then resold at a higher price to the capital user. By paying this higher price by instalments, the capital user
effectively gets credit without paying interest. (Also see tawarruq the opposite of murabaha.)

Musharaka

Quick definition: profit and loss sharing. This is considered to be the purest form of Islamic financing, because profits and shared in pre-arranged proportions and losses are shared in
proportion to the investment made by each investor. Each partner within the Musharakah contributes capital and can make executive decisions
however they are under no obligation to. It?s basically very similar to a partnership which involves owning voting stock in a limited company.

Riba

Quick definition: interest. This is forbidden by the Quran and it forbids any return of money on money, whatever type of interest it may be.

Shariah

Quick definition: Islamic law This refers to the law set down in the Quran and performed by example by Prophet Muhammad (PBUH). Any product purporting to be Shariah must adhere to Islamic law in all respects and to ensure this, a company will usually appoint a Shariah board which will overlook the development and implementation of all Shariah products to ensure they comply.

Shariah adviser

Quick definition: person who advises on Islamic financial law. A Shariah adviser is generally a Islamic legal scholar who has been classically trained and has the expertise and knowledge to ensure products comply with Shariah. Some work individually to advise companies but most are employed as part of a Shariah board to ensure full compliance.

Shariah compliant

Quick definition: observing Islamic law The Shariah board ensures that products are Shariah compliant, a term that is also covered by the word ?Islamic?. Many financial products use the term
?Shariah compliant? as a prefix so customers can be totally sure that the product has followed the law to the letter.

Sukuk

Quick definition: a conventional bond
In conventional terms they are not quite the same as a bond is asset backed and the term ?sukuk? describes the proportionate beneficial
ownership in the asset itself. The company leases the asset to the client so they can take the profits arising from the sukuk.

Takaful

Quick definition: Islamic insurance Because the concept of insurance relates to uncertainty, which could then be related to interest and gambling, Takaful takes a different approach.
The arrangement can be summed up as a charitable collection of funds based on the idea of mutual assistance.

Tawarruq

Quick definition: the Islamic way of obtaining cash When as Islamic customer requires cash, they can use this arrangement to obtain it. It involves buying something on deferred credit and selling the item on to get cash. As a result, cash has been obtained without taking out a loan and paying interest. See murabahah for the opposite – a way to get credit.

Source: http://www.canadian-money-advisor.ca/archives/2006/05/islamic+finance+terms+glossary.html