Islamic Finance Terms & Glossary

Ajr

Commission or fee charged for services

Baitul Mal

Treasury

Batil

Null and void

Faqih

Shari’a jurist

Fatwa

Religious decree

Fiqh

Islamic jurisprudence

The science of the Shari’a. An important source of Islamic economics.

Gharar

Uncertainty

Hadith

The Prophet's (PBUH) sayings and and commentary on Quran

Halal

Lawful, permissible

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.

Haram

Unlawful, forbidden

Activities, professions, contracts and transactions that are explicitly prohibited under Islamic Shariah.

Hibah

Gift

Ijarah

Leasing

A lease agreement whereby a bank buys an asset or property and then leases it to the customer.

Istisnah

Advance purchase of goods or buildings

Contract of sale of goods of good to be manufactured or constructed in a fixed time for an agreed price.

Jahl

Ignorance (of morality or divinity)

Kafalah

Surity

Maysir

Gambling

Muamalat

Economic transaction

Mudarabah

Trust financing, profit sharing

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.

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...

Murabahah

Cost-plus financing

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.

Musharakah

Joint venture, profit and loss sharing

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 partnership structure and the holding of voting stock in a limited company. 

Nisab

Minimum (amount) required for eligibility of obligation to pay Zakat

Qard

Loan

Qard Hasan

Benevolent loan

A loan contract between two parties where the repayment shall be for the same amount as the amount borrowed.

Rahn

Mortgage

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.
 

Shari’a

Islamic jurisprudence

Islamic law derived from three sources: the Quran, the Hadith and the Sunnah
A “Shari’a Compliant” product meets the requirements of Islamic law.
A “Shari’a board” is the committee of Islamic scholars available to an Islamic financial institution for guidance and supervision in the development of Shari’a Compliant products.

Shirkah

Partnership

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

Sukuk

Islamic Certificates representing equity

Sukuk is an Islamic Investment structured in accordance with the principles of Shari’a. It represents equity and not loan with the interest due from the Issuer to the Sukuk Certificate holders.

Sunnah

Practice and traditions of the Prophet Muhammad

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.

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.

Ujrah

Fee

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

Wakalah

Agency

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.

Waqf

Charitable trust

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.

Zakat

Religious Duties

An obligatory contribution which every wealthy Muslim is required to pay a proportion of his/her wealth every year.