By Bernardo Vizcaino
Islamic finance, based on religious principles which avoid
interest and pure monetary speculation, is growing rapidly,
supported by large pools of sharia-compliant funds in the Gulf
and the opening of North African markets in the wake of the Arab
Here is summary of commonly used terms and concepts:
> Amana: Deposit in trust; a widely applied term that refers to
anything in the safekeeping of another.
> Arboun: Down payment; an advance payment which is counted as
part of the purchase price if the buyer decides to complete the
transaction, but which becomes the property of the seller if the
deal is not completed. Can be used as a form of short-selling.
> Bay: Sale; an agreement between two parties in which ownership
of an item is transferred from seller to buyer for a price.
> Fatwa: Religious opinion under Islamic law - a formal response
issued by an expert scholar.
> Fiqh: Islamic jurisprudence; it provides supplemental legal
reasoning in cases where explicit rules are not available in
> Gharar: Contractual ambiguity due to ignorance of an aspect of
the goods, in which one or both parties stand to be deceived.
Gharar should be avoided but there are different levels of it
and only some of them are banned outright. The concept is cited
to ban pure monetary speculation.
> Hadith: Report of the sayings or actions of the Prophet
> Halal: Lawful, a deed permitted by Allah.
> Haram: Unlawful, impermissible.
> Hukum: Ruling. There are five categories: obligatory
(wajib/fard), recommended (mustahabb), neutral/permissible
(mubah), reprehensible (makruh), or forbidden (haram).
> Ijara: Lease or rental arrangement; for example, one party
leases equipment, buildings or other facilities to a client for
an agreed rent. In a common form of ijara sukuk, the originator
sells assets to a special-purpose vehicle which in turn issues
sukuk certificates to obtain funding to pay for the asset.
> Ijtihad: Decision-making in Islamic law by personal effort,
independently of any school of jurisprudence. To be valid it has
to be rooted in the Koran and the hadith, and there must be no
established doctrine ruling the case.
> Istijrar: Continuous purchase or supply contract; the supplier
undertakes to provide a particular product on an ongoing basis
at an agreed price with payment made in an agreed manner.
> Istisna: Manufacturing contract; a type of sale, similar to
salam, in which a price is paid for goods that are subsequently
manufactured and delivered on a stipulated date.
> Kafala: Guarantee; a standard Islamic transaction in which a
guarantor (kafil) agrees to assume responsibility for the debts
of a creditor (makful 'anhu).
> Khiyar: Option; power to cancel a contract. Jurists recognise
different types including khiyar al ru'yah (option to cancel
upon viewing), khiyaral'ayb (option to cancel if undesirable),
khiyar al naqad (option to cancel on non-payment), khiyar al
shart (option to rescind sale), and khiyar al majlis (option to
cancel during the life of the contract).
> Maqasid al Sharia: The higher purposes of sharia law, which is
believed to be built on three objectives: purification of the
soul, upholding justice and protecting interests of all sides.
> Maslaha'ammah: The public good or benefit.
> Maysar: Gambling, which is impermissible.
> Mudaraba: Investment management partnership; one party
provides funds while the other provides expertise and
management. Any profits are shared between the two parties on a
pre-agreed basis, while losses are borne by the provider of the
capital. Mudaraba is a common structure for sukuk.
> Mudarib: Investment manager.
> Murabaha: Cost-plus sale; a financial institution agrees to
purchase merchandise for a client and the client promises to buy
it from the institution at an agreed mark-up. In a common form
of murabaha sukuk, a special-purpose vehicle is set up to raise
funds from sukuk holders and purchase an asset which the SPV
will in turn sell to the originator at a mark-up. The originator
takes delivery of the asset and makes periodic payments to the
SPV which flow to sukuk investors.
> Musawama: Negotiated sale, in which the price of a commodity
is negotiated without overt reference to the price previously
paid by the seller.
> Musharaka: Investment partnership. In a typical musharaka
agreement, two or more parties agree to provide capital towards
the financing of a commercial venture, share profits according
to a stipulated ratio, and share losses on the basis of equity
participation. A typical structure for sukuk.
> Qard: Loan; X lends Y some wealth to be repaid after a
specified amount of time, but which can be reclaimed at any
time. It is legitimate for a borrower to repay more than the
amount borrowed as long as that is not stated as an obligation
in the contract; some Islamic banks cope with this constraint by
charging servicing fees on loans. A "qard hasan" is a loan in
which no additional amount is repaid.
> Rabb al mal: Owner of capital, investor.
> Riba: Interest; any increase in a loan or sale that accrues to
the lender, seller or buyer without the provision of an
equivalent countervalue to the other party. Riba is
impermissible; the term encompasses various types of illicit
gain, of which banking interest is one example.
> Salam: Deferred delivery sale, the sale of fungible goods to
be delivered in the future for a price to be paid in the
present. It resembles a forward contract in conventional
> Sharia: Islamic law originating in the Koran, as defined in
practices and explanations by the Prophet Mohammed.
> Sukuk: Islamic certificate; a term used to describe
equivalents to conventional debt issues such as bonds. In
contrast to debt issues, sukuk holders are the legal and/or
beneficial owners of the underlying assets, sometimes through a
special-purpose vehicle. As such they receive the equivalent of
a coupon from the performance of the yielding asset.
> Sunna: The actions, deeds, endorsements and characteristics of
the Prophet Mohammed.
> Takaful: Islamic insurance, an alternative to conventional
commercial insurance based on the concept of mutual support. It
provides mutual protection of assets and property; the takaful
company oversees a pool of funds contributed by all policy
holders, but does not necessarily bear risk itself.
> Tawarruq/tassiyeel: Monetisation, to convert something to
cash. One party purchases an asset on credit from a second party
on a deferred payment basis, and then sells it on to a third
party, receiving instant cash. Used by some Islamic banks to
provide cash financing to customers (also known as "commodity
murabaha"). In "organised" tawarruq, the first party does not
take material ownership of the asset; this is controversial
among some scholars.
> Wa'd: Unilateral promise; the primary difference between this
and a contract is that the promise is binding only on the maker,
whereas a contract binds both parties.
> Wakala: Agency; a standard Islamic practice where one party
acts as an agent (wakil) for another party. In a wakala sukuk,
certificates are issued by an originator through a
special-purpose vehicle that purchases specific assets, which in
turn are given to a wakil for management (in many cases the
originator is also the wakil). The originator undertakes to buy
the assets at maturity at an agreed price.
> Waqf: Charitable trust, an endowment set up for Islamic
purposes (usually for education, mosque building or the poor).
It involves tying up a property in perpetuity so that it cannot
be sold, inherited or donated to anyone.
> Zakat: Zakah tax, the third pillar of Islam; obligatory alms
giving. Every Muslim who has wealth above a prescribed amount is
required to give money to the Islamic authority for distribution
to the poor and the needy.
(Compiled by Bernardo Vizcaino; Edited by Andrew Torchia)