My Key Terms and Concepts

A

Aaqilah: Mutual Help, which was an arrangement of mutual help or indemnification customary in some tribes at the time of the Prophet Muhammad (pbuh). This is a foundation doctrine based on which Islamic insurance practices, known as Takaful, have been developed.

Adl: A general term which conveys the meaning of justice, equity and fairness.

Ahad: One. Inherently one (God).

Ahkam: Plural of Hukum.

Ajr: A payment or compensation such as commission, fees or wages charged for services.
Al-Ghurm bil Ghurm: The principle that one is entitled to a gain only if one agrees to bear the responsibility for the loss. Earning profit is legitimised only by risk-sharing and engaging in an economic venture. This provides the rationale and the principle of profit-sharing in Shirkah (partnership) arrangements.

Al-kharaj bil daman: Link of exposure to risk, one can claim profit only if one is ready to bear the business risk, if any. The principle in Islamic jurisprudence that entitlement to return or yield (al-kharaj) is for the one who bears the liability (daman) for something, say an asset, and one who does not bear the liability has no claim to the yield.

Al-Sar-al-Adl: The just price.

Al-Wakala al Mutlaqa: Absolute power of attorney.

Alim: One who knows.

Amanah: Trust. Lit.: reliability, trustworthiness, loyalty, honesty. Technically, an important value of Islamic society in mutual dealings; it also refers to deposits in trust. A person may hold property in trust for another, it entails the absence of any liability for loss, except for breach of duty. By extension, the term can also be used to describe different financial or commercial activities such as deposit taking, custody or goods on consignment. Deposits in current accounts (usually non-interest bearing) with Islamic banks are regarded as Amanah. If the bank obtains authority to use the funds in the current accounts to invest in its business, Amanah transforms into a loan from the depositor to the bank and the bank is liable to repay the full amount in the current account, irrespective of profit or loss made by the bank.

Amil: Literally it means worker. One who performs a task, an agent. One who deserves compensation for performing a task, such as the mudarib (manager) in a mudarabah contract or a zakat collector.However, in Fiqh it also refers to the working partner in mudarabah contract. Under this contract, one partner provides the capital and the other provides the labour who is called amil or mudarib.

Amin: One who holds honestly the trusts of other people; trustworthy.

Amwal: Plural of Mal which means worldly possessions including both property and money (wealth).

Aqd: Contract, Agreement, Bond. Synonymous with the word “contract” in modern law.

Aqd-al-Bay: A contract of sale.

Aqd-al-Muawadah: A contract of exchange in which compensation is given against the goods or services received.

Aqd-al-Qard: A loan contract. Also known as Qard.

Aqd Ghair Lazim: A contract in which any one of the parties has a unilateral right to revoke it with the consent of the other(s).

Aqd Lazim: A contract in which none of the parties has a unilateral right to revoke it without the consent of the other(s).

Aqidah: Belief, faith.

Aqilah: Kin or persons of relationship who share responsibility.

Aql: Intellect.

Ariya: Loan, which means to give any non-fungible commodity to another for use, without taking any return for its use.

Arbun: A non-refundable down payment or deposit paid by a buyer for the right to purchase goods at a certain time and certain price in future; if the right is exercised, it becomes part of the purchase price. If the buyer does not complete the purchase or backs out for any reason, the seller has the option to forfeit the deposit. Also known as Urboun and Bai al-Arbun. Also see Hamish Jiddiyah.

Assets: Anything of value. Any interest in real or personal property which can be appropriated for the payment of debt.

Awqaf: Plural of Waqf, meaning trust.

Ayn: Monetary wealth. A tangible (physical) asset. Also, refers to currency or ready money. Ayn is often contrasted with Dayn.

B

Bai: Stands for “sale” or contract of sale. It is often used as a prefix in referring to different sales-based modes of Islamic finance, such as Murabaha, Istisna’a, and Salam.

Bai Al Amanat: Fiduciary sales like murabaha and wadi’ah.

Bai al Inah: Buying an object for cash then selling it to the same party for a higher price whose payment is deferred so that the purchase and sale of the object serves as a ruse for lending on interest. It equates to a double sale by which the borrower and the lender sell and then resell an object between them, once for cash and once for a higher price on credit, with the net result of a loan with interest. Used by some Islamic banks, it refers to selling of an asset to the customer through deferred payments. At a later date, the bank will repurchase the asset and pay the client in cash terms. Thus, Bai al Inah comprises two agreements; in the first agreement, the bank sells an identified asset to the customer at an agreed price and the customer can complete the purchase of bank’s asset by payment in installments over an agreed period; in the second agreement, the bank re-purchases the same asset from the customer at a lower price and on completion of the second transaction, the bank will pay the lump sum amount in immediate cash at the price agreed between them. The difference in the price is the bank’s profit, which is determined in advance. This arrangement is prohibited by the majority of Shari’ah scholars as it also equates to a sale and buy-back arrangement. Also known as Bay-al Inah or Inah. Similar to tawarruq however, in tawwaruq a third party is involved as an intermediary.

Bai´ al khiyar / Kiyar: Option to rescind the sale.

Bai´ al Mutlaq: Conclude a sale without any option to rescind.

Bai´ al Muqayaza: Exchange of goods with goods is called barter.

Bai Bithaman Ajil (BBA): This contract refers to the sale of goods on a deferred payment basis; a deferred payment sale. Islamic banks use it as a mode of financing for purchase and sale or deferred payment of consumer goods. Technically, this financing facility is based on the activities of buying and selling. There is no interest charged. Equipment or goods required by the customer are purchased by the bank which subsequently sells the goods to the customer at an agreed higher price; payment is deferred and the customer is allowed to settle payment either by instalments or in a lump sum within a pre-agreed period. The deferred payment price which is the bank’s sale price includes a profit mark-up for the bank agreed by both parties. Similar to a Murabaha contract, but with payment on a deferred basis known as Murabaha Muajjal.

Bai Mu’ajjal: Lit.: a credit sale or deferred payment contract. Technically, a financing technique adopted by Islamic banks, It is a contract in which the seller allows the buyer to pay the price of a commodity at a future date in a lump sum or in installments. The price fixed for the commodity in such a transaction can be the same as the spot price or higher or lower than the spot price. The concept is the same as Bai Bithaman Ajil (BBA).

Bai wafa: Buy-back, sale and repurchase, a contract with the condition that when the seller pays back the price of goods sold, the buyer returns the goods to the seller.

Barakah: Blessing.

Bay’al ayan: Sale of tangible objects such as goods (as opposed to sale of services or rights).

Bay al-dayn: Sale of debt. According to a large majority of fuqaha’, debt cannot be sold for money, except at its face value, but can be sold for goods and services.

Bayu al-Gharar: Trading in risk, where the Arabic word gharar is taken to mean “risk”. See Gharar.

Bay al-kali bil kali: A sale in which both the delivery of the object of sale and the payment of its price are delayed. It is similar to a modern forward sale contract.

Bay al-mudaf: A sales contract in which delivery of both the commodity and the payment is deferred – for example forward sales in modern times. Such contracts are not permitted by the Shari’ah.

Bay muzayadah: Sales by auction.

Bayt-al-Mal: Public Treasury in the Islamic State.

Batil: Null and void. Invalid sale or contract. One that does not fulfil the conditions relating to offer and acceptance, subject matter or the consideration and possession or delivery of the subject matter or involves some contravention of the Shari’ah, such as the involvements of riba, gharar or qimar.

Bad Debt: A debt that is not collectible and is therefore worthless to the creditor.
Balance Sheet

C

Capital Markets: Those financial markets, including institutions and individuals, that exchange securities, especially long-term debt instruments.

Collateral: Assets pledged to secure the repayment of a loan.

Commutative: Relating to, involving, or characterised by substitution, interchange, or exchange. Legal term in which one in which each of the contracting parties gives and, receives an equivalent. The contract of sale is of this kind. The seller gives the thing sold, and receives the price, which is the equivalent. The buyer gives the price and receives the thing sold, which is the equivalent.

Covenant: An agreement or promise to do or not to do a particular thing; to enter into a formal agreement; a promise incidental to a deed or contract. The following are functional objectives guiding most covenants: full disclosure of information, preservation of net worth, maintenance of asset quality, maintenance of adequate cash flow, control of growth, control of management, assurance of legal existence and concept of going concern, provision for lender profit or program goals.

Current Asset: Assets that will normally be turned into cash within a year . Current Liability Liability that will normally be repaid within a year

Current Ratio: Current assets divided by current liabilities. A measure of liquidity. Generally, the higher the ratio, the greater the “cushion” between current obligations and a firm’s ability to meet them.

D

Dalil: A scientific argument based on reason.

Daman: Guarantee, security. Taking responsibility.

Daman Khatar Al-Tariq: Guarantee against the travel hazards.An arrangement of mutual assistance in which losses suffered by traders during journeys due to hazards were indemnified from jointly pooled funds.

Darurah: Darura Necessity, overriding necessity. Adopting a ruling, even one that may contravene a Shari’ah rule, when one is compelled by extreme necessity, usually life or death (Usually used for the “Doctrine of Necessity,” whereby something otherwise prohibited becomes temporarily permissible).

Dayn: Debt. A dayn comes into existence as the result of any contract or credit transaction. Debt An amount owed for funds borrowed. The debt may be owed to an organization’s own reserves, individuals, banks, or other institutions. Generally, the debt is secured by a note, bond, mortgage, or other instrument that states repayment and interest provisions. The note, in turn, may be secured by a lien against property or other assets. Debt Service Reserve Term used to refer to cash reserves set aside by a borrower, either by internal policy or lender covenant, to repay debt in the event that cash generated by operations is insufficient. Default A failure to discharge a duty. The term is most often used to describe the occurrence of an event that cuts short the rights or remedies of one of the parties to an agreement or legal dispute, for example, the failure of the mortgagor to pay a mortgage installment, or to comply with mortgage covenants.

Dhimmah: Responsibility, term used in Takaful.

Dinar: Currency in the form of gold coins that was used in the past. The term is still used in some Muslim countries, like Iraq.

Dirham: Name of a currency unit, usually a silver coin, used in the past in several Muslim countries. The term is still used in some Muslim countries, such as Morocco and United Arab Emirates.

Duyoon Haalah Dayn: Debts that have become due or can be called back at any time.

Duyun Mu’ajjalah: Time of payment settled between the creditor and the debtor and the debt is not yet due.
Due Diligence Refers to the task of carefully confirming all critical assumptions and facts presented by a borrower. This includes verifying sources of income, accuracy of financial statements, value of assets that will serve as collateral, the tax status of the borrower and any other material facts presented by the borrower.

E

Equity: The value of property in an organisation greater than total debt held on it. Equity investments typically take the form of an owner’s share in the business, and often, a share in the return, or profits. Equity investments carry greater risk than debt, but the potential for greater return should balance the risk.

Equity Participation An ownership position in an organisation or project or venture taken through an investment. Returns on the investment are dependent on the profitability of the organisation or project.

F

Fadl Excess, additional, surplus, as in Takaful.

Fadl-al-Allah: The bounties bestowed by the Almighty Allah.

Falah Success, to thrive. Technically, it implies success both in this world and in the Hereafter ( Akhirah).

Faqih Jurist who gives rulings on various juristic issues in the light of the Qur’an and the sunnah.

Faraid:The section of Islamic law that deals with the distribution of the estate of a deceased persons among his/her heirs accordance with Allah’s decree in the Qur’an and the Hadith.

Fasid: Voidable. A forbidden term in a contract, which consequently renders the contract invalid. A voidable or defective contract due to non-fulfillment of any condition required for valid contracts.

Fatwa: A religious decree. A ruling made by a competent Shari’ah scholar on a particular issue, where fiqh (Islamic jurisprudence) is unclear. It is an opinion, and is not legally binding. It may address either a specific problem of interest to a particular person or a matter of public concern.

Fictitious Assets: Asset having no tangible existence.

Fiqh: Refers to the whole corpus of Islamic jurisprudence. In contrast to conventional law, fiqh covers all aspects of life – religious, political, social, commercial, and economic. Fiqh is based primarily on interpretations of the Qur’an and the Sunnah and secondary sources that are supported by the Qur’an and the Sunnah. Fiqh may also be understood as the jurists’ understanding of the Shari’ah.

Fiqh al-mua’malat: Islamic commercial jurisprudence, jurisprudence of financial transactions or the rules of transacting in a Shari’ah-compliant manner.

Fitrah: Law of nature

G

Gharam: Damage, Loss, as in Takaful.

Ghaban: Misappropriation or defrauding others in respect of specifications of the goods and their prices.

Ghaban-e-Fahish: Excessive profiting with deception, exorbitant price.

Gharar : Lit: uncertainty, hazard, chance or risk. Technically, sale of a thing which is not present at hand; or the sale of a thing whose consequence or outcome is not known; or a sale involving risk or hazard in which one does not know whether it will come to be or not, such as fish in water or a bird in the air. It is an exchange in which one or more parties stand to be deceived through ignorance of an essential element of the exchange. Thus it refers to an element of absolute or excessive uncertainty in any business or contract. Gambling (qimar) is a form of gharar because the gambler is ignorant of the result of the gamble. ( gharar one of the three fundamental prohibitions in Islamic finance, the other two being riba and maysir). The Hanafi school of Islamic jurisprudence defined gharar as “that whose consequences are hidden.” The Shafi’i school defined gharar as “that whose nature and consequences are hidden” or “that which admits two possibilities, with the less desirable one being more likely.” The Hanbali school defined it as “that whose consequences are unknown” or “that which is undeliverable, whether it exists or not.” Ibn Hazn of the Zahini school wrote ” Gharar is where the buyer does not know what he bought, or the seller does not know what he sold.’

Gharar-fil-Sifah: Uncertainty with respect to characteristics of the goods.

Gharar-fi-al-Ajal: Uncertainty with respect to time of the delivery.

Gharar-fi-al-Miqdar: Uncertainty with respect to quantity of goods.

Gharar-fi-al-Taslim: Uncertainty with respect to delivery of the goods.

Gharar Yasir: A small amount of gharar that may be unavoidable.

Gharim: A debtor who does not possess the fund with which to repay his/her debt. According to the Hanifi jurists, a gharim is one who whose funds, after repayment of his debt, would not to equal the nisab. The Shafi and Maliki jurists divide gharim into two types: i) those whose debts were incurred in their own benefit and 2) those whose debts were incurred benefiting others. The gharimun (pl. for gharim) are one of the eight groups mentioned in the Qur’an as legitimate recipients of the Zakat funds.

Guaranteed Loan: A pledge to cover the payment of debt or to perform some obligation if the person liable fails to perform. When a third party guarantees a loan, it promises to pay in the event of a default by the borrower.

H

Hadith: A record of the sayings and living example of the Prophet Muhammad (pbuh), referred to as the Sunnah.

Halal: That which is permissible by the Shari’ah, valid earnings.

Hamish Jiddiyah: Token money, down payment by a party intending to purchase certain goods who wishes to confirm the intention to do so by paying an amount to the seller as token money or down payment to secure the goods.

Haram: Unlawful in Islam. Activities which are explicitly prohibited by The Qur’an or the Sunnah.

Hawala: Literally, it means transfer; legally, it is an agreement by which a debtor is freed from a debt by another becoming responsible for a debt or the transfer of a claim of a debt by shifting the liability for payment from one person to another, such as a contract for assignment of debt.

Hikmah: Rationale, Wisdom behind any course of action or injunction.

Hila: A forbidden structure used for the purpose of attaining a desired legal outcome, something done to deceive others. Using permissible or a combination of permissible means to reach forbidden ends. Tricks or ruses employed in structuring transactions to give the appearance that they are in compliance with the Shari’ah when the real intention is to circumvent the basic prohibitions.

Hisbah: A term used by the classical Muslim jurists to describe the function carried out by the state or appropriate Islamic authority to regulate the market place. It includes whatever steps may be needed in order to maintain a fair and orderly market place.

Hukum: In Fiqh, the Shari’ah ruling associated with any action; rules, provisions and laws includes Allah’s command’s/norms/values for individual believer.

Husah: Lit: pebbles. A type of sale that was practiced by the Arabs in the Jahiliyyah in which the sale was determined by casting of pebbles. This practice was prohibited by Prophet Muhammad (pbuh) because of the uncertainty ( gharar) which characterised the contract which governed it.

I

Ibaha: Permissibility. Ibaha refers to the rule that every economic transaction is mubah (permissible) unless expressly and specifically forbidden by the Shari’ah.

Ibnu Sabil: Ibnu sabil is an expression for musafir. Musafir are people who are travelling. Although an ibnu sabil has living means, the person can receive zakat in case of problems in accessing provisions during travelling.”

Ihtikar: Hoarding. The prohibited practice of purchasing essential commodities, such as food and storing them in anticipation of increase in prices.

Ijarah Muntahia-bi-tamleek: A lease ending in the transfer of the ownership to the lessee in such a way that the lease and sale are kept separate and independent transactions. Use of the this term for leasing is better known as ljarah wa iqtina, as the latter tends to give the impression that the Ijarah and the sale are working side by side when actually they have to be two separate deals to fulfil the Shari’ah requirement. See ljarah wa iqtina.

Q

Qard: Loan. It is so called because the property cut off – transferred to the borrower. An interest-free loan which the borrower must return on or before the agreed date; repayment is obligatory.

R

Rahn: Pledge. Collateral; technically and legally, it means to pledge or lodge a real or tangible property of material value as security for a debt or pecuniary obligation so as to make it possible for the creditor to recover the debt, in case of non-payment or default, by selling the pledged property

S

Salaf: In a wider sense, it refers to a loan which draws forth no profit for the creditor and is slightly different from Qard in that an amount given as Salaf cannot be called back before it is due; it includes loans for specified periods, i.e. short, intermediate and long-term loans. See Qard.

Suftajah: A type of banking instrument used for the delegation of credit during the early Muslim period, especially the Abbasides period (749 to 1258 AD). It was used to collect taxes, disburse government dues and transfer funds by merchants and was commonly used by travelling merchants.

T

Tabarru: Act of charity out of one’s own free will without any compulsion or obligation. A donation covenant in which the participants agree to mutually help each other by contributing financially should a fellow participant suffer a loss. A contract to provide somebody any good or service without compensation in return.

Tawarruq: Reverse Murabaha , for the purpose acquiring cash through trade activities. Technically, according to the Muslim jurists, tawarruq can be defined as: a person who buys a commodity at a deferred price, in order to sell it in cash at a lower price. Usually, the sale is to a third party, with the aim to obtain cash. This is the classical form tawarruq , which is permissible, provided that it complies with the Shari’ah requirements on sale ( bai ).

U

Ujrah: The financial charge for using services (wage, salary, allowance, commission, fee).

Ushr: Ten percent (in some cases five percent) of the agriculture produce payable by the Muslim as a part of his religious obligation, like Zakah, mainly for the benefit of the poor and the needy.

W

Wa’ad: Promise, undertaking. A promise, such as is found in purchase and sale undertakings used in certain Islamic finance transactions; a promise to buy or sell certain goods in a certain quantity at a certain time in future at a certain price.

Z

Zakat: Blessing, purification, increase or cultivation of good deeds. An obligatory contribution or tax which is prescribed by Islam on all Muslim persons having wealth above an exemption limit at a rate fixed by the Shari’ah.