Glossary of Islamic Finance 1

Transcription

1 Glossary of Islamic Finance 1 AAOIFI Accounting and Auditing Organization for Islamic Financial Institutions: Bahrain-based Islamic international standard setting body established in 1991 for Islamic corporations and the industry. Members include central banks, Islamic financial institutions and other industry participants. Akhirah The hereafter. Akhlaq Virtue, morality and manners in Islamic theology. Alim Shariah jurists. Alternative spelling: Ulema. Al-wa d bi al-bai Promise to sell. Al-wa d bi al-syira Promise to buy. Amanah Reliability, trustworthiness, loyalty, honesty. Alternative spelling: Amana. An important value of Islamic society in mutual dealings. It also refers to deposits in trust, where a person may hold property in trust for another. 215

2 216 GLOSSARY OF ISLAMIC FINANCE Amil Agent. Someone who deserves compensation for completing a task, such as a mudarib in a Mudarabah or a Zakat collector. Aqd Contract. Aqidah Set of beliefs. Bai Ajil bi Ajil Delayed-for-immediate sale. The sale price is paid immediately and delivery of the sale item is delayed. Synonymous with Bai al Salam. Bai al Arboon Deposit-secured sale. A sale agreement in which a security deposit is provided in advance as part payment towards the price of the commodity. The deposit is forfeited if the buyer does not meet his obligation. Bai al Inah Sale and buy-back. The sale and buy-back of an asset for a higher price than that for which the seller originally sold it. A seller immediately buys back the asset he has sold on a deferred payment basis at a price higher than the original price. This can be seen as a loan in the form of a sale. Bai al kali bi al kali Sale of debt for a debt. Prohibited sale, the most well known of which is where a lender extends his debtor s debt repayment period in return for an increase on the principal, that is, interest. Bai al Salam Future delivery. A contract whereby the payment is made in cash at the point of contract but the delivery of asset purchased will be deferred to a predetermined date.

3 Glossary of Islamic Finance 217 Bai Bithaman Ajil Deferred payment sale. Alternative spelling: Bai Muajjal. The sale of goods on a deferred payment basis. Equipment or goods requested by the client are bought by the bank, which subsequently sells the goods to the client for an agreed price, including a mark-up (profit) for the bank. The client may pay by installments within a pre-agreed period, or in a lump sum. This sale works in a similar way to a Murabahah contract, but with deferred payment. Bai Muajjal Deferred payment sale. Alternative spelling: Bai Bithaman Ajil. The sale of goods on a deferred payment basis. Equipment or goods requested by the client are bought by the bank, which subsequently sells the goods to the client for an agreed price, including a mark-up (profit) for the bank. The client may pay by installments within a preagreed period, or in a lump sum. This sale works in a similar way to a Murabahah contract, but with deferred payment. Bai Wafa Sale and buy-back. The sale and buy-back of an asset within a set time, when the original buyer agrees to the original seller s repurchase. Baitul Mal Treasury. Dayn Debt. Alternative spelling: Duyun. Wealth that one is required to pay back to another. Dha wa ta ajjal Creditor s debt. A creditor s forfeit on part of the debt when the debtor settles the balance of his debt earlier than scheduled. Dhaman Guarantee. A contract of guarantee whereby a guarantor shall underwrite any claim and obligation that should be fulfilled by an owner of the asset. This concept is also applicable to a guarantee provided

4 218 GLOSSARY OF ISLAMIC FINANCE on a debt transaction in the event a debtor fails to fulfill his debt obligation. Dhimmah Liability. The concept may be likened to a virtual liability container that every responsible person has, which is constantly being filled with rights and obligations, such as the obligation to repay someone. Dirham Unit of currency. A unit of currency, usually a silver coin, used in the past in some Muslim countries and still used in some Muslim countries today, for example Morocco and the UAE. Falah To flourish. Success as measured in this world and Akhirah. Faqih Shariah jurist. Alternative spelling: Fuqaha. Faqir Poor person. Alternative spelling: Fuqara Fard al Kifayah Socially obligatory duties. Alternative spelling: Fard Kifaya. A collective duty of Muslims. The performance of these duties (for example funeral prayers) by some Muslims absolves the rest from discharging them. This term covers functions which the communities fails to or cannot perform and hence are taken over by the state, such as the provision of utilities, or the building of roads, bridges and canals. Fasid Unsound or unviable. A forbidden term in a contract, which consequently renders the contract invalid. Fatwa Religious decree. Alternative spelling: Fatwah, Fatawa. Islamic legal opinion based on Qu ranic, Sunnah and Islamic legal precedent or the Shariah.

5 Glossary of Islamic Finance 219 Fiqh Islamic jurisprudence. The science of the Shariah. An important source of Islamic economics. Fiqh al-muamalat Islamic commercial jurisprudence. GCC Gulf Cooperation Council. A political alliance and trade bloc consisting of six states of the Arabian Gulf: Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the UAE. Ghalat Mistake. A negative element that can affect the validity of `aqad. In Arabic, it connotes error in perception. Gharar Uncertainty. One of three fundamental prohibitions in Islamic finance (the other two being riba and maysir). Gharar is a sophisticated concept that covers certain types of haram uncertainty in a contract. It is an exchange in which one or more parties stand to be deceived through ignorance of an essential element of the exchange. Gambling is a form of gharar because the gambler is ignorant of the result of the gamble. The prohibition on gharar is often used as the grounds for criticism of conventional financial practices such as short selling, speculation and derivatives. Gharim Alternative spelling: Gharimun. A debtor who does not have the funds, after repayment of his debt, would not equal the nisab. The Shafi`i and Maliki jurists divide the gharimun into two types: (i) those whose debts were incurred in their own benefit; and (ii) those whose debts were incurred benefiting others. The gharimun are one of the eight groups mentioned in the Quran as legitimate recipients of zakah funds. Hadith The Prophet s sayings and commentary on the Quran. Alternative spelling: Ahadith.

6 220 GLOSSARY OF ISLAMIC FINANCE Hak Tamalluk Ownership right. A tradable asset in the form of ownership rights. Halal Lawful, permissible. The concept of halal has spiritual overtones. 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. This concept differentiates Islamic economics from conventional economics. In western finance all activities are judged on economic utility. In Islamic economics, spiritual and moral factors are also involved an activity may be economically sound but may not be allowed in Islamic society if it is not forbidden by the Shariah. Hamish jiddiyyah Security deposit. Sum paid by a party who places an order to purchase, as security for his promise. Hanbali Islamic school of law. Islamic school of law founded by Imam Ahmad Ibn Hanbal. Followers of this school are known as Hanbalis. Hanifite Islamic school of law. One of the major Islamic school of law, founded by Imam Abu Hanifa. Followers of this school are known as Hanafis. Haqq A right which a party possesses, for example, the creditor s right to payment. Haram Unlawful, forbidden. Activities, professions, contracts and transactions that are explicitly prohibited by the Quran or the Sunnah. See halal above. Hawala Bill of exchange, remittance. Alternative spelling: Hiwala. A contract which allows a debtor to transfer his debt obligation to a third party

7 Glossary of Islamic Finance 221 who owes the former a debt. The mechanism of Hawala is used for settling international accounts by book transfers, thus obviating the need for a physical transfer of cash. Hibah Gift. A gift voluntarily donated in return for a loan provided or a benefit obtained. Hisbah Regulatory duty. The necessary steps in order to maintain a fair and orderly marketplace. Ibra Rebate. IFSB Islamic Financial Services Board. A Kuala Lumpur based international standard-setting organization that was set up in 2003 to promote the stability of the Islamic financial services industry by issuing global prudential standards and guidelines. The IFSB helps regulators govern Islamic financial institutions in compliance with Basel II and evolving global standards. Ihtikar Hoarding. The prohibited practice of purchasing essential commodities, such as food and storing them in anticipation of a price increase. Ijarah Leasing. Alternative spelling: Ijara. A lease agreement whereby a bank or financier buys an item for a customer and then leases it to him over a specific period, thus earning profits for the bank by charging rental. The duration of the lease and the fee are set in advance. During the period of the lease, the asset remains in the ownership of the lessor (the bank), but the lessee has the right to use it. After the expiry of the lease agreement, this right reverts back to the lessor. This is a classic Islamic financial product.

8 222 GLOSSARY OF ISLAMIC FINANCE Ijma Consensus. The unanimous decision of all or the majority of leading jurists on a Shariah matter in a certain age. Ijma has traditionally been recognized as an independent source of law, along with the Quran, Sunnah and Qiyas. Ijtihad Effort, exertion, industry. A faqhi s endeavor to formulate a rule on the basis of evidence found in the Islamic sources. Ikhtilaf Divergence of opinion among jurists. Iktinaz Hoarding wealth by not paying zakat on it. Illah Legal effective cause. Basis for applying analogy in determining the permissibility or otherwise of a transaction. Iman Conviction, faith, or belief. Islah Reform. Israf Wastefulness. Lawful spending but exceeding moderation in quality or quantity; includes spending on objects that are incompatible with the economic standard of the majority of the population and spending on superfluous objects while necessities are not met. (Also see Tabzir.) Istijrar Recurring sale. Different quantities are bought from a single seller over a period of time. Sometimes it is also referred to transactions whereby seller delivers different quantities in different installments to complete

9 Glossary of Islamic Finance 223 the full purchase. Some divergence among the scholars in terms of the timing of fixation and pricing. Istisnah Advance purchase of goods or buildings. Alternative spelling: Istisna a, Istisna ah. A contract of acquisition of goods by specification or order, where the price is paid in advance, or progressively in accordance with the progress of a job. For example, to purchase a yet to be constructed house, payments would be made to the builder according to the stage of work completed. This type of financing, along with Salam, is used as a purchasing mechanism, and Murabahah and Bai Bithaman Ajil are for financing sales. Jahiliyyah Pre-Islamic period. The era just before the coming of Prophet Muhammad (P.B.U.H.)* and, more generally, to the state of affairs which characterized this era, which was plagued by shirk (the crime of associating partners with Allah), infanticide, tribal strife and so on. Jahl Ignorance (of morality or divinity). Ju alah Stipulated price for performing a service. Alternative spelling: Ju ala. Applied by some in Islamic banking. Bank charges and commission have been interpreted to be ju alal by the jurists and thus considered lawful. Kafalah Guarantee. Shariah principle governing guarantees. It applies to a debt transaction in the event of a debtor failing to pay. Khalif or khalifa Ruler, steward, custodian. Alternative spelling: khulafaa. * P.B.U.H.: Peace Be Upon Him.

10 224 GLOSSARY OF ISLAMIC FINANCE Maaliki Islamic school of law. Islamic school of law founded by Imam Malik Ibn Anas. Followers of this school are known as Maalikis. Madhhab Way of going. Alternative spelling: Madhahib. A fiqh school or orientation characterized by differences in the methods and therefore in the Shariah rulings that are deduced from them. There are four wellknown madhahib among Sunni Muslims whose names are associated with the classical jurists who are said to have founded them (Hanafi, Maliki, Shafi`i and Hanbali). Makruh Detested. An action that one is rewarded for avoiding, but not punished for committing. Mal Capital or wealth. Valuable item that can be gainfully used according to the Shariah. Manfa ah Beneficial ownership. Usufruct associated with a given property, especially in leasing transactions. In an automobile lease, for example, manfa ah might be used to describe the benefit which the lessee derives from the use of the car for the duration of the lease (as opposed to the actual ownership of the vehicle). Maqasid General objectives of Islamic law. Maslahah Public good or benefit. Maysir Gambling. One of three fundamental prohibitions in Islamic finance (the other two being riba and gharar). The prohibition on maysir is often used as grounds for criticism of conventional financial practices such as speculation, conventional insurance and derivatives.

11 Glossary of Islamic Finance 225 Muamalat Economic transaction. Alternative spelling: Mu amalah, Mu amalat, Muamalah. The lease of land or fruit trees for money, or for a share of the crop. Mudarabah Trust financing, profit sharing. Alternative spelling: Mudaraba, Modaraba, Modarabah. 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. The investor has no right to interfere in the management of the business, but he can specify conditions that would ensure better management of his money. In this way Mudarabah is sometimes referred to as a sleeping partnership. A joint Mudarabah can exist between investors and a bank on a continuing basis. The investors keep their funds in a special fund and share the profits before the liquidation of those financing operations that have not yet reached the stage of final settlement. Many Islamic investment funds operate on the basis of joint Mudarabah. 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. A Mudarabah is similar to a diversified pool of assets held in a discretionary asset management portfolio. Mufawadah Equal, unlimited partnership. Mufti Qualified professional who issues fatwa, usually in response to questions posed. Mujtahid Legal expert or a jurist who expends great effort in deriving a legal opinion or interpreting the sources of the law.

12 226 GLOSSARY OF ISLAMIC FINANCE Murabahah Cost-plus financing. Alternative spelling: Morabaha, Morabahah, Murabaha. 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. The legality of this financing technique has been questioned because of its similarity to riba. However, the modern Murabahah has become the most popular financing technique among Islamic banks, used widely for consumer finance, real estate, the purchase of machinery and for financing short-term trade. Musawwamah General sale. The price of the commodity in question is reached through bargaining. Musharakah Joint venture, profit and loss sharing. Alternative spelling: Musharaka. 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 conventional partnership structure and the holding of voting stock in a limited company. This equity financing arrangement is widely regarded as the purest form of Islamic financing. The two main forms of Musharakah are: Permanent Musharakah: an Islamic bank participates in the equity of a project and receives a share of the profit on a pro rata basis. The length of contract is unspecified, making it suitable for financing projects where funds are committed over a long period. Diminishing Musharakah: this allows equity participation and sharing of profits on a pro rata basis, and provides a method through which the bank keeps on reducing its equity in the project, ultimately transferring ownership of the asset to the participants. The contract provides for payment over and above the bank s share in the profit for the equity held by the bank. Simultaneously the entrepreneur purchases some of the bank s equity, progressively reducing it until the bank has no equity and thus ceases to be a partner.

13 Glossary of Islamic Finance 227 Musharakah mutanaqisah Partnership. One of the partners promises to buy the equity share of the other gradually until the title is completely transferred to him. Nisab Exemption limit. Exemption limit for the payment of zakat, which differs for different types of wealth. Non Performing Financings (NPFs) The Islamic banking equivalent to non-performing-loans. NPF s are based on a profit sharing basis and not interest as are their conventional counterparts. Qard Loan. Qard Hasan Benevolent loan. Alternative spelling: Qard Hassan, Qard al Hassan. A loan contract between two parties for social welfare or for short-term bridging finance. Repayment is for the same amount as the amount borrowed. The borrower can pay more than the amount borrowed so long as it is not stated by contract. Most Islamic banks provide interest-free loans to customers who are in need. The Islamic view of loans (qard) is that there is a moral duty to give them to borrowers free of charge, as a person seeks a loan only if he is in need of it. Some Islamic banks give interest-free loans only to the holders of investment accounts with them; some extend them to all bank clients; some restrict them to needy students and other economically weaker sections of society; and some provide interest-free loans to small producers, farmers and entrepreneurs who cannot get finance from other sources. Qimar Gambling. An agreement in which possession of a property is dependent upon the occurrence of an uncertain event. By implication it applies to those agreements in which there is a definite loss for one party and a gain for the other, without specifying which party will gain and which party will lose.

14 228 GLOSSARY OF ISLAMIC FINANCE Qiyas Analogical deduction.derivation of the law on the analogy of an existing law if the basis or Illah of both is the same. Qu ran The holy scriptures of Islam. Ra s al-mal Capital. The money or property that the Rab al maal invests in a profitseeking venture, often in a partnership such as a Mudarabah or Shirkah. Rab al maal The investor in a Mudarabah contract. Alternative spelling: Rab al mal. Rahn collateral. An arrangement whereby a valuable asset is placed as collateral for a debt. The collateral may be disposed of in the event of a default. 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. Riba al Buyu Usury of trade. Also known as riba al fadl. A sale transaction in which a commodity is exchanged for an unequal amount of the same commodity and delivery is delayed. To avoid riba al buyu, the exchange of commodities from both sides must be equal and instant. Riba al buyu was prohibited by the Prophet Mohammad (P.B.U.H.)* to forestall riba (interest) from creeping into the economy. Riba al Diyun Usury of debt. Also known as usury of delay (riba al nasia). The usury of debt was an established practice amongst Arabs during the * P.B.U.H.: Peace Be Upon Him.

15 Glossary of Islamic Finance 229 pre-islamic period. It can occur as an excess increment on top of the principal, which is incorporated as an obligatory condition of the giving of a loan. Alternatively, an excess amount is imposed on top of the principal if the borrower fails to repay on the due date. More time is permitted for repayment in return for an additional amount. If the borrower fails to pay again, a further excess amount is imposed, etc. Ribawi Goods subject to fiqh rules on riba. Rishwah Bribery. Sadaqah Voluntary charitable giving. Alternative spelling: Sadaqat. Sahih Sound, correct. Opposite of Batil. Hadith of the highest level of authentication. Salaf Loan for short, intermediate or long term. Also a synonym for Salam. Unlike Qard, however, the amount given as Salaf cannot be called back before it is due. Salam Advance purchase. Alternative spelling: Al Salam, Bai al Salam, Bai Salam. Advance payment for goods which are to be delivered at a specified future date. Under normal circumstances, a sale cannot be effected unless the goods are in existence at the time of the bargain. However, this type of sale is an exception, provided the goods are defined and the date of delivery is fixed. The objects of sale must be tangible goods that can be defined as to quantity, quality and workmanship. This mode of financing is often applied in the agricultural sector, where the bank advances money for various inputs to receive a share in the crop, which it then sells. Sarf Currency sale. Refers to buying and selling of currencies.

16 230 GLOSSARY OF ISLAMIC FINANCE Shafi e Islamic school of law. Islamic school of law founded by Abu Abdullah Ahmad bin Idris or Imam Shafie. Followers of this school are known as Shafi es. Shariah Islamic jurisprudence. Alternative spelling: Sharia, Shari a, Shari ah, Syariah, Syaria, Syari ah, Syari a. Islamic cannon law derived from three sources: the Quran, the Hadith and the Sunnah A Shariah compliant product meets the requirements of Islamic law. A Shariah board is the committee of Islamic scholars available to an Islamic financial institution for guidance and supervision in the development of Shariah compliant products. A Shariah advisor is an independent Islamic trained scholar that advises Islamic institutions on the compliance of the products and services with the Islamic law. Shirkah Partnership. A contract between two or more persons who launch a business or financial enterprise to make a profit. Sukuk Islamic bond (Plural. Also see Saak.) An asset-backed bond which is structured in accordance with Shariah and may be traded in the market. A Sukuk represents proportionate beneficial ownership in the underlying asset, which will be leased to the client to yield the return on the Sukuk. Sunnah Practice and traditions of the Prophet Muhammad (P.B.U.H.).* 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 * P.B.U.H.: Peace Be Upon Him.

17 Glossary of Islamic Finance 231 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. Tawarruq Reverse Murabahah. In personal financing, a client with a genuine need buys an item on credit from the bank on a deferred payment basis and then immediately resells it for cash to a third party. In this way, the client can obtain cash without taking out an interest-based loan. It has two forms: TawarruqMunazzam (organized Tawarruq), in which the client simply seeks credit and has no interest in the original asset for sale; and Tawarruq al Asli, where the client buys goods on credit and then sells them to get cash. Ujrah Fee. The financial charge for using services, or manfaat (wages, allowance, commission, etc). Ummah The Muslim community. Umum balwa Common plight. An unfavorable widespread situation affecting most people which is difficult to avoid. Urbun Deposit. Earnest money which forms part payment of the price of goods or services paid in advance, but will be forfeited in the event the transaction is cancelled. The forfeited money is considered as hibah (gift).

18 232 GLOSSARY OF ISLAMIC FINANCE Wadiah Deposit. Alternative spelling: Wadia, Al Wadia, Al Wadiah. The safekeeping of goods with a deposit on the original stated cost. An Islamic bank acts as the keeper and trustee of depositors funds. It guarantees to return the entire deposit, or any part of it, on the depositor s demand. Wadiah Yad Dhamanah Savings or deposits with guarantee. Goods or deposits entrusted to the care of a person, who is not the owner, for safekeeping. The depository becomes the guarantor, thereby guaranteeing repayment of the whole amount or any part of the deposits that is outstanding in the account of depositors, when so demanded. The depositors are not entitled to any share in the profits but the depository may provide returns to the depositors as a token of appreciation. Wakalah Agency. Alternative spelling: Wakala, Al Wakala, Al Wakalah. 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. Alternative spelling: Awkaf, Awqaf. 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. Wasiyyah Will or testament. Document detailing the manner in which a Muslim s wealth is to be disposed of after his death. Zakat Religious tax. Alternative spelling: Zakah. An obligatory contribution which every wealthy Muslim is required to pay to the Islamic state, or to distribute amongst the poor. According to Islam, zakat the third

19 Glossary of Islamic Finance 233 pillar of Islam purifies wealth and souls. Zakat is levied on cash, cattle, agricultural produce, minerals, capital invested in industry and business. There are two types of zakat: Zakat al Fitr, which is payable by every Muslim able to pay at the end of Ramadan. This is also called Zakat al Nafs (poll tax). Zakat al Maal is an annual levy on the wealth of a Muslim above a certain level. The rate paid differs according to the type of property owned. NOTE 1. Reproduced by permission of Islamic Finance News All rights reserved. Islamic Finance New ( glossary.asp) provides insightful and intelligent editorial coverage from around the world, helping you stay ahead. Industry professionals and leading academics contribute via non-biased, educational and up-to-date country and sector reports, giving you first-hand knowledge and understanding of the Islamic finance markets and instruments from the specialist s point of view. Published every Wednesday, Islamic Finance news is the industry s leading, capital markets focused e-newsletter now providing over 19,500 individuals with unrivaled editorial coverage of the global Islamic financing market.