GLOSSARY OF TERMS

Gharar

This refers to uncertainty and is one of three fundamental prohibitions in Islamic finance with the remaining two being riba and maysir. Gharar is a sophisticated concept that covers certain types of uncertainty or contingency in a contract. The prohibition on gharar is often used as the grounds for criticism of conventional financial practices such as short selling, speculation and derivatives.

Ijarah

An Islamic lease agreement. Instead of lending money and earning interest, Ijarah allows the bank to earn profits by charging rentals on the asset leased to the customer. Ijarah wa iqtinah extends the concept of ijarah to a hire and purchase agreement.

Maysir

This refers to gambling and is one of three fundamental prohibitions in Islamic finance with the other two being riba and gharar. The prohibition on maysir is often used as the grounds for criticism of conventional financial practices such as speculation, conventional insurance and derivatives.

Mudarabah

A Mudarabah is an Investment partnership, whereby the investor (the Rab ul Mal) provides capital to another party/entrepreneur (the mudarib) in order to undertake a business/investment activity. While profits are shared on a pre-agreed ratio, loss of investment is borne by the investor only. The mudarib loses its share of the expected income.

Murabaha

Purchase and resale. Instead of lending out money, the capital provider purchases the desired commodity (for which the loan would have been taken out) from a third party and resells it at a predetermined higher price to the capital user. By paying this higher price over installments, the capital user has effectively obtained credit without paying interest.

Riba

This refers to interest although the legal concept extends further than interest. In simple terms riba covers any return of money on money - whether the interest is fixed or floating, simple or compounded, and at whatever the rate. Riba is strictly prohibited in the Islamic tradition.

Shari'ah

Islamic law as revealed in the Quran and through the example of Prophet Muhammad (PBUH). A Shariah compliant product meets the requirements of Islamic law. A Shari'ah Board is the committee of Islamic scholars available to an Islamic financial institution for guidance and supervision in the development of Shari'ah compliant products.

Shari'ah Compliant

An act or activity that complies with the requirements of the Shari'ah, or Islamic law. The term is often used in the Islamic banking industry as a synonym for "Islamic" for example, Shari'ah compliant financing or Shariah compliant investment.

Sukuk

Sukuk is the Arabic name for a financial certificate, but can be viewed as an Islamic equivalent of a bond. However, fixed income, interest bearing bonds are not permissible in Islam. Hence Sukuk are securities that comply with Islamic law and its investment principles, which prohibits the charging, or paying of riba or interest. Sukuk is a certificate of equal value representing undivided shares in ownership of tangible assets, usufruct and services or (in the ownership of) the assets of particular projects or investment activities.

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