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Glossary of Islamic Finance Terms
Bay salam
A sales contract where the price is paid in advance and the goods are delivered in the future, provided that the
characteristics of the goods are fully defined and the date of delivery is fixed.
Diminishing musharaka
A form of partnership in which one of the partners undertakes to buy the equity share of the other partner gradually
until ownership is completely transferred to the buying partner.
Gharar
An exchange transaction in which one or both parties remain ignorant of an essential element of the transaction.
Halal
Lawful; permitted by Sharia.
Haram
Unlawful; prohibited by Sharia.
IFI
Islamic financial institution.
Ijara
Lease financing. The purchase of the leased asset at the end of the rental period is optional.
Ijara muntahia bittamleek
A form of lease contract that offers the lessee the option to own the asset at the end of the lease period, either by
purchase of the asset through a token consideration or payment of the market value, or by means of a gift contract.
Ijara wa iqtina
Lease purchasing, where the lessee is committed to buying the leased equipment at the end of or during the rental
period.
Investment risk reserve
The amount appropriated by an IFI from the income of PSIA holders, after allocating the mudarib’s share of the
profit or mudarib fee (mudarib refers to the IFI as a manager of the PSIA), in order to create a cushion against future
investment losses for account holders.
Istisna
A contract that refers to an agreement to sell to a customer a nonexistent asset, which is to be manufactured or built
according to the buyer’s specifications and is to be delivered on a specified date at a predetermined selling price.
Mudaraba
A contract between a capital provider and a mudarib (skilled entrepreneur or managing partner) whereby the IFI
provides capital to an enterprise or activity to be managed by the mudarib. Profits generated by that enterprise or
activity are shared in accordance with the terms of the mudaraba agreement while losses are borne solely by the
capital provider, unless the losses are due to the mudarib’s misconduct, negligence, or breach of contractual terms.
Musharaka
A contract between an IFI and a customer to provide capital to an enterprise, or for ownership of real estate or a
moveable asset, either on a temporary or permanent basis. Profits generated by the enterprise or real estate/asset are
shared in accordance with the terms of the musharaka agreement, while losses are shared in proportion to each
partner’s share of capital.
Qard hasan
A loan granted for welfare purposes or to bridge short-term funding requirements; it could also take the form of a
nonremunerated deposit account. The borrower is required to repay only the principal.
Riba Usury.
It is in : Islamic Finance · Tags: glossary, Islamic Finance
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