Last Updated: Saturday November 15, 2008
GLOSSARY OF ISLAMIC BANKING TERMINOLOGY
Amanah : It refers
to deposits in trust. A person can hold a property in trust for another,
sometimes by express contract and sometimes by implication of a contract. Amanah entails absence of liability for
loss except in breach of duty. Current Accounts are regarded as Amanah (trust). If the bank gets
authority to use Current Accounts funds in his business, Amanah transforms into a loan. As every
loan has to be repaid, banks are liable to repay full amount of the Current
Accounts.
Arbun : Down payment; a
nonrefundable deposit paid by a buyer retaining a right to confirm or cancel
the sale.
Al-‘Aariyah (Gratuitous loan of
non-fungible objects): Al-
‘Aariyah means loan of a particular piece of property, the substance
of which is not consumed by its use, without anything taken in exchange, In
other words, it is the gift of usufruct of a property or commodity that is not
consumed on use. It is different from Qard that is the loan of fungible objects
which are consumed on use and in which the similar and not the same commodity
has to be returned. It is also a virtuous act like Qard. The borrowed commodity
is treated as liability of the borrower who is bound to return it to its owner.
Bai‘ Muajal : Literally it means a
credit sale. Technically, a financing technique adopted by Islamic banks that
takes the form of Murabaha Muajjal. It is a contract in which the seller earns
a profit margin on his purchase price and allows the buyer to pay the price of
the commodity at a future date in a lump sum or in installments. He has to
expressly mention cost of the commodity and the margin of profit is mutually
agreed. 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.
Bai Salam: Salam means a contract in which advance
payment is made for goods to be delivered later on. The seller undertakes to
supply some specific goods to the buyer at a future date in exchange of an
advance price fully paid at the time of contract. According to normal rules of
the Sharia,h, no sale can be
effected unless the goods are in existence at the time of the bargain, but Salam sale forms an exception given by
the Holy Prophet (SAW) himself to the general rule provided the goods are
defined and the date of delivery is fixed. It is necessary that the quality of
the commodity intended to be purchased is fully specified leaving no ambiguity
leading to dispute. The objects of this sale are goods and cannot be gold,
silver or currencies because these are regarded as monetary values exchange of
which is covered under rules of Bai al Sarf, i.e. mutual exchange is hand to hand
without delay. Barring this, Bai Salam covers
almost everything which is capable of being definitely described as to
quantity, quality and workmanship.
Bai bil Wafa :
Dayn or Debt: A Dayn comes into existence as a result
of any other contract or credit transaction. It is incurred either by way of
rent or sale or purchase or in any other way that leaves it as a debt to
another. Duyun (debts) ought
to be returned without any profit since they are advanced to help the needy and
meet their demands and, therefore, the lender should not impose on the borrower
more than what he had given on credit.
Falah: Falah means to thrive, to
become happy or to have luck and success. Technically it implies success both
in this world and in the Akhirah (Hereafter). The Falah presumes belief in one
God, the apostlehood of Prophet Muhammad (Peace be upon him), Akhirah and
conformity to the Sharia’h in behaviour.
Fiqh : Islamic law. The science of
the Sharia’h. It is an important source of Islamic economics.
Gharar: It means
any element of absolute or excessive uncertainty in any business or a contract
about the subject of contract or its price, or mere speculative risk. It leads
to undue loss to a party and unjustified enrichment of other, which is
prohibited.
Al Ghunm bil Ghurm : This provides
the rationale and the principle of profit sharing in Shirkah arrangements.
Earning profit is legitimized only by engaging in an economic venture, risk
sharing and thereby contributing to the economy.
Hadith (see Sunnah)
Halal: Anything
permitted by the Sharia’h.
Haram : Anything prohibited by the
Sharia’h.
Hawalah : Literally,
it means transfer; legally, it is an agreement by which a debtor is freed from
a debt by another becoming responsible for it, or the transfer of a claim of a
debt by shifting the responsibility from one person to another – contract of
assignment of debt. It also refers to the document by which the transfer takes
place.
Hibah : Hibah means Gift.
Ijab: Offer, in a
contract; see also qabul.
Ijara: Letting on lease. Sale of a
definite usufruct of any asset in exchange of definite reward. It refers to a
contract of land leased at a fixed rent payable in cash and also to a mode of
financing adopted by Islamic banks. It is an arrangement under which the
Islamic banks lease equipments, buildings or other facilities to a client,
against an agreed rental.
Ijara-wal-Iqtina‘: A mode of
financing, by way of Hire-purchase, adopted by Islamic banks. It is a contract
under which the Islamic bank finances equipment, building or other facilities
for the client against an agreed rental together with a unilateral undertaking
by the bank or the client that at the end of the lease period, the ownership in
the asset would be transferred to the lessee. The undertaking or the promise
does not become an integral part of the lease contract to make it conditional.
The rental as well as the purchase price are fixed in such a manner that the
bank gets back its principal sum alongwith with some profit, which is usually
determined in advance.
Ijtihad: It refers to an endeavor of
a qualified jurist to derive or formulate a rule of law to determine the true
ruling of the divine law in a matter on which the revelation is not explicit or
certain, on the basis of Nass or evidence found in the Holy Qur’an and the
Sunnah. Express injunctions have no room for Ijtihad. Implied injunctions can
be interpreted in different ways by way of inference from the accepted principles
of the Sharia’h.
‘Illah : It is the attribute of an
event that entails a particular Divine ruling in all cases possessing that
attribute. ‘Illah is the basis for applying analogy for determining
permissibility or otherwise of any act or transaction.
Ijma‘ : Consensus of all or majority
of the leading qualified jurists on a certain Sharia’h matter in a certain age.
‘Inah ( A kind of Bai) : 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.
‘Inan (A type of Shrikah) : It
is a form of partnership in which each partner contributes capital and has a
right to work for the business, not necessarily equally.
Istihsan : It is a doctrine of
Islamic law that allows exception to strict legal reasoning, or guiding choice
among possible legal outcomes, when considerations of human welfare so demand.
Israf: It refers to immoderateness,
exaggeration and waste and covers spending on lawful objects but exceeding
moderation in quantity or quality; spending on superfluous objects while
necessities are unmet; spending on objects that are incompatible with the
economic standard of the majority of the population. See also Tabzir
Istisna ’a: It is a contractual
agreement for manufacturing goods and commodities, allowing cash payment in
advance and future delivery or a future payment and future delivery. A
manufacturer or builder agrees to produce or build a well-described good or
building at a given price on a given date in the future. Price can be paid in
installments, step by step as agreed between the parties. Istisna’a can be used
for providing the facility of financing the manufacture or construction of
houses, plants, projects, and building of bridges, roads and highways.
Jahl or Jahala : Ignorance, lack of
knowledge; indefiniteness in a contract, sometime leading to gharar.
Jua alah or Ji’alah : Literally,
Joalah constitutes wages, pay, stipend or reward. Legally, it is a contract for
performing a given task against a prescribed fee in a given period. A similar
contract is ‘Ujrah’ in which any work is done against stipulated wage or fee.
Kali bil-Kali : The
term Kali refers to something delayed; appears in a maxim forbidding the sale
of al-Kali bil-Kali i.e. the exchange of a delayed counter value for another
delayed counter value.
Al- Kafalah (Suretyship) : Literally,
Kafalah means responsibility, amenability or suretyship, Legally in Kafalah a
third party become surety for the payment of debt. It is a pledge given to a
creditor that the debtor will pay the debt, fine etc. Suretyship in Islamic law
is the creation of an additional liability with regard to the claim, not to the
debt or the assumption only of a liability and not of the debt.
Kharaj bi-al-Daman: Gain accompanies
liability for loss; a Hadith forming a legal maxim and a basic principle – see
also Al- Ghunm bil Ghurm.
Khiyar: Option or
a power to annul or cancel a contract.
Khiyar al-Majlis: Option of the
contracting session; the power to annul a contract possessed by both
contracting parties as long as they do not separate.
Khiyar al-Shart: A right, stipulated
by one or both of the parties to a contract, to cancel the contract for any
reason for a fixed period of time.
Mal-e-Mutaqawam : Things
the use of which is lawful under the Sharia’h; or wealth that has a commercial
value. Legal tenders of modern age that carry monetary value are included in
Mal-e-Mutaqawam. It is possible that certain wealth has no commercial value for
Muslims (non-Mutaqawam) but is valuable for non-Muslims. Examples are wine and
pork.
Maisir: An ancient Arabian game of
chance played with arrows without heads and feathering, for stakes of
slaughtered and quartered camels. It came to be identified with all types of
hazard and gambling.
Mithli (Fungible goods): Goods that
can be returned in kind, i.e. gold for gold, silver for silver, US $ for US $,
wheat for wheat, etc.
Mubah: Object that is lawful (i.e.
something which is permissible to use or trade in).
Mudaraba: A form of partnership
where one party provides the funds while the other provides expertise and
management. The latter is referred to as the Mudarib. Any profits accrued are
shared between the two parties on a pre-agreed basis, while loss is borne by
the provider(s) of the capital.
Murabaha: Literally
it means a sale on mutually agreed profit. Technically, it is a contract of
sale in which the seller declares his cost and the profit. This has been
adopted by Islamic banks as a mode of financing. As a financing technique, it
can involve a request by the client to the bank to purchase a certain item for
him. The bank does that for a definite profit over the cost which is stipulated
in advance.
Musawamah: Musawamah is a general
kind of sale in which price of the commodity to be traded is bargained between
seller and the purchaser without any reference to the price paid or cost
incurred by the former.
Musharakah: Musharakah
means a relationship established under a contract by the mutual consent of the
parties for sharing of profits and losses in the joint business. It is an
agreement under which the Islamic bank provides funds which are mixed with the
funds of the business enterprise and others. All providers of capital are
entitled to participate in management, but not necessarily required to do so.
The profit is distributed among the partners in pre-agreed ratios, while the
loss is borne by every partner strictly in proportion to respective capital
contributions.
Qabul: Acceptance, in a contract;
see also Ijab.
Qard (Loan of fungible objects): The
literal meaning of Qard is ‘to cut’. It is so called because the property is
really cut off when it is given to the borrower. Legally, Qard means to give
anything having value in the ownership of the other by way of virtue so that
the latter could avail of the same for his benefit with the condition that same
or similar amount of that thing would be paid back on demand or at the settled
time. It is that loan which a person gives to another as a help, charity or advance
for a certain time. The repayment of loan is obligatory. The Holy Prophet is
reported to have said “Every loan must be paid”. But if a debtor is in
difficulty, the creditor is expected to extend time or even to voluntarily
remit the whole or a part of the principal. Qard is, in fact, a particular kind
of Salaf. Loans under Islamic law can be classified into Salaf and Qard, the
former being loan for fixed time and the latter payable on demand. (see Salaf)
Qimar : Qimar means gambling.
Technically, it is an arrangement in which possession of a property is
contingent upon the happening of an uncertain event. By implication it applies
to a situation in which there is a loss for one party and a gain for the other
without specifying which party will lose and which will gain.
Qiyas: Literally it means measure,
example, comparison or analogy. Technically, it means a derivation of the law
on the analogy of an existing law if the basis (‘illah) of the two is the same.
It is one of the sources of Islamic law.
Riba: An excess or increase.
Technically, it means an increase over principal in a loan transaction or in
exchange for a commodity accrued to the owner (lender) without giving an
equivalent counter-value or recompense (‘iwad) in return to the other party; every
increase which is without an ‘iwad or equal counter-value.
Riba Al-Fadl: Riba Al-Fadl (excess)
is the quality premium in exchange of low quality with better quality goods
e.g. dates for dates, wheat for wheat, etc. – an excess in the exchange of
Ribawi goods within a single genus. The Concept of Riba Al-Fadl refers to sale
transactions while Riba Al-Nasiah refers to loan transactions.
Riba Al-Nasiah : Riba Al-Nasiah or riba of delay is due
to exchange not being immediate with or without excess in one of the counter
values. It is an increment on principal of a loan or debt payable. It refers to
the practice of lending money for any length of time on the understanding that
the borrower would return to the lender at the end of the period the amount
originally lent together with an increase on it, in consideration of the lender
having granted him time to pay. Interest, in all modern banking transactions,
falls under purview of Riba Al-Nasiah. As money in present banking system is
exchanged for money with excess and delay, it falls, under the definition of
riba. A general accord reached among scholar about its prohibition.
Ribawi: Goods subject to Fiqh rules
on Riba in sales, variously defined by the schools of Islamic Law: items sold
by weight and by measure, foods, etc.
Al- Rahn: Pledge,
Collateral; legally, Rahn means to pledge or lodge a real or corporeal property
of material value, in accordance with the law, as security, for a debt or
pecuniary obligation so as to make it possible for the creditor to recover the
debt or some portion of the goods or property. In the pre-Islamic contracts,
Rahn implied a type of earnest money which was lodged as a guarantee and
material evidence or proof of a contract, especially when there was no scribe
available to put it into writing. The institution of earnest money was not
accepted in Islamic law and the common Islamic doctrine recognized Rahn only as
a security for the payment of a debt.
Salaf or Loan / Debt: The word Salaf literally means a loan that draws
forth no profit for the creditor. In wider sense, it includes loans for
specified periods, i.e. short, intermediate and long-term loans. Salaf is
another name of Salam as well wherein price of the commodity is paid in advance
while the commodity or the counter value is supplied in future; thus the
contract creates a liability for the seller. Amount given as Salaf cannot be
called back, unlike Qard, before it is due. (see Qard)
Al-Sarf : Basically,
in pre-Islamic times it was exchange of gold for gold, silver for silver and
gold for silver or vice versa. In Islamic law such exchange is regarded as
‘sale of price for price’ (Bai al Thaman bil Thaman), and each price is
consideration of the other. It also means sale of monetary value for monetary
value – currency exchange.
Sharia ’h: The term Sharia’h refers to divine guidance as
given by the Holy Qur’an and the Sunnah of the Prophet Muhammad (PBUH) and
embodies all aspects of the Islamic faith, including beliefs and practice.
Shirkah : A contract between two or more persons who launch
a business or financial enterprise to make profits. In the conventional books
of Fiqh, the partnership business has been discussed under the option of
Shirkah that, broadly, may include both Musharakah and Mudaraba.
Sunnah: Custom, habit or way of life. Technically, it
refers to the utterances of the Prophet Muhammad (PBUH) other than the Holy
Quran known as Hadith, or his personal acts, or sayings of others, tacitly
approved by the Prophet.
Tabarru’: It is a donation/gift the purpose of which is not
commercial but is seeking the pleasure of Allah. Any benefit that is given by a
person to other without getting anything in exchange is called Tabarru’.
Gracious repayment of debt, absolutely at lender’s own discretion and without
any prior condition or inducement for reward, is also covered under Tabarru’.
Repaying a loan in excess of principal and without a pre-condition is
commendable and compatible with the Sunnah of the Holy Prophet (peace be upon
him). But, it is matter of individual discretion and cannot be adopted as a
system because this would mean that loan would necessarily yield a profit. If
such reward takes the form of a system, it would be considered Riba.
Tabzir
: Spending wastefully on objects which have been explicitly prohibited
by the Sharia’h irrespective of the quantum of expenditure. See also Israf.
Ujrah:
See Jualah.
Wakalah : A contract of agency in which one person appoints
someone else to perform a certain task on his behalf, usually against a certain
fee.
(Source: SBP
Publication, ‘Islamic Banking and Finance: Theory and Practice’ by Muhammad
Ayub, Sr. J.D. IBD, SBP)
Zakah / Zakat: compulsories levy on every Muslim who has
wealth greater than the amount of Nisab. The amount payable by a Muslim on his
net worth as a part of his religious obligations, mainly for the benefit of the
poor and the needy. See also ushr.
Zakah al-Fitr: A small obligatory
head-tax imposed on every Muslim who has the means for himself and his
dependants. It is paid once yearly at the end of Ramadan before Eid al-Fitr.
Zakah Al-Mal: The Muslims wealth
tax: One must pay 2.5% of ones yearly savings above a certain amount to the
poor and needy Muslims. The Zakah is compulsory on all Muslims who have
saved(at least) the equivalent of 85g of 24 carat gold at the time when the
annual Zakah payment is due.
Zakatul Huboob: Zakah of grain/corn.
Zakatul Madan: Zakah of minerals.
Zakatur Rikaaz: Zakah of
treasure/precious stones.
Zakatu-rid Tijaarah: Zakah of
profits of merchandise.
Zar: seed; crop to be sown.
Zhulm: A comprehensive term used to refer to all forms of inequity, injustice,
exploitation, oppression and wrongdoing
whereby a person either deprives others of their rights or does not fulfil his
obligations towards them.
Zimmah: equivalent of legal personality in positive law; receptacle for the
capacity for acquisition; see ahd.
(Source: SBP Publication,
‘Islamic Banking and Finance: Theory and Practice’ by Muhammad Ayub, Sr. J.D.
IBD, SBP)
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