Glossary

Islamic finance terms, defined with their sources.

221 terms in 14 categories, from contracts and Shariah governance to sukuk, takaful, zakat and open finance. Each definition explains the term and points to the AAOIFI, IFSB, central-bank or IIFM page that governs it. Definitions explain; they are not rulings.

Shariah fundamentals 25 terms

RibaAn increase over principal that Shariah prohibits: extra stipulated on a loan, or an unequal exchange of certain like-for-like goods.GhararExcessive uncertainty in a contract, about the object, price, quantity or delivery, which can make the contract invalid.MaysirGambling or games of chance, where gain depends on luck rather than productive exchange; prohibited in Islamic finance.ShariahIslamic law and its principles; in finance, the rules that contracts, products and institutions are expected to comply with.Fiqh al-muamalatThe branch of Islamic jurisprudence that governs commercial and financial dealings between people.Maqasid al-ShariahThe objectives of Shariah: protecting people's interests and averting harm, used to guide how rules are applied.Riba al-nasiahRiba of deferment: an increase stipulated in return for extra time, most commonly on a loan.Riba al-fadlRiba of excess: an unequal exchange of the same kind of certain goods, such as gold for a larger quantity of gold.Al-ghunm bil-ghurmThe legal maxim that entitlement to gain comes with liability for loss: whoever takes the profit must also bear the risk.Amanah (trust)Holding someone else's property as a trust: the holder is not liable for its loss unless it was caused by misconduct or negligence.Daman (liability for loss)Possession or obligation that makes the holder answerable for an asset's loss, whatever the cause.Dhimmah (legal capacity for obligations)The legal capacity in which rights and obligations are held, so that a debt can sit in a person's liability rather than in a specific asset.Ijma (consensus of jurists)The consensus of qualified jurists on a ruling, treated as a source of Shariah after the Quran and the Sunnah.Qiyas (analogical reasoning)Extending a ruling from a case covered by the texts to a new case that shares the same underlying cause.Ijtihad (independent juristic reasoning)The effort of a qualified jurist to derive a ruling on a question the texts do not settle directly.Mujtahid (qualified jurist)A jurist qualified to perform ijtihad, that is, to derive rulings from the sources by recognised methods.Maslaha (public interest)Benefit or public interest, considered in reaching rulings where the texts are silent, within the principles of Shariah.Istihsan (juristic preference)A recognised method of preferring one ruling over a strict analogy when a stronger consideration justifies it.Urf (custom)Established custom or business practice, which Shariah recognises when it does not contradict the texts or principles.Usul al-fiqh (principles of jurisprudence)The discipline that studies the sources of Shariah and the methods for deriving rulings from them.Khiyar (option to revoke or confirm)A right of one or both parties to confirm or revoke a contract, for example because of a defect, a stipulated condition or a cooling-off period.Bay al-inah (sale and buy-back)Selling an asset on deferred terms and buying it back from the same buyer for a lower spot price. Standard setters disagree on it.Majlis al-aqd (contract session)The session in which a contract is concluded; some exchanges, such as currency trades and salam payments, must complete within it.Ta'addi and taqsir (misconduct and negligence)Misconduct and negligence: the two grounds that make a trustee, agent or mudarib liable for a loss it would otherwise not bear.Tawatu (pre-arrangement)A prior understanding between parties about how linked transactions will unfold, which can change how they are judged.

Sale-based contracts 23 terms

MurabahaA sale at cost plus an agreed, disclosed profit; the seller must own the asset first. Payment is often deferred in instalments.MusawamahA negotiated sale in which the seller does not disclose its cost; the price is simply agreed between the parties.Bay al-muajjal (deferred-payment sale)A sale in which the goods are delivered now and the price is paid later, in one sum or in instalments.SalamA forward sale: the full price is paid at signing for precisely specified goods to be delivered later.IstisnaA contract to manufacture or build a specified asset for delivery on a set date, with the price paid in stages or as a lump sum.TawarruqBuying an asset on deferred payment and selling it to a third party for cash, to raise liquidity. Its organised form is contested.Bay al-sarf (currency exchange)An exchange of money for money, of the same or a different currency, which must be settled on the spot.Murabaha to the purchase ordererMurabaha in which the customer first asks the bank to buy an asset and promises to buy it from the bank once acquired.Hamish jiddiyyah (security deposit)A deposit paid by a customer to secure a promise to buy; it covers only actual loss if the promise is broken.Urbun (earnest money)An earnest payment made at signing: part of the price if the sale completes, kept by the seller if the buyer withdraws.Bay bithaman ajil (BBA)A sale at a deferred price, paid later or in instalments; the name used in Malaysian practice for deferred-payment sale financing.Istijrar (supply sale with deferred price)A continuing supply arrangement in which goods are taken over time and priced or paid later, used in trade finance.Ibra (rebate on early settlement)Releasing a debtor from part of a debt; in sale-based financing, the rebate of unearned profit when a customer settles early.Parallel istisnaA second, independent istisna in which a bank that has agreed to deliver an asset orders it from a manufacturer or contractor.Parallel salamA separate, independent salam with a third party that lets a party to a first salam offset its position in the same goods.Qabd (possession)Taking possession of an asset, actually or constructively, which many contracts require before the asset can be sold on.Qabd hukmi (constructive possession)Possession recognised in law without physical delivery, for example through documents, registration or an account entry.Ta'widh (compensation for actual loss)Compensation for the actual loss a creditor suffers from late payment, accepted by some authorities and rejected by others.Gharamah (late-payment penalty paid to charity)A penalty for late payment that the creditor may not keep as income and must direct to charitable purposes.Bay al-bara'ah (sale on an as-is basis)A sale in which the seller is released from liability for some or all defects in the goods, by agreement with the buyer.Bay al-dayn (sale of debt)Selling a debt created by a sale or lease to a third party; standard setters set different limits on it.Muzayadah (sale by auction)A sale in which buyers bid against each other and the asset goes to the highest bidder.Shart jaza'i (penalty clause in istisna)An agreed charge on a manufacturer or contractor for late delivery, permitted in istisna and supply contracts.

Lease, agency and service contracts 17 terms

IjarahA lease: the lessor owns the asset and sells its use for an agreed rent over an agreed period.Ijarah muntahia bittamleekA lease that ends with ownership passing to the lessee, through a separate sale or gift promised by the lessor.WakalahAgency: one party appoints another to act on its behalf, with or without a fee.KafalahA guarantee: a guarantor joins the guaranteed party in assuming a specified liability.HawalahTransfer of a debt: the obligation to pay moves from the original debtor to another party who accepts it.Ju'alahA reward contract: a fee is promised for achieving a specified result and is paid only when the result is delivered.RahnA pledge: an asset held as collateral for a debt, which can be sold to repay it if the debtor defaults.Ijarah mawsufah fi al-dhimmah (forward lease)A forward lease of an asset described by specifications, with use starting on a future date once it is delivered.Ijarah of servicesThe service side of ijarah: hiring a person's work or a defined service for a specified period and fee.Ujrah (fee)A fee, wage or rent paid for a service, an agency or the use of an asset; the price side of ijarah and paid wakalah.Ijarah thumma al-bai (AITAB, lease then sale)A lease followed by a separate sale of the asset to the lessee at the end, used in Malaysia for vehicle financing.Sub-lease (ijarah from a lessee)A lease granted by a lessee to a third party over the usufruct it holds, unless the owner has prohibited it.Variable rental (benchmark-linked ijarah rent)Ijarah rent that is fixed for the first period and then reset by a clear benchmark formula agreed at the start.Fuduli (uncommissioned agent)A person who deals in another's property without authority; the owner may approve or reject the act.Paid agency (wakalah bil ujrah)An agency in which the agent is paid a fee; the fee must be known, and the arrangement follows the rules of ijarah.Letter of guaranteeA bank's written guarantee to a beneficiary; AAOIFI and Bank Negara Malaysia take different positions on charging for it.Documentary creditA bank's written undertaking to pay a seller, on the buyer's instruction, against presentation of stipulated documents.

Partnership and investment 17 terms

MudarabahA partnership of capital and work: profit is shared by an agreed ratio, while financial loss falls on the capital provider.MusharakahA partnership in which each partner contributes capital; profit is shared as agreed and loss in proportion to capital.Diminishing musharakahA partnership in which one partner buys the other's share in stages until it owns the whole asset; common in home finance.Rabb al-malThe capital provider in a mudarabah, who funds the venture, shares profit by the agreed ratio and bears financial loss.MudaribThe manager in a mudarabah, who runs the venture and earns a share of profit rather than a guaranteed fee.Profit sharing ratioThe agreed split of profit between partners, expressed as a ratio of actual profit, never as a fixed sum or a share of capital.Restricted mudarabahA mudarabah in which the capital provider limits where, how or for what the capital may be invested.Unrestricted mudarabahA mudarabah that leaves the manager free to invest the capital in any permissible business at its discretion.Wakalah bil-istithmar (investment agency)Investment agency: the agent invests the principal's funds for a fee, and the profit or loss belongs to the principal.Shirkat al-milk (co-ownership)Co-ownership of an asset by two or more parties, whether by choice, as in a joint purchase, or by circumstance, as in inheritance.Shirkah (partnership: inan, mufawadah, abdan, wujuh)Partnership in Islamic law, with classical forms based on capital, work or credit and a rule that losses follow capital.Tanazul (waiver of entitlement)A party's waiver of an entitlement it would otherwise have, such as profit above an agreed ceiling.Muzara'ah (sharecropping partnership)A partnership in which one party provides land and the other cultivates it, for an agreed share of the crop.Musaqat (irrigation partnership)A partnership in which one party provides fruit trees and the other tends and irrigates them for a share of the fruit.Capital protection (as distinct from a guarantee)Using permitted methods to safeguard invested capital, which AAOIFI distinguishes from the manager guaranteeing it.Mugharasah (planting partnership)A partnership in which one party gives bare land to another to plant trees, and they share the trees and fruit.Unit buy-out price (diminishing musharakah)The price at which a customer buys the bank's units in a diminishing musharakah: market value or a price agreed at the time.

Deposits and accounts 13 terms

WadiahSafekeeping: an asset placed with a custodian to be kept and returned on demand.QardA loan of money to be repaid in an equivalent amount; any benefit stipulated for the lender is riba.HibahA gift: a transfer of ownership without consideration, sometimes paid by banks at their discretion to account holders.Islamic depositA deposit product whose principal the Islamic bank is obliged to repay, as distinct from an investment account that shares risk.Profit-sharing investment account (PSIA)An account whose funds the bank invests, usually as mudarib, with returns based on actual results rather than a promised rate.Unrestricted investment accountAn investment account whose funds the bank may invest at its discretion and commingle with its own in a pooled portfolio.Restricted investment accountAn investment account whose holder limits where, how or for what purpose the bank may invest the funds.Investment account holderA customer who places funds in an investment account and shares in its returns and risks, rather than holding a deposit claim.Wadiah yad amanahSafekeeping on trust: the custodian holds the asset without using it and is liable only for negligence or misconduct.Tawarruq-based term depositA fixed-return term placement in which the customer sells a commodity to the bank on deferred payment.Current account (Islamic)A repayable-on-demand account that AAOIFI treats as a loan to the bank, so the holder is owed the balance and no stipulated benefit.Banking service feeA fee for a banking service that involves no lending, charged as a lump sum or a percentage of the service's value.Safe deposit box (lease of a vault)A bank service in which a customer leases a vault or box for a fee to keep valuables.

Sukuk and capital markets 17 terms

SukukCertificates of equal value representing undivided shares in the ownership of assets, usufruct, services or a project.Sukuk al-ijarahSukuk whose holders own leased assets and receive the rent paid by the lessee as their return.Sukuk al-musharakahSukuk whose holders are partners in a venture, sharing profit by agreed ratios and loss in proportion to capital.Sukuk al-mudarabahSukuk whose proceeds are capital in a mudarabah managed by the issuer; used by some Islamic banks to raise regulatory capital.Sukuk al-wakalahSukuk whose proceeds the obligor invests as agent in a portfolio of eligible assets, for an agreed fee.Periodic distributionThe scheduled payment of rent or profit to sukuk holders on set dates during the life of the sukuk.Islamic collective investment schemeAn Islamic fund: investors pool money in units of equal value, managed under Shariah rules, sharing in the fund's profit or loss.Shariah screeningChecking whether a company's business and finances meet Shariah criteria before it can be held in an Islamic fund or index.Asset-backed and asset-based sukukThe distinction between sukuk whose holders have real recourse to the assets and those relying mainly on the obligor's promise to pay.Purchase undertakingA unilateral promise by the originator or obligor to buy the sukuk assets from the holders at maturity or on default.Special purpose vehicle (SPV)A legal entity set up only for a specific transaction, such as holding sukuk assets for the holders, and kept apart from the originator.Sukuk al-salamCertificates that raise salam capital so the goods to be delivered belong to the holders; AAOIFI does not permit trading them.Sukuk al-istisnaCertificates that fund the manufacture or construction of an asset, which then belongs to the holders.Sukuk al-murabahaCertificates that finance goods bought for sale by murabaha; once the goods are delivered, they represent a debt.Sukuk of usufruct (sukuk al-manfa'ah)Certificates representing ownership of the right to use an asset, or of services, rather than the asset itself.Tradability of sukukWhether sukuk may be sold on, which depends on what they represent: assets and usufruct, or debts and cash.Investment trustee (sukuk)The intermediary that protects sukuk holders' interests, supervises the issue manager and keeps documents and guarantees safe.

Takaful 15 terms

TakafulMutual cover: participants contribute to a common fund, as donations, to help one another against specified losses.TabarruThe donation portion of a takaful contribution, paid into the risk fund to meet claims as mutual help.Participants' risk fundThe pool of donated contributions from which takaful claims are paid, owned collectively by participants and managed by the operator.Participants' investment fundIn family takaful, the fund holding participants' savings and investment contributions, owned individually by each participant.Shareholders' fund (takaful)The takaful operator's own fund: its capital, fees and expenses, kept apart from the participants' funds.Takaful operatorThe entity that manages a takaful business on behalf of participants, usually for a fee, a profit share or both.Wakalah model (takaful)The takaful model in which participants appoint the operator as agent to run underwriting and investment for a known fee.Takaful participantA person or business that joins a takaful scheme, contributes to its funds and is entitled to compensation under its terms.Underwriting surplusWhat remains in the participants' risk fund after claims, expenses and reserves, plus attributed investment returns.RetakafulTakaful for takaful funds: a takaful undertaking cedes part of its risks to a retakaful fund on behalf of its participants.Qard from the takaful operatorAn interest-free loan from the operator's shareholders' fund to cover a deficit in the participants' risk fund, repaid from future surpluses.Wakalah fee (takaful operator)The fee a takaful operator charges, usually from contributions, for managing the participants' risk fund.Family takafulTakaful covering risks to people, such as death, disability or illness, often with a savings or investment element.General takafulTakaful covering property and liability risks, such as motor, fire or travel, typically written for one year.Retakaful commissionAn amount a retakaful or reinsurance provider pays back to the ceding takaful undertaking for its work in placing the business.

Shariah governance 21 terms

Shariah supervisory boardAn independent panel of Shariah scholars that approves an institution's products and oversees its Shariah compliance.FatwaA juristic opinion on a Shariah question; in finance, usually a Shariah board's ruling on a product or transaction.Shariah governance systemThe institutional arrangements through which an institution ensures independent oversight of its Shariah compliance.Shariah reviewA regular compliance function that assesses whether an institution's operations follow Shariah requirements.Shariah auditAn independent assessment of internal controls, risk management and overall Shariah compliance, usually by internal audit.Shariah non-compliance riskThe operational risk that an institution fails to comply with Shariah rules and principles in its products and services.Purification of incomeGiving away, usually to charity, income from a non-compliant source or a Shariah breach, so the institution does not benefit.Central Shariah boardA national or regulator-level Shariah authority whose rulings set or harmonise Shariah positions across a jurisdiction.Shariah compliance functionThe internal control function that checks, day to day, that operations follow Shariah board rulings.Islamic windowThe part of a conventional institution, such as a branch or unit, that provides Islamic financial services.AAOIFI (Islamic finance standard setter)The Bahrain-based not-for-profit body that issues Shari'ah, accounting, auditing, governance and ethics standards for Islamic finance.IFSB (Islamic Financial Services Board)The international standard setter that issues prudential standards and guiding principles for Islamic banking, capital markets and takaful.Shariah resolution (board decision)A recorded decision of a Shariah board or committee on a product, transaction or issue, with its reasoning and any dissent.Istifta (request for a Shariah opinion)The act of seeking a Shariah opinion on a matter that has occurred or is expected to occur.Conflict of interest (Shariah committee)A member's interest that could affect a decision; it must be declared, and the member steps out of that matter.Shariah non-compliance eventAn actual failure to meet Shariah requirements, which must be confirmed, rectified and, where required, reported to the regulator.External Shariah auditAn independent audit of Shariah governance and compliance by persons outside the institution, appointed by the board.National Shariah authorityA Shariah body set up by national law or government, independent of the regulator, whose rulings bind institutions.Internal Shari'ah Supervision Committee (ISSC)In the UAE, the committee of scholars an Islamic financial institution appoints to supervise its transactions, activities and products.Higher Shari'ah Authority (UAE)The UAE's national Shari'ah body whose regulations, standards and resolutions frame institutions' internal Shari'ah committees.Shariah risk management functionThe function that identifies, measures, monitors and reports Shariah non-compliance risk across the institution.

Prudential regulation 11 terms

Capital adequacy (Islamic banks)Holding enough capital against risks; for Islamic banks, the IFSB adapts the Basel rules to each Shariah contract.Displaced commercial riskPressure on an Islamic bank to give up part of its own profit so investment account holders earn a competitive return.Profit equalisation reserveAn amount set aside from mudarabah income to maintain a level of return for investment account holders and the bank over time.Investment risk reserveAn amount set aside from investment account holders' profit, after the bank's share, to cushion their future investment losses.Alpha factorIn IFSB capital rules, the share of risk on investment-account-funded assets that is treated as falling on shareholders.Islamic deposit insuranceA deposit protection scheme designed on Islamic lines to protect depositors of Islamic banks if a bank fails.Rate of return riskThe risk that changes in market rates affect an Islamic bank's net income; the analogue of interest rate risk in the banking book.Fiduciary riskThe risk that an institution fails to meet the standards that apply to its duties as trustee or manager of others' funds.Institutions offering Islamic financial services (IIFS)The IFSB's umbrella term for Islamic banks, takaful institutions, Islamic windows and other Islamic financial institutions.Operational riskThe risk of loss from failed processes, systems, people or external events; for Islamic institutions it includes Shariah non-compliance risk.Additional Tier 1 sukukMudarabah sukuk issued by an Islamic bank that count as Additional Tier One capital because they absorb losses and pay discretionary profit.

Open finance and APIs 14 terms

Open financeCustomer-permissioned sharing of financial data, and initiation of services, by licensed third parties through secure interfaces.Application programming interface (API)A defined way for software systems to request data or actions from each other; the technical channel of open finance.Consent (open finance)The customer's explicit, informed permission for a provider to access specified data or initiate a transaction.Data sharing (open finance)An open finance service that gives a customer a consolidated view of their data from one or more institutions.Service initiationAn open finance service in which a licensed provider initiates a transaction on a customer's account or product, with consent.Data holderThe licensed institution that holds a customer's data and must make it available to authorised providers with the customer's consent.Open finance providerA firm licensed to offer data sharing or service initiation to customers under an open finance regime.API hubA central platform through which institutions and licensed providers connect for open finance, instead of many bilateral links.Strong customer authenticationVerifying a customer with at least two independent factors, such as something they know, have or are.Regulatory sandboxA regulator's framework for testing new financial products with real customers, under agreed conditions and close supervision.Consent withdrawal (open finance)A user's right to withdraw open finance consent at any time, which providers must explain when consent is given.Trust framework (open finance)The shared directory, certificates and onboarding rules that let open finance participants identify and trust one another.Unauthorised transaction (open finance)A transaction that the user did not consent to, whether it was executed or only initiated.ISO 20022The international standard for financial messages, with a shared data dictionary and business process catalogue.

Treasury, liquidity and hedging 13 terms

Commodity murabahaInterbank and treasury deals in which commodities are bought and sold on deferred payment to place or raise short-term funds.Wa'd (promise)A unilateral promise to do something in the future; it can be made binding and is used in hedging, sukuk and lease-to-own deals.Muwaadah (mutual promise)An exchange of promises between two parties for the same future transaction, treated more restrictively than a unilateral wa'd.Tahawwut (hedging)Hedging; in Islamic finance, risk management transactions built from permissible contracts rather than conventional derivatives.Islamic profit rate swapAn alternative to an interest rate swap that exchanges fixed and floating profit flows through commodity murabaha trades.Islamic FX forwardA currency hedge built on a binding promise to exchange at an agreed rate on a future date, with the exchange itself done at spot.Islamic cross-currency swapAn alternative to a cross-currency swap that exchanges profit and principal flows in two currencies through commodity trades.Interbank investment wakalahAn interbank placement in which one bank invests another's funds as agent for a fee, targeting an expected but not guaranteed profit.Collateralised murabahahA murabaha placement secured by collateral such as sukuk, used as an Islamic alternative to a repo.Short-term liquidity sukukShort-term, tradable sukuk that Islamic banks hold as liquid assets and use to manage cash, including across borders.Sell and buy back (SBBA)An interbank arrangement of an outright sale of securities, promises to reverse it and a later outright sale back at a set price.Muqassah (set-off)Extinguishing a debt owed to a party by a debt that party owes, either by operation of law or by agreement.Islamic interbank money marketThe market in which Islamic banks lend surplus liquidity to one another and raise short-term funds without interest.

Accounting and reporting 10 terms

AAOIFI Financial Accounting Standards (FAS)The accounting standards AAOIFI issues for Islamic financial institutions, covering contract types and Islamic-specific reporting.Deferred profitThe profit on a deferred-payment sale that is recognised over the payment period rather than all at once at the sale date.Quasi-equityAAOIFI's category for investment accounts and similar risk-sharing funds, presented between liabilities and owners' equity.Off-balance-sheet assets under managementAssets an institution manages for others, such as restricted investment accounts, that are reported outside its own balance sheet.Investment poolA group of assets funded by identified sources, such as shareholders or investment account holders, whose income is allocated to them.Impairment and credit lossesRecognising losses when financing assets lose value or become doubtful; AAOIFI's standard uses an expected credit loss approach.Takaful accountingAccounting for takaful contracts and funds, which keeps the participants' funds and the operator's own accounts distinct.Promotional gifts and prizesGifts and prize schemes an institution offers to attract or reward customers, which AAOIFI addresses under specific Shariah and accounting rules.Profit allocation (investment accounts)The method for dividing a pool's income between the bank and investment account holders, including reserves and weightages.Ijarah accountingHow lessors and lessees report ijarah contracts, including leases ending in ownership, under AAOIFI's ijarah standard.

Calendar, settlement and markets 10 terms

Hijri calendarThe Islamic lunar calendar of twelve months, used for religious dates, zakat and, in some markets, official and business dates.Lunar monthA month that begins with the new crescent moon and lasts twenty-nine or thirty days; the unit of the Hijri calendar.HawlThe full lunar year for which qualifying wealth must be held above the nisab before zakat becomes due on it.Moon sightingObserving the new crescent moon to determine the start of a Hijri month; it decides the dates of Ramadan and the Eid holidays.Business dayA day on which banks, markets or payment systems in a given place are open; the unit for due dates and settlement.Value dateThe date on which a payment or transfer is due to take effect and funds become available to the receiver.Settlement finalityThe point at which a transfer becomes irrevocable and unconditional, so it cannot be unwound even if a participant fails.T+n settlementSettlement a set number of business days after the trade date: T+1 means one business day later, T+2 two business days later.Delivery versus paymentA settlement mechanism that delivers securities only if payment is made, and makes payment only if delivery occurs.Weekend conventionWhich days count as the weekend in a market; it varies across Islamic-finance markets and drives settlement and due dates.