Islamic Finance Glossary
- Gharar - exposure to excessive risk and danger in a business transaction as a result of the taking of inappropriate risk /unnecessary speculation.
- Ijarah - an Islamic lease agreement. Instead of lending money and earning interest Ijarah allows a bank to earn a profit by charging rental on the asset leased to the customer.
- Istisnah - a contractual agreement used for the provision of funding for the construction of houses, plants, projects, bridges, roads, and highways whereby a cash payment is made in advance of future delivery.
- Mudaraba (Profit/Loss Sharing) - a contract between 2 parties, normally an investor and an investment manager. Profits are distributed between the two parties in accordance with the ratio agreed at the time of the contract. Financial loss is borne only by the investor. The Investment Manager's loss is restricted to receiving no payment for services rendered.
- Mudarib - an investment manager in a Mudaraba contract.
- Murabaha (Cost Plus) - Shari'a compliant, commodity - based finance, whereby a seller expressly mentions the cost he has incurred in the purchase of an asset prior to selling it with added profit, or mark-up, thereon which is known to the buyer in a time frame that is also pre-agreed. It is one of the most popular modes used by banks in Islamic countries to promote riba-free transactions.
- Musawama - a simple sale in which the price of the commodity to be traded is negotiated by the seller and the buyer without any reference to the price paid or cost incurred by the former.
- Musharaka - a partnership resulting from a contract. A musharaka contract is similar to a mudaraba contract, the difference being that, in the former, both partners participate in the management and provision of capital and, accordingly, share in the profit and loss.
- Riba - the interest or premium that must be paid by the borrower of a loan.
- Shari'a - Islamic law which requires the avoidance of:
- payment or receipt of riba (interest or inequitable enrichment)
- gharar (uncertainty)
- investment in "haram" (forbidden) businesses. The Shari'a encourages trade and the generation of a lawful return on capital if the capital provider is prepared to share the risks in a business venture. Other Islamic prohibitions include the trading of debt contracts at a discount and forward foreign exchange transactions (which involve risk and speculation). The structure of each transaction has to be approved by a board of Shari'a scholars and, therefore, be compliant with the principles of Islamic finance
- Sukuk - An Islamic "debt" instrument which may be issued by governments, local authorities or public companies. Such instruments are distinct from conventional debt securities in that the Sukuk holder is the beneficial owner of the underlying asset and, as such, receives the equivalent of a coupon in the form of rental payments from the issuer.
- Zakah - the sum payable by a Muslim, based on his net worth and in accordance with his religious obligations, mainly for the benefit of the poor and needy.
