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Key Sharia Instruments

Murabaha (Cost Plus Financing)

A financier buys a good to be financed from a third party supplier and resells to the client either for immediate or deferred payment. The financier has to take title to the commodity and assume the risk of ownership before an onward sale can take place. Payment could be on bullet or instalment basis, however price is fixed from start of contract.

Mudaraba (Profit Sharing Agreement):

An investment arrangement whereby the financier provides capital to another party, the Mudarib (expert). This expert invests the capital in an investment or a business activity and the profits are shared on a pre-agreed basis, whilst losses are for the capital provider only. The Mudarib bears the cost of providing the service.Mudaraba investments may be open ended or for a fixed term.Mudaraba may be restricted to certain types of assets (restricted Mudaraba) or general investment fund at discretion of Mudarib (unrestricted Mudaraba).

Ijarah (Leasing):

Ijarah is a lease contract in which a financier purchases equipment or property and leases it to a client. Effectively an operating lease.Ijarah wa lqtina. Same as above but the Lessee promises to buy the asset for an agreed sum at the end of the contract. Effectively a financing lease/hire purchase.In both cases, the ownership of the asset remains with the financier.Ijarah example: lease (operating/finance) of new machinery for a factory.

Istisna’a (Pre-production Financing):

A financier contracts to sell goods that are yet to be constructed / manufactured to a customer. The financier enters into parallel contract to have the goods manufactured (usually by the customer himself).Some form of manufacturing or construction is a requirement (Istisna’a cannot be used for agricultural produce, for example). The end product must be precisely specified.The sale price is agreed up front and can be deferred by bullet or installment payments.The customer must take title to the finished goods.Istisna’a example: financing for the purchase of new-build aircraft, ships, locomotives, etc.

Arbun (Option):

A contract where the client wants to acquire a good in the future, he will pay a percentage of the purchase price spot, and on a specific date in the future, he will pay the balance.If he chooses not to buy the good he loses his initial payment.Purchase price must be fixed on contract date and seller must have ownership of good transacted through the period of the contract.Arbun example: Essentially a call option.

Sukuk (Islamic Bond):

Sukuk is normally a trust certificate that provides an equal share in an undivided asset. Sharia requires that the Sukuk holders have ownership (beneficial) rights in tangible assets, not just in contracts. Repayment is based on cash flow from underlying transaction. There are approximately US $110 billion Sukuk outstanding globally. This paper has been absorbed into the market very quickly and very rarely trades in the secondary market.

A-Z Islamic Terminology

  • Amanah

    Reliability, trustworthiness, loyalty and honesty. An important value of Islamic society in mutual dealings. It also refers to deposits in trust, where a person may hold property in trust for another.

  • SAl-Sarf

    Sale of monetary value for monetary value (i.e. currency exchange). In Islamic law, only spot exchange is permitted, which means immediate delivery of the exchanged currencies at the prevailing rate.

  • Bai

    Agreement where a supplier agrees to supply a product at an agreed price, with an agreed mode of

  • Bai al Arboun

    A sale agreement in which a security deposit is provided in advance as part payment towards the price of a good. The deposit is forfeited if the buyer does not meet his obligation. If the sale is completed, the Arboun deposit becomes part of the price.

  • Bai al Inah

    The instant sale and buy back of an asset for higher price than that for which the seller originally sold it.

  • Bai Bithaman Ajil

    Also known as Bai Mua’jal. The sale of goods on a deferred payment basis. Equipment or goods requested by the client are bought by the bank, which subsequently sells the good to the client for an agreed price, including a mark-up (profit) for the bank. The client may pay by instalments within a pre-agreed period, or in a lump sum at the end of the contract period.

  • Bai Dayn

    Islamic term for sale of debt. Most Islamic scholars do not approve of the sale of debt because as this may involve Riba and Gharar.

  • Bai Istisna’a

    A sales contract for manufacturing tangible assets, allowing cash payment in instalments and future delivery of the product. For example, a manufacturer or a builder agrees to produce or build a well described asset for a given price and promises delivery on a date in the future.

  • Bai Mua’jal

    A sale of a commodity where the price is paid on a deferred payment basis.

  • Bai Salam

    A sales contract in which full payment is made in advance for goods to be delivered later. The seller undertakes to supply specific goods to the buyer at a future date in exchange for an advance price paid at the time of signing the contract.

  • Darura

    A necessity or emergency. This is a condition in which aspects of Sharia may be suspended in order to preserve life, or to assure the safety of the Muslim community, or an individual.

  • Dayn

    A debt which comes into existence as a result of a commitment to pay later.

  • Diminishing Musharaka

    This specific form of partnership provides a method through which the bank keeps on reducing its equity in a project, ultimately transferring ownership of the asset to the other participants as they purchase some of the bank’s equity, progressively reducing it until the bank has no equity and the partnership comes to an end.

  • Fatwa

    A legal verdict given on a religious basis. The sources on which a fatwa is based are the Holy Qur’an, the Sunnah of the Prophet, Ijma’a and Qiyas.

  • Fiqh

    Islamic jurisprudence or Islamic law. It is the complete set of rulings written down by well recognized Islamic Scholars since the time of the Prophet Muhammad (may peace be upon him).

  • Fiqh al Mu’amalat

    The rules of transacting business in a Sharia-compliant manner.

  • Gharar

    An exchange in which there is an element of ambiguity or deception, either through ignorance of goods or price, or through faulty description of goods. For example, selling goods you are not in a position to deliver, such as fish yet to be caught, would be Gharar.

  • Hadith

    The sayings of Prophet Muhammad (may peace be upon him) as narrated by his companions.

  • Halal

    Anything permitted by Sharia.

  • Haram

    Anything prohibited by Sharia.

  • Hanafi

    Islamic school of law founded by Imam Abu Hanifah. Followers on this school are known as Hanafis.

  • Hanbali

    Islamic school of law founded by Imam Ahmad Ibn Hanbal. Followers of this school are known as Hanbalis.

  • Hamish Jiddyah

    A security deposit. An amount of money paid by a purchaser upon request of a seller to make sure that the purchaser is serious about the transaction. If the purchaser fails to carry out his promise to buy the asset, the seller can use the deposit to cover any losses incurred.

  • Hawala

    Transfer or assignment of rights and responsibilities in a contract. It can also mean remittances of money.

  • Hawalat Dayn

    An arrangement for the assignment of debt to a third party whereby that third party accepts to pay or collect a debt.

  • Hibah

    Gift (usually a property).

  • Hila

    Forbidden structure. A transaction which appears permissible, but is in fact structured in a un-Islamic way. For example, Bai al Inah is a transaction which is considered as Hila.

  • Ijarah wai Iqtina (alternatively Ijarah Muntahia bil-Tamleek)

    A contract under which an Islamic bank finances equipment, building or other facilities for the client against an agreed rental, which includes a binding promise by the lessor to transfer the ownership of the leased property to the lessee, either at the end of the term of the lease period or by stages during the term of the contract. The lessee is under no obligation to buy the asset.

  • Ijab and Qubool

    Ijab is an offer in a contract; and Qubool is an acceptance of an offer.

  • Ijarah

    Sale of the right to use an asset in exchange for rental payments. It is an arrangement under which the Islamic bank leases equipment, building or other facility to a client, against an agreed rental amount.

  • Ijarah Mawsufah

    A forward lease. It is a lease contract where the asset involved is not present at the time of signing of the contract. The use of the asset can only be realized on a future date, and hence the rent is also only realized on a future date.

  • Ijma’a

    Consensus of the majority of all the leading and qualified jurists on a certain matter in a certain time period. Such rules then become part of Sharia.

  • Ijtihad

    The effort of a qualified Islamic jurist to interpret or reinterpret sources of Islamic law in cases in which no clear directives exist.

  • Istihsan

    Judicial preference for one legal analogy over another, often in view of public interest. The strict application of Istihsan would require that preference be given to the more sound of the two analogies. Istihsan is one of many tools used by jurists in the process of Ijtihad.

  • Jahala

    Ignorance, lack of knowledge, indefiniteness and ambiguity in a contract, often leading to Gharar.

  • Jua’alah

    Wages, pay, stipend, or reward in exchange for a service provided.

  • Kafalah

    Guarantee. In Kafalah, a third party guarantees the performance of another party involved in a contract. Islamic scholars normally do not allow a fee to be collected by the Guarantor in such a transaction.

  • Kharaj bi-al-Daman

    A basic principle of Sharia that gains should be accompanied by a liability for losses.

  • Maaliki

    Islamic school of law founded by Imam Maalik lbn Anas. Followers of this school are known as Maalikis.

  • Manfaa

    The use or benefit derived from an asset. For example, in an Ijarah transaction, the Manfaa or the benefit of the leased asset is the subject matter underlying the contract. That is why Ijarah may also be defined as a sale of Manfaa.

  • Maysir

    Gambling or playing games of chance with the intention of making an easy profit. Sharia considers Maysir a form of Gharar and it is a Haram act.

  • Mudarib

    Managing partner in a Mudaraba. Generally, a Mudarib is a contributor of labour and/or management rather than capital.

  • Mudaraba

    A form of partnership where one party provides funds while the other party provides expertise and management. The partners agree to share profit on a pre-agreed ratio; but loss, if any, is borne by provider of funds.

  • Murabaha

    A sales contract of a tangible asset for a mark-up (profit) above the cost of the asset, and an agreed mode of payment (payment can be spot but is often defined in the form of instalments). In a Murabaha, the seller has to reveal his cost to the buyer.

  • Musawamah

    A general kind of sale in which price of the commodity to be traded is bargained between the seller and the purchaser without any reference to the price paid or cost incurred by the seller.

  • Musharaka

    A partnership between two parties, both of whom provide capital towards the financing of a project. Both parties share profits on a pre-agreed ratio, but losses are shared on basis of equity participation. Management of the project is carried out either by both parties or by any one of them.

  • Qabd

    Possession of an asset.

  • Qard

    An interest free loan.

  • Qard Hasan

    A benevolent loan contract between two parties for social welfare or for short-term bridge financing. Repayment is for the same amount as the amount borrowed. The borrower can pay more than the amount borrowed as long as it is not stipulated by the contract. The Islamic view is that is a moral duty of Muslim to give Qard to needy borrowers, free of charge.

  • Qiyas

    Measure, comparison or analogy. A source of law and part of Islamic jurisprudence.

  • Qur’an

    The Muslim holy book containing the words of Allah (God) revealed to his final messenger, the prophet Muhammad (may peace be upon him), for the guidance of mankind.

  • Rabb al Maal

    An investor or contributor of capital in a Mudaraba transaction (see Mudaraba above).

  • Rahn

    Property given as collateral for payment of an obligation. In case the debtor fails to make payment, the creditor can liquidate that property to settle the debt.

  • Riba

    Riba denotes the additional amount that a lender receives, or a borrower pays, which is in excess of the principal amount of loan. Riba also includes penalty or charge for delay of payment of debt. Riba is generally held to be the same as interest.

  • Ribawi

    A transaction in which Riba is present. The following items are classified as Ribawi in Sharia: cash, gold, silver, wheat, barley, dates and salt. A loan in these commodities with an increase in exchange is a Ribawi transaction, which means it involves Riba.

  • Sadaqah

    Voluntary charitable contribution by a Muslim seeking the pleasure of Allah.

  • Shart

    A stipulation in a contract.

  • Sharia

    Divine guidance as given by the Holy Qur’an and Sunnah of the Prophet Muhammed. Sharia embodies all aspects of Islamic faith, including beliefs and practices.

  • Sharia Supervisory Board

    A body of qualified Sharia Scholars responsible for ensuring that the products and contracts of an Islamic financial institution comply with the principles of Sharia.

  • Shafi’e

    Islamic school of law founded by Abu Abdullah Ahmad bin Idris or Iman Shafi’e. Followers of this school are known as Shafi’ees.

  • Sukuk

    Asset backed certificates which are structured in accordance with Sharia. Most of these certificates may be traded in the market, depending upon how they are structured. Sukuk represent proportionate beneficial ownership in the underlying asset(s), the earnings from which provide a return on the Sukuk. Singular of Sukuk is Suk.

  • Sunnah

    Refers to the sayings and deeds of the Prophet Muhammad (may peace be upon him) during his life time.

  • Tabarru’

    A donation or gift whose purpose is not commercial, but for seeking the forgiveness and consideration of Allah. This concept has been used in the structuring of Islamic Insurance (Takaful)

  • Takaful

    Arabic for solidarity (collective protection). This term means mutual assurance or insurance under Sharia. In some Muslim countries, the term is used as a name for Islamic Insurance.

  • Tawarruq

    In personal financing, a client with a genuine need buys an item on credit from the bank on a deferred payment basis and then immediately resells it for cash to a third party. In this way, the client can obtain cash without taking out an interest-based loan. Islamic banks have used this type of arrangement intensively to place money with each other.

  • Trustee

    A person, who has the legal responsibility for holding title in a property for the benefit of another person or party.

  • Ulema

    Sharia scholars. Islamic jurist who are well versed in Sharia. Ulema is plural of Alim.

  • Ummah

    The Islamic nation beyond all national boundaries, ethnicities, colours and races. Used to refer to the worldwide community of Muslims.

  • Wadia

    Safe keeping of a property for a fee. Islamic banks in the Middle East use this concept for safe deposit boxes.

  • Wakalah

    A contract of agency in which one person appoints someone else to perform a certain task on his behalf, usually for a certain fee.

  • Waqf

    An endowment or a charitable trust set up for Islamic purposes. It involves tying up a property in perpetuity so that it cannot be sold, inherited, or donated to anyone. Waqfs are usually set up for education, or for the benefit of the poor.

  • Zakat

    An annual, specified wealth tax to be paid to specific people, by a Muslim possessing a minimum specified amount of wealth.

  • Zakat

    An annual, specified wealth tax to be paid to specific people, by a Muslim possessing a minimum specified amount of wealth.

  • Waqf

    An endowment or a charitable trust set up for Islamic purposes. It involves tying up a property in perpetuity so that it cannot be sold, inherited, or donated to anyone. Waqfs are usually set up for education, or for the benefit of the poor.

  • Wakalah

    A contract of agency in which one person appoints someone else to perform a certain task on his behalf, usually for a certain fee.

  • Wadia

    Safe keeping of a property for a fee. Islamic banks in the Middle East use this concept for safe deposit boxes.

  • Ummah

    The Islamic nation beyond all national boundaries, ethnicities, colours and races. Used to refer to the worldwide community of Muslims.

  • Ulema

    Sharia scholars. Islamic jurist who are well versed in Sharia. Ulema is plural of Alim.

  • Tawarruq

    In personal financing, a client with a genuine need buys an item on credit from the bank on a deferred payment basis and then immediately resells it for cash to a third party. In this way, the client can obtain cash without taking out an interest-based loan. Islamic banks have used this type of arrangement intensively to place money with each other.

  • Takaful

    Arabic for solidarity (collective protection). This term means mutual assurance or insurance under Sharia. In some Muslim countries, the term is used as a name for Islamic Insurance.

  • Tabarru’

    A donation or gift whose purpose is not commercial, but for seeking the forgiveness and consideration of Allah. This concept has been used in the structuring of Islamic Insurance (Takaful).

  • Sunnah

    Refers to the sayings and deeds of the Prophet Muhammad (may peace be upon him) during his life time.

  • Sukuk

    Asset backed certificates which are structured in accordance with Sharia. Most of these certificates may be traded in the market, depending upon how they are structured. Sukuk represent proportionate beneficial ownership in the underlying asset(s), the earnings from which provide a return on the Sukuk. Singular of Sukuk is Suk.

FAQ

What is Islamic finance?

Islamic finance is simply a way of doing business that is based upon the ethical principles of Islamic law (Sharia). Sharia is derived from both the Quran and the Sunnah – the teachings, practices and deeds of the Prophet Mohamed (may peace be upon him).The application of Sharia principles is determined through analysis and consensus by Sharia scholars, who opine and give their fatwa (i.e. pronouncement) on the compliance of each financial product / structure with the principles and practices of Islam.

Can anyone do business involving Islamic finance?

Yes. Absolutely any investor can benefit from Sharia compliant financing. Islamic finance is for all investors (both Muslim and non-Muslim) and it is a market that is experiencing rapid growth. In fact, these difficult financial times make the ethical foundations and sensible approach to risk in Islamic financing more attractive than ever.With an estimated 1.4bn Muslims worldwide and increasing interest amongst issuers in tapping the Sharia compliant market for funding, the industry is believed to be growing by at least 15% per annum. Global Sharia compliant assets are estimated to have now exceeded $1trillion and there are over 300 Islamic financial institutions around the world.

Is Islamic finance well established in the UK?

Outside of the Muslim world, the United Kingdom Government has been especially supportive of the industry’s development in London and has enacted tax legislation and regulatory reform to facilitate the use of Sharia compliant structures. The Government has taken a lead amongst western nations in permitting the establishment of a Sharia compliant financial services sector (starting with the authorisation of the Islamic Bank of Britain in 2004). As a result of these measures, the UK Financial Conduct Authority expressed the view that London is emerging as a hub for the Islamic finance industry in its recent paper on the subject (“Islamic Finance in the UK”).

What does Islamic finance allow and forbid?

Transactions must be Halal (permissible), which precludes investments in certain industries (for example, gambling, alcohol, tobacco, pork, insurance and conventional banking).Sharia encourages earning of profit through trade and therefore prohibits any form of interest (Riba). Conventional deposits, loans, overdrafts or bonds are therefore forbidden.
Speculative behaviour or undue uncertainty in a transaction is called Gharar and is forbidden by Sharia. Conditions in a contract should therefore not be subject to future uncertain events that could lead to misunderstandings.It is also not permissible to sell something that one does not already own. Activities such as short selling are therefore prohibited.

What are typical Islamic finance structures?

Transactions should be based upon tangible assets and involve risk-sharing. Sharia compliant structures tend therefore to have some form of collateralization. The classic example of a risk-sharing transaction is an equity investment.

How can I learn more about Islamic finance?

Please contact us in confidence for further details of our services. Tejara Capital, through its access to attractive, distinctive investment opportunities worldwide, its excellent distribution capabilities within the Middle East and its deep expertise in structuring and marketing Sharia compliant products and services, is extremely well positioned to deliver you a world-class service.

Links

We are active participants in a number of organizations involved in Islamic finance such as:

  • www.aaoifi.com - Accounting and Auditing Organisation of Islamic Financial Institutions
  • www.islamicfi.com – General Council for Islamic banks and Financial Institutions
  • www.ifsb.org – Islamic Financial Services Board
  • www.iaie.net – The International Association of Islamic Economics