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Key Islamic Banking Definitions

S.NO TERM EXPLANATION
01 Kafalah (Guarantee) A contract of surety in which a person adds to his responsibility or liability on behalf of another person in respect of a demand for something.Al Kafalah is a contract made between the Bank and another party whereby the Bank agrees to discharge
the liability of a third party in the case of default by the third party. As a surety, the third party will give the Bank some form of collateral and pay a fee for the services.
02 Qard e Hasana (Interest free loan) A goodwill loan against which interest is not charged; where only the principal amount is to be returned in the future.
03 Rabb al Maal (Owner of capital) The investor or the owner of capital in a Mudarabah contract.
04 Gharar (Uncertainty) Contractual uncertainty that may lead to major dispute between contracting parties which is otherwise preventable or avoidable.
05 Arbun (Down-payment/deposit) A non-refundable down payment received from the buyer or the Istisna requester securing the purchase of manufactured goods.
06 Haamish Jiddiah (Security Deposit) The Islamic financial term for a sum of earnest money received from the client as security that serves as compensation in the event the lessee backs out from entering into or continuing an Ijarah. The lessor makes up for the actual loss from
it and returns the remainder to the client.
07 Shirkat ul Milk (Joint ownership) Primarily a ‘partnership of joint ownership’ which may come about deliberately or involuntarily.
08 Wakalah (Agency) An agency contract which usually includes in its terms a fee for the agent.
09 Bai Muajjal (Deferred Payment Contract) A deferred sale, where one of the considerations of the contract such as its price or the delivery of its subject matter is delayed to a future date
10 Salam (Advance Payment) A sale where the price of the subject matter is paid in full at the time of the contract’s execution while the delivery of the subject matter is deferred to a future date
11 Istijrar (Recurring sale) A contract where the supplier agrees to provide a client a particular commodity on an ongoing basis for an agreed price based on an agreed mode of payment.
12 Commodity Murabaha A transaction where the Islamic bank purchases a commodity on spot and sells it for a deferred payment for the purpose of managing liquidity.
13 Diminishing Musharakah (Declining Partnership) A temporary partnership where an asset or property is jointly purchased by two partners and one partner eventually acquires ownership of it through a series of property share purchases.
14 Ijarah (Islamic Lease) A form of lease seeking to provide the benefits of an asset or a service to the lessee in return for a payment of an agreed upon price or rent.
15 Ijarah Muntahiya bi Tamlik (Leasing ending with ownership) An Ijarah based on the lessor’s undertaking to transfer the ownership of the leased property to the lessee at the end of the lease or by stages during the term of the contract.
16 Ijarah wa Iqtina (Lease-and-purchase transaction) An Ijarah conducted solely for the purpose of transferring the ownership of the leased asset to the lessee at the end of the lease period.
17 Istisna (Order to Manufacture) A transaction used for the purpose of acquiring an asset manufactured on order. It may be executed directly with the supplier or any other party that undertakes to have the asset manufactured.
18 Mudarabah (Investment partnership) A Mudarabah is a business partnership between two or more parties, where, typically, one of the parties supplies the capital for the business, and the other provides the investment management expertise.
19 Murabaha (Cost + Profit) A contract in which the cost of acquiring the asset and the profit agreed and disclosed to the client or the buyer upfront.
20 Musawamah (Negotiated Sale) A general sale in which the price of the commodity to be traded is bargained between the buyer and the seller and where no reference is made to the cost of acquisition of the sale asset or the profit to be earned from it.
21 Musharakah (Equity participation / partnership) A business partnership set up to make profit, where all partners contribute capital and effort to help the business run.
22 Mudarabah Al Muqayyadah (Restricted Mudarabah) A Mudarabah in which the Mudarib has to observe certain restrictions regarding how the business may be run. Typically, these restrictions may relate to sector, activity, and/or region in which the business may be operated.
23 Sukuk (Islamic bonds) Certificates of equal value representing undivided shares in ownership of tangible assets, usufruct and services.
24 Takaful (Insurance) A Shariah-compliant system of insurance based on the principle of mutual cooperation. In takaful members contribute money into a pooling system in order to guarantee each other against loss or damage.
25 Tawarruq (Purchase on Credit & Spot Sale for liquidity arrangement) A mode of financing, similar to a Murabaha transaction, where the commodity sold is not required by the client but is bought on a deferred payment basis and sold to a third party for a lesser price, thereby becoming a means of liquidity generation.