Islamic Banking Glossary

Frequent Asked Questions

  • Riba: (usury). It includes interest because it is a stipulated increase in a loan.
  • Rahn: means collateralized borrowing. It refers to an arrangement whereby a valuable asset is placed as collateral for a debt. The collateral may be disposed in the event of default.
  • Dayn: a debt or a liability to pay arising from a contract or credit transaction.
  • Hiwala: means debt transfer. It refers to a transfer of funds (debt) from the depositor's (debtor's) account to the receiver's (creditor's) account where a commission may be charged for such a service. It is applicable to remittances.
  • Hamish Jiddiyah: earnest money paid by a person who intends to purchase an asset and wishes to confirm his intention to do so by paying earnest money to the seller.
  • Gharar: ambiguity, uncertainty, hazard and risk relating to the main aspects of a transaction.
  • Sarf: refers to currency exchange, buying and selling of foreign currencies.
  • Urbun: a sale contract with an earnest money deposit, (urbun), which contains a condition that if the sale is completed the urbun will be part of the sale price and if the sale if not completed then the seller can retain the urbun.
  • Ujr: refers to commissions or fees charged for services.
  • Hibah: refers to gifts awarded voluntarily in return for loan given.
  • Istina: This contract involves the sale of manufactured assets where the Bank pays the manufacturer in advance and the assets are delivered subsequently upon completion. The specifications of the assets are pre-agreed. This contract enables suppliers to be paid a pre-delivery advance.
  • Salam: refers to an agreement whereby payment is made immediately while the goods are delivered at an agreed later date. It is equivalent to an advance payment.
  • Sukuk: in the context of Islamic financing this means trust certificates evidencing the holder’s pro rata share of the ownership of the underlying assets.
  • Ijara: means leasing. Under this principle, the Bank may finance its customers to acquire the right to use the services of a given asset. The Bank will first purchase the asset required by the customer and subsequently leases the asset to the customer for a fixed period, lease rentals and other terms and conditions as agreed to by both parties.
  • Ijarah Thuman Al-Bai: means leasing and subsequent purchase. It refers to two contracts undertaken separately and consequentially, ie. Al-Ijarah contract (leasing) and Al-Bai contract (purchase). It is an extension of the principle of Al-Ijarah whereby both parties further agrees that at the end of the lease period, the customer will purchase from the Bank the asset concerned at an agreed price with all the lease rentals previously paid constituting part of the price. This concept is applicable for financing of consumer goods and durables.
  • Kafala: means guarantee. It refers to the guarantee or surety given by one party who agrees to discharge the liability of a third party, in case of default. "Mudaraba" is an agreement made between two parties, one to provide the capital, financier (the Rabul Mal) and the other (the Mudarib), using their business wisdom, to provide the management. The profit-sharing ratio is agreed in advance. Capital losses are borne solely by the financier. In the case of our deposit products, it refers to a profit-sharing agreement between the Bank (Mudarib) and the depositors (financier) for the Bank to invest depositors' funds to generate profits.
  • Murabaha: is contract that involves a request from a customer to the Bank to purchase and then on sell to the customer certain goods. The sale by the Bank to the customer is at cost plus an agreed margin. Payment by the customer is in one or more pre-determined installments at agreed points in time. Ownership of the goods passes to the customer upon delivery by the Bank. Such a sale contract is valid on condition that the price, other cost and the profit margin of the seller is stated at the time of the agreement of sale.
  • Musharaka: is an Islamic financing technique referring to a partnership between two parties, where both provide capital towards the financing project. Both parties share profits on a pre-agreed ratio, but losses are shared on the basis of equity participation. In other words, it is a joint-venture profit-sharing contract between the Bank and the initiators of the relevant project. All parties including the Bank have the right to participate in the management of the project.
  • Musharaka Mutanaqisah: a diminishing partnership. A form of partnerships where the ownership ratio of the Bank gradually decreases in favor of the customer during the tenor of the financing.
  • Maisir: a game of chance or gambling.
  • Qard ul Hassan: refers to an interest-free loan or benevolent debt financing contract for which the borrower is not obliged but has the option to reward the lender for benevolent deed.
  • Zakat: a religious tax payable by Muslims based on their wealth.
  • Wakala: an agreement where a person nominates another person to act on his behalf.
  • Waqf: property dedicated to the benefit of a class of relatives, charities or other humanitarian purposes.