Saturday, January 21, 2012

Glossary of Islamic Financial Terms - List No.2

The principles and precepts of Islamic Shari'ah governing commercial and financial transactions are both extraordinary complex and also elegantly simple. The existence and doctrinal enunciations of different schools of Islamic jurisprudence render it challenging to summarize those principles and precepts in a succinct fashion. To familiarize the reader of these materials with the terminology used in Islamic Finance transactions, however, we are providing brief and generalized summaries of the key concepts (primarily embodied in certain Arabic words) that describe the structures and philosophy underlying modern Islamic Finance. We also set forth a few abbreviations for organizations that are currently prominent in the field of Islamic Finance.

AAOIFI means the Accounting and Auditing Organization for Islamic Financial Institutions.

Adl (pl. is adlan) means a trusted person selected by the parties to the transaction to serve as a type of trustee-arbitrator.

Arboon (also Arbun or Arboun or Bai al Arboon) means a sale involving a down payment in respect of the purchase price and complete performance of the contract at a future date. The down payment will be applied in respect of the purchase price, if the purchaser shall subsequently consummate the sale, or forfeited, if the purchaser shall not subsequently consummate the sale (including as a result of an election by the purchaser).

Bai Dayn means debt financing.

Dayn means debt. Certain schools of Islamic thought prohibit the sale of debt (bai' al-dayn) except where the purchase price does not reflect a discount from the face value of the debt.

Fatwa (pl. is fatawa) is an opinion or pronouncement on Islamic law issued by an Islamic scholar or Shari'ah Supervisory Board.

Fiqh means understanding or human comprehension of the divine law (Shari'ah). Different schools of Fiqh developed over time within Islam, and these schools often have varying views on whether a particular action is permitted under Shari'ah.

Gharar means uncertainty and ambiguity and, separately, can also include elements of deceit. Under Shari'ah, parties may not enter into an agreement that is subject to excessive uncertainty and ambiguity.

Halal means lawful under Shari'ah.

Hawala is a transfer agreement whereby an obligation is transferred from one person to another; bill of exchange, remittance.

Haram means unlawful under Shari'ah.

Hissas means equity shares or ownership interests.

IDB means the Islamic Development Bank.

IFSB means the Islamic Financial Services Board.

Ijara (also Ijarah) means lease or leasing of assets or services. In Islamic finance transactions, a financial institution or a special purpose entity receiving financing may purchase an asset and lease it to the customer at an agreed rental and for an agreed term.

Ijara wa iqtina means a lease of an asset couple with a right in the lessee to purchase the asset at the end of the lease term. This arrangement is often quite similar, structurally, to a conventional "hire/purchase" scheme, in which the lessee/customer has the right to buy an asset at the end of the asset's lease term.

Ijtihad means, literally, "effort" or legal reasoning or the making of a legal decision by independent interpretation of the usul al-fiqh, particularly the revealed sources.

Islamic finance refers to investment and financing that are structured to comply with the requirements of the Shari'ah.

Istisna'a (also Istisna) is variously referred to as a commissioned manufacture and sale, a commissioned future sale and purchase/sale transaction in which a buyer/customer places an order for the construction or manufacture of an object to be delivered at a future date (which can range from something as simple as an item of jewelry to something as large as a liquefied natural gasification project) at a pre-agreed price.

Masnou means that which is manufactured or constructed pursuant to an istisna'a arrangement or contract.

Maysir (also maisir) means gambling.

Mudaraba is a type of joint venture in which one venturer (the investor, or rabb ul-maal) provides capital to another (the working or service venturer, or mudarib) in order to undertake a business activity. Profits are shared at a pre-determined ratio, but losses of capital are borne by the investor.

Mudarib (also Mudareb) means the joint venturer providing services in a mudaraba and who manages the mudaraba.

Murabaha means "a profitable sale", a cost-plus sale. In modern financial practice involving bank mediation, it has come to mean a mode of financing whereby the financier purchases a specific asset/commodity chosen by the financier's customer and re-sells it to that customer at a predetermined price. The selling price is higher than the purchase price, and the difference between the financier's acquisition price and resale price is the financier's profit (i.e., the reward for the financier's risk). The customer's payment obligation can become due and payable at the time of the financier's transfer of the asset/commodity or can be deferred and paid over time.

Musharaka (also Musharakah or Musharaqah) is a joint venture (frequently a partnership) in which each of the joint venturers contribute capital to a particular business undertaking. The joint venturers share profits as they may agree, but the losses must always be shared in accordance with the contributed capital of the respective joint venturers.

Musharaka Mutanaqisa means a musharaka in which sharing of one joint venturer diminishes over time with performance by the other joint venturer and is frequently referred to as a "diminishing partnership".

Mussallam means the purchaser of the commodity or item to be delivered on a deferred basis pursuant to a salam contract.

Mussallam fiihi means the commodity or item that is the subject of a salam contract.

Musallam ilayhi means the seller of the commodity or item to be delivered on a deferred basis pursuant to a salam contract.

Mustasne' means the purchaser under an istisna'a arrangement.

Qur'an (also Quran or Koran) is the holy book of Islam as revealed to the Prophet Mohammad (sawf).

Qard hassan means a benevolent loan in which the lender is afforded no monetary return, and in current parlance frequently refers to an interest-free loan.

Rabb ul-maal means the venturer providing funds in and to the mudaraba and will not have the right to manage the mudaraba.

Rahn means a mortgage (with respect to real property) and pledge (with respect to personal property).

Riba means, literally, "increase" and is used to connote an unjustified increase in capital; the term is often used to refer to interest, usury or unjust enrichment). A key tenet of Shari'ah requires that participants in a commercial transaction undertake a risk in the endeavor. A borrower's obligation to pay interest in a conventional loan transaction is viewed as assuring a "riskless" return on the financier's investment, and thus is not permitted under the Shari'ah.

Salam is a sale agreement in which the seller undertakes to supply the buyer with specific goods at a future date in exchange for, and as a liability against, full payment in advance at the current time.

Sane' means the seller who agrees to supply the item to be manufactured or constructed pursuant to the istisna'a arrangement or contract. The sane' may or may not be the entity or person that actually manufactures or constructs that item.

Shari'ah (also Shari'a or Sharia) means the perfect, immutable, divine Islamic "law" as revealed in the Qur'an and the Sunna.

Shari'ah Supervisory Board (also Shari'ah Board or Shari'ah Committee) is a body of Islamic scholars that reviews Islamic financing transaction documents and approve them as being compliant with the Shari'ah.

Sharika means a partnership (or similar joint venture) or a contract between two or more parties pertaining to capital and work (management) for the purpose of making a profit.

Sharika al-masrafiyya means, in current usage, musharaka.

Sharikat ul-amwaal means a property partnership or property joint venture.

Sukuk (pl. of sakk or saak) are capital market instruments which may be "Islamic bonds", "Islamic asset securitizations" or "Islamic whole business securitizations". The sukuk holder is granted a fractional undivided ownership in the assets or business being financed. AAOIFI recognizes 14 categories of sukuk.

Sunna means the practices and traditions of the Prophet Mohammad; the binding authority of his dicta and decisions.

Takaful means "guaranteeing each other" and the sharing of risk on a cooperative basis and mutual assistance (ta'awun). It is an Islamic insurance system that is based on mutual co-operation and assistance among groups. Such Islamic insurance has been devised to avoid fundamental prohibitions under Islamic Shari'ah such as riba, gharar and maysir.

Tandeed means conversion of musharaka assets into money.

Taqlid means "imitation" in the following of precedent and is particularly relevant to the period of Islamic history (approximately 950 ? 1900 (possibly 1970) C.E.) during which it is said that there was a "closing of the gate of ijtihad".

Usul al-fiqh means the "roots of the law", which are (a) the Qur'an, (b) the Sunna, (c) the ijma, or "consensus" of the community of Islamic scholars, and (d) the qiyas, or analogical deductions and reasoning of the Islamic scholars with respect to the foregoing. The Qur'an and the Sunna are often referred to as the "revealed" sources.

Wakala is an agency agreement or arrangement.

Wakil (also Wakeel) is the agent in a Wakala relationship.

(Dechert LLP)
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Ahmad Sanusi Husain : www.ahmad-sanusi-husain.com 
Alfalah Consulting - KL : www.alfalahconsulting.com 
Islamic Investment Malaysia : www.islamic-invest-malaysia.com

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