Islamic Finance Glossary
| Term | Description |
|---|---|
| Al Ghunm bil Ghurm | This provides the rationale and the principle of profit sharing in Shirkah arrangements. Earning profit is legitimised only by engaging in an economic venture involving risk sharing which ultimately contributes to economic development. |
| Amanah | This refers to deposits held in trust. A person can hold a property in trust for another, sometimes by express contract and sometimes by implication of a contract. Amanah entails an absence of liability for loss except in the breach of duty. Current accounts are regarded as Amanah (trust). If the bank gets authority to use Current accounts funds in his business, Amanah transforms into a loan. As every loan has to be repaid, banks are liable to repay the full amount of the Current accounts. |
| Arbun | Down payment. A non-refundable deposit paid by a buyer retaining a right to confirm or cancel the sale. |
| Asset backed sukuk | Sukuk which are characteristically non-recourse Sukuk with the underlying assets forming the sole source of profit and capital payments. Sukuk owners generally do not have recourse to the originator. |
| Asset based sukuk | Sukuk in which the asset is present for the purpose of Sharia’a requirements rather than to serve as the source of profit and capital payments. Sukuk owners generally do have recourse to the originator. |
| Assignment | In relation to receivables, it means the legal transferring of receivables from one person to another. In relation to a mortgage, it would mean the transfer of a mortgage by the mortgagee (borrower and occupier) to another person. |
| Bai’ al-Dayn | A transaction that involves the sale and purchase of securities or debt certificates that confirms with the Sharia’a. Securities or debt certificates will be issued by a debtor to a creditor as evidence of indebtedness. |
| Bai’ al-Dayn | A transaction that involves the sale and purchase of securities or debt certificates that conforms to the Sharia’a. Securities or debt certificates will be issued by a debtor to a creditor as evidence of indebtedness. Popular in Malaysia |
| Bai’ al-‘Inah | A contract, which involved the sale and buy back transaction of assets by a seller. A seller will sell the asset to a buyer on a cash basis. The seller will later buy back the same asset on a deferred payment basis where the price is higher than the cash price. It can also be applied when a seller sells an asset to a buyer on a deferred basis. A seller will later buy back the same asset, on a cash basis, at a price, which is lower than the deferred price. |
| Bai’ al-‘Inah | A contract, which involves the sale and buy back transaction of assets by a seller. A seller will sell the asset to a buyer on a cash basis. The seller will later buy back the same asset on a deferred payment basis where the price is higher than the cash price. This can also be applied when a seller sells an asset to a buyer on a deferred basis. A seller will later buy back the same asset on a cash basis at a price lower than the deferred price. |
| Bai’ al-Istijrar | A contract between the client and the supplier, whereby the supplier agrees to supply a particular produce on an ongoing basis, for example monthly, at an agreed price and on the basis of an agreed mode of payment. |
| Bai’ al-Istijrar | A contract between the client and the supplier, whereby the supplier agrees to supply a particular product on an on going basis, for example monthly, at an agreed price and on the basis of an agreed mode of payment. |
| Bai’ al-Muzayadah | An action by a person to sell his asset in the open market, which is accompanied by the process of bidding among potential buyers. The asset for sale will be awarded to the person who has offered the highest price. |
| Bai’ al-Muzayadah | An action by a person to sell his asset in the open market, which is accompanied by the process of bidding among potential buyers. The asset for sale will be awarded to the person who has offered the highest price. In other words a sale and purchase transaction based on an auction/tender. |
| Bai’ al-Salam | A contract whereby the payment is made in cash at the point of contract but the delivery of the asset purchased will be deferred to a pre-determined date. |
| Bai’ al-Wafa’ | A contract with the condition that when the seller pays back the price of the goods sold, the buyer returns the goods to the seller. |
| Bai’ bil Wafa | Sale with a right of the seller enabling him to repurchase (redeem) the property by refunding the purchase price. According to the majority of Fuqaha this is not permissible. |
| Bai’ Bithaman Ajil (BBA) | A contract that refers to the sale and purchase transactions for the financing of assets on a deferred and an instalment basis with a pre-agreed payment period. The sale price will include a profit margin. |
| Bai’ Bithaman Ajil (BBA) | A widely used contract in Malaysia that refers to the sale and purchase transaction for the financing of assets on a deferred and as an instalment basis with a pre-agreed payment period. The sale price will include a profit margin. BBA Sukuk issued in Malaysia usually involves a Bai’ al-‘Inah element. If the issuer has an asset the procedure is as above. If the Issuer does not have an asset they will source it from the parent company. Most commonly the the parent company of the issuer will provide the asset using a hibah (gift) contract. The issuer will then sell and buy back the asset and will then return the asset to the original owner through another hibah transaction. |
| Bai’ Muajjal | Literally this means a credit sale. Technically, a financing technique adopted by Islamic banks that takes the form of Murabaha Muajjal. It is a contract in which the seller earns a profit margin on his purchase price and allows the buyer to pay the price of the commodity at a future date in a lump sum or in instalments. He has to expressly mention the cost of the commodity and the margin of profit is mutually agreed upon. |
| Bankruptcy remote | A key concern in securitisation transactions is to ensure that the transfer of assets of the originator to the SPV is not affected by bankruptcy or distress of the originator. This necessitates certain legal precautions in structuring the assignment of receivables and also in constituting the SPV to ensure that neither can be taken to liquidation by the shareholders of the originator. Further, the structure should also ensure that the SPV would not be treated as the subset of the originator by substantive consolidation. Such a structure is called a bankruptcy remote structure. |
| BBA. Sukuk Al-Bai-Bithaman Ajil | Refers to a Sukuk based on sale and purchase contract transaction for financing asset on a deferred and an installment basis with a pre-agreed payment period. The sale price will include a profit margin. The literal Arabic translation is sale (bai) with a deferred (ajil) price (bithaman) |
| Beneficial interest | The interest of the investors on whose behalf the trustee or the SPV holds securities/ receivables. In a securitisation deal, the receivables/ cash flows are legally held by the SPV or trust, for the benefit of the investors; hence the investors are beneficiaries and their interest is beneficial interest. |
| Credit enhancement | Credit support techniques are used to improve the credit quality of a Sukuk/bond so that it can obtain a high rating. Most securitizations use credit enhancement to allow their senior classes of bonds to obtain triple-A ratings. Common examples of credit enhancement include the following: • Subordination - the credit quality of a deal's senior class of bonds is improved by subordinating the junior classes (also called senior subordinated structure). • Overcollateralization - the par amount of securities issued in a deal is less than the aggregate principal amount of underlying financial assets being securitized. • Excess spread – the difference between the interest rate on securitized financial assets and the interest rate on the bonds backed by those assets, which can be applied to offset losses. • Reserve fund - within the structure of securitization, an account containing cash or high-quality securities from which withdrawals can be made to offset losses or shortfalls on securitized assets. • Guarantee - either the sponsor of a transaction or a third party, such as a bond insurer, can guarantee bonds. |
| Dayn or Debt | A Dayn comes into existence as a result of a contract or credit transaction. It is incurred either by way of rent or sale or purchase or in any other way which leaves it as a debt to another. Duyun (debts) should be returned without any profit since they are advanced to help the needy and meet their demands and, therefore, the lender should not impose on the borrower more than what he had given on credit. |
| Dhaman | Contract of guarantee, security or collateral. |
| Dhaman | A contract of guarantee whereby a guarantor wiII underwrite any claim and obligation that should be fulfilled by an owner of the asset. This concept is also applicable to a guarantee provided on a debt transaction in the event a debtor fails to fulfil his debt obligation. |
| Excess spread | Refers to the excess of the income inherent in the portfolio of receivables, over and above the SPV's discounting rate and the expenses of the transaction. Represents the profit of the originator in the securitisation transaction. Excess spread is the difference between the gross yield on a pool of securitized assets and the cost of financing those assets, including applicable servicing fees. Excess spread can be a source of credit enhancement for securitized assets, provided that it is available to absorb losses on the assets. |
| Fiqh | Islamic law. The science of the Sharia'a. Practical jurisprudence or human articulations of divine rules encompassing both law and ethics. Fiqh may be understood as the jurists’ understanding of the Sharia’a, or jurists’ law .Fiqh al-Muamalat is Islamic commercial jurisprudence, or the rules of transacting in a Sharia’a-compliant manner. It is an important source of Islamic banking and economics. |
| Gharar | This means any element of absolute or excessive uncertainty in any business or contract. It potentially leads to undue loss to a party and unjustified enrichment of another. This is prohibited. |
| Gharar | Gharar is an element of deception either through ignorance of the goods, the price, or through faulty description of the goods, in which one or both parties stand to be deceived through ignorance of an essential element of the exchange. As an example, gambling is a form of Gharar because the gambler is ignorant of the result of the gamble.Gharar is divided into three types, namely gharar fahish (excessive), which vitiates the transaction, ghara yasir (minor), which is tolerated and gharar mutawassit (moderate), which falls between the other two categories. Any transaction can be classified as forbidden activity because of excessive gharar. |
| Halal | Anything permitted by the Sharia’a. |
| Haq Maliy | Haq maliy are rights on the financial assets. Examples of such rights are haq dayn (debt rights) and haq tamalluk (ownership rights). |
| Haram | Anything prohibited by the Sharia’a. |
| Hawalah | Literally, this means transfer. Legally, it is an agreement by which a debtor is freed from a debt by another party becoming responsible for it or by the transfer of a claim of a debt shifting the responsibility from one person to another. It also refers to the document by which the transfer takes place. |
| Hibah | Hibah means Gift. |
| Hibah | A gift awarded to a person. |
| Hiwalah | A contract that allows a debtor to transfer his debt obligation to a third party. |
| Hybrid Sukuk Structures | Each structure pertaining to a Sukuk is transaction-specific and is determined, in particular, by reference to the relevant assets available to underpin the Sukuk, the relevant jurisdiction in which such assets are located and (if different) the relevant jurisdiction in which the obligor is incorporated. For many financial institutions issuing Sukuk, a hybrid structure (using a Wakala and Mudaraba) has recently been used. Although more complex than the earlier structures given the fact that they typically adopt multiple components within the structure, these hybrid structures may be structured in such a way as to facilitate the use of real estate assets without the need to register a legal transfer of real estate. Depending on the particular circumstances, a hybrid structure may be created to include both “tangible” and “non-tangible” assets. This has the additional advantage of allowing issuers to issue Sukuk on a more “asset efficient” basis than previously, for example by allowing a commodity Murabaha transaction to form part of the asset base. However, the Bay’ Al-Dayn principle relating to tradability means that the proportion of the asset base that can be represented by non-tangible assets, such as a commodity Murabaha transaction, is limited. |
| Ibra’ | An act by a person to withdraw his rights i.e. his rights to collect payment from a person who has the obligation to repay the amount borrowed from him. |
| Ijara | Leasing. This is the sale of a definite usufruct of any asset in exchange for definite reward. It refers to a contract of land leased at a fixed rent payable in cash and also to a mode of financing adopted by Islamic banks. It is an arrangement under which the Islamic banks lease equipment, buildings or other facilities to a client, against an agreed rental. |
| Ijara | A manfaah (usufruct) type of contract whereby a lessor (owner) leases out an asset or equipment to its client at an agreed rental fee and pre-determined lease period upon the aqad (contract). The ownership of the leased equipment remains in the hands of a lessor. |
| Ijarah Thumma Bai’ | A contract which begins with an Ijara contract for the purpose of renting out/ leasing the lessor’s asset to the lessee. Consequently, at the end of the lease period, a lessee will purchase the asset at an agreed price from the lessor by executing a purchase (Bai’) contract. |
| Ijara Sukuk | These certificates are issued on stand-alone assets identified on the balance sheet. The assets can be parcels of land to be leased or leased equipment such as aircraft and ships. The rental rates of returns on these Sukuk can be both fixed and floating depending on the particular originator. The income generated under an Ijara Sukuk comes from the underlying rent receivables |
| Ijara-wa-Iqtina | A mode of financing, by way of hire purchase, adopted by Islamic banks. It is a contract under which the Islamic bank finances equipment, building or other facilities for the client against an agreed rental together with a unilateral undertaking by the bank or the client that, at the end of the lease period, the ownership in the asset would be transferred to the lessee. The undertaking or the promise does not become an integral part of the lease contract in order to make it conditional. The rental, as well as the purchase price, is fixed in such a manner that the bank gets back its principal sum along with some profit. This is usually determined in advance. |
| Ijma | Consensus of all or majority of the leading qualified jurists on a certain Sharia’a matter at a certain moment in time. |
| Ijtihad | This refers to an endeavour of a qualified jurist to derive or formulate a rule of law to determine the true ruling of the divine law in a matter on which the revelation is not explicit or certain. This would be on the basis of Nass, or evidence, found in the Qur’an and the Sunnah. |
| ‘Inah | A double sale by which the borrower and the lender sell and then resell an object between them, once for cash and once for a higher price on credit, with the net result being a loan with interest. |
| ‘Inan (A type of Shrikah) | This is a form of partnership in which each partner contributes capital and has a right to work for the business, not necessarily equally. |
| Issuer | In context of securitisations this refers to the SPV which issues the securities to the investors. |
| Istihsan | This is a doctrine of Islamic law that allows exceptions to strict legal reasoning, or guiding choice among possible legal outcomes, when considerations of human welfare so demand. |
| Istisna’a | This is a contractual agreement for manufacturing goods and commodities, allowing cash payment in advance and future delivery or a future payment and future delivery. A manufacturer or builder agrees to produce or build a well described good or building at a given price on a given date in the future. The price can be paid in instalments, step by step as agreed between the parties. Istisna’a can be used for financing the manufacture or construction of houses, plant, projects and building of bridges, roads, power stations etc. |
| Istisna’a | A purchase order contract of assets whereby a buyer will place an order to purchase an asset that will be delivered in the future. In other words a buyer will require a seller or a contract to deliver or construct the asset that will be completed in the future according to the specifications given in the sale and purchase contract. Both parties to the contract will decide on the sale and purchase prices as they wish and the settlement based on the schedule of the work completed. |
| Istisna’a Sukuk | A sukuk which refers to a purchase contract of an asset whereby a buyer will place an order to purchase the asset which will be delivered in the future. In other words, the buyer will require a seller or a contractor to deliver or construct the asset that will be completed in the future according to the specifications given in the sale and purchase contract. Both parties of the contract will decide on the sale and purchase prices as they wish and the settlement can be delayed or arranged based on the schedule of the work completed. |
| Ittifaq Dhimni | A sale and re-purchase of the underlying asset whereby the prices are agreed by the parties prior to the completion of the contract. This is an external agreement, which must be reached before the contract can be concluded to allow for the bidding process (Bai’ al-Muzayadah) to take place. |
| Jahala | Ignorance, lack of knowledge; indefiniteness in a contract, sometimes leading to Gharar. |
| Ji’ alah | Contract of reward; a unilateral contract promising a reward for a specific act or accomplishment. |
| Jua’alah | Literally, Jua’alah constitutes wages, pay, stipend or reward. Legally, it is a contract for performing a given task against a prescribed fee in a given period. A similar contract is ‘Ujrah’ in which any work is done against a stipulated wage or fee. |
| Kafalah | Same meaning as Dhaman. |
| Kafalah (Suretyship) | Literally, Kafalah means responsibility, or Suretyship, Legally in Kafalah a third party becomes a surety for the payment of debt. It is a pledge given to a creditor that the debtor will pay the debt, fine etc. Suretyship in Islamic law is the creation of an additional liability with regard to the claim, not to the debt itself. |
| Khilabah | A form of fraud, either in word or deed by a party to the trading contracts, with the intention of inducing the other party into making a contract. This is prohibited according to Sharia’a. |
| Khiyanah | Refers to deception by not disclosing the truth or breaching an agreement in a hidden way. This is prohibited according to Sharia’a. |
| Khiyar | Option or a power to annul or cancel a contract. |
| Limited Resource | The right of recourse is limited to a particular amount or a particular security. For example, in a securitisation transaction, the right of recourse being limited to the over-collateralisation or cash collateral placed by the originator would be a case of limited recourse. |
| Maisir | An ancient Arabian game of chance played with arrows without heads and feathers, for stakes of slaughtered and quartered camels. It came to be identified with all types of gambling. |
| Maisir | Any activities that involve betting whereby the winner takes all the bets and the loser will lose his bet. This is prohibited according to Sharia’a. |
| Mal | Something that has value and can be gainfully used according to Sharia’a. |
| Maslaha | This is a concept in traditional Sharia’a Law. It is invoked to prohibit or permit something on the basis of whether or not it serves the public's benefit or welfare. The concept is related to that of Istislah. While the meaning of maslaha is 'public interest', the meaning of Istislah is 'to seek the best public interest'. |
| Mithli (Fungible goods) | Goods that can be returned in kind, i.e. gold for gold, silver for silver, US$ for US$, wheat for wheat, etc. |
| Mudaraba | A contract, which is made between two parties to finance a business venture. The parties are a rabb al-mal or an investor who solely provides the capital and a mudarib or an entrepreneur who solely manages the project. If the venture is profitable, the profit will be distributed based on a pre-agreed ratio. In the event of a business loss, the loss wiII be borne solely by the provider of the capital. |
| Mudaraba Sukuk | Sukuk which apply the Sharia’a rules for the Mudaraba Sharia’a contract |
| Mudaraba (Trust Financing) | This is an agreement made between two parties one of whom provides 100 per cent of the capital for the project who has no control over the management of the project, and another party know as a mudarib, who manages the project using his entrepreneurial skills. Profits arising from the project are distributed according to a predetermined ratio. Losses are borne by the provider of capital. |
| Mudarib | The managing partner in a mudaraba contract |
| Mudarib | The manager with whom the profits are shared once the work is undertaken by the individual contracted in the Mudaraba contract. This manager is usually the entrepreneur rather than the financier, and he provides the management, business acumen, and the products/services the business entails. |
| Mujtahid | Legal expert, or a jurist who expends great effort in deriving a legal opinion or interpreting the sources of Sharia’a law. |
| Muqasah | Debt settlement by a contra transaction. |
| Murabaha | A contract that refers to the sale and purchase transaction for the financing of an asset whereby the cost and profit margin (mark-up) are made known and agreed by all parties involved. The settlement for the purchase can be settled either on a deferred lump sum basis or on an instalment basis, and is specified in the agreement. |
| Murabaha (Cost plus financing) | This is a contract sale between the bank and its client for the sale of goods at a price which includes a profit margin agreed by both parties. As a financing technique it involves the purchase of goods by the bank as requested by its client. The goods are sold to the client with an agreed mark-up. |
| Murabaha Sukuk | A sukuk which is based on the process of direct structuring of securities wherein a special purpose vehicle (SPV),created by the company that needs funds in consultation with an investment bank, invests the funds raised through sale of Sukuk in Murabaha operations. The company purchases the asset from the SPV on a Murabaha basis. The periodic instalments paid by the company in future to the SPV account for the repayment of the cost and the profit component. |
| Musawamah | Musawamah is a general kind of sale in which price of the commodity to be traded is bargained between seller and the purchaser without any reference to the price paid or cost incurred by the former. |
| Musharaka | A partnership arrangement between two parties or more to finance a business venture whereby all parties contribute capital either in the form of cash or in kind for the purpose of financing the business venture. Any profit derived from the venture will be distributed based on a pre-agreed profit sharing ratio, but a loss will be shared on the basis of equity participation. |
| Musharaka (Joint Venture financing) | This Islamic financing technique involves a Joint Venture between two parties who both provide capital towards the financing of a project. Both parties share profits on a pre-agreed ratio, but losses are shared on the basis of equity participation. Management of the project may be carried out by both the parties or by just one party. This is a very flexible arrangement where the sharing of the profits and management can be negotiated and pre-agreed by all parties. |
| Musharaka Sukuk | Under the Musharaka Sukuk the Sukuk holders’ contribute a capital amount to the issuer. The issuer then enters into a joint venture with the party seeking finance (the originator) where the issuer provides the capital received from the Sukuk holders, and the originator supplies the assets and/or their own capital required for the business to function. The profits from the Musharaka business are distributed to the issuer and the originator at a predetermined basis. Any losses are shared in proportion to the capital contribution, and the issuer pays a periodic distribution amount to the Sukuk holders from the Musharaka profit distribution. |
| Obligator | The party who is legally liable to pay the debt. A binding legal agreement, by which somebody is bound to pay a sum of money related to a debt. The obligator is the organization that benefits from the sukuk issuance. |
| Obligor | An obligor is also referred to as a 'debtor.' The debtor from whom the originator has the right to receivables. In the context of securitisation, the term means the parties making payments on the assets being securitised. These payments are the source of cash flows from which investors are repaid. The obligor is a person or entity who is legally, or contractually, obliged to provide some benefit or payment to another. In the financial context, the term obligor refers to a bond issuer, who is contractually bound to make all principal repayments and interest payments on outstanding debt. The recipient of the benefit or payment is known as the obligee. |
| Off balance sheet | A debt or asset which does not show up on the balance sheet of the entity that originated the asset or debt. In a securitisation transaction, if the transaction qualifies for a true sale treatment, the assets transferred by the originator are off the balance sheet of the originator, and so is the amount received on account of such transfer. |
| Originator | The entity assigning receivables in a securitisation transaction. The originator is usually the asset owner. The originator is usually the asset owner. During the origination process of creating a home loan or mortgage, a borrower submits a variety of financial information to the mortgage lender, who uses it to determine the type of loan the borrower is eligible for and what interest rate he or she will pay. The lender will also rely on the borrower's credit report and other information to determine loan eligibility. |
| Purchase Undertaking | A procedure whereby the sukuk originator agrees to repurchase the assets from the issuer at maturity of the sukuk, or upon a pre-defined early termination event, for an amount equal to the principal repayment. |
| Qabdh | Qabdh means possession, which refers to a contract of exchange. Generally, qabdh depends on the perception of ‘urf or the common practices of the local community in recognising that the possession of a good has taken place |
| Qard Hasan | A contract of loan between two parties on the basis of enhancing social welfare or to fulfil a short-term financial need of the borrower. The amount of repayment must be equivalent to the amount borrowed. It is however legitimate for a borrower to pay more than the amount borrowed as long as it is not stated or agreed at the point of contract. |
| Qard (Loan of fungible objects) | Legally, Qard means to give anything having value in the ownership of the other by way of virtue so that the latter could avail of the same for his benefit with the condition that same or similar amount of that thing would be paid back on demand or at the settled time. It is that loan which a person gives to another as a help, charity or advance for a certain time. The repayment of the loan is obligatory. The Prophet is reported to have said “…Every loan must be paid…” But if a debtor is in difficulty, the creditor is expected to extend time or even to voluntarily remit the whole or a part of the principal. The literal meaning of Qard is ‘to cut’. It is so called because the property is really cut off when it is given to the borrower. |
| Qimar | Qimar means gambling. Technically, it is an arrangement in which possession of a property is contingent upon the happening of an uncertain event. By implication it applies to a situation in which there is a loss for one party and a gain for the other without specifying which party will lose and which will gain. |
| Qiyas | Literally this means measure, example, comparison or analogy. Technically, it means a derivation of the law on the analogy of an existing law if the basis (‘ilaih) of the two is the same. It is one of the sources of Sharia’a law. |
| Rahn | Pledge or Collateral. Legally, Rahn means to pledge or lodge a real or corporeal property of material value, in accordance with the law, as security, for a debt or pecuniary obligation so as to make it possible for the creditor to recover the debt or some portion of the goods or property. In the pre-Islamic contracts, Rahn implied a type of earnest money which was lodged as a guarantee and material evidence or proof of a contract, especially when there was no scribe available to put it into writing |
| Rahn | An act whereby a valuable asset is used as collateral for a debt. The collateral will be utilised to settle the debt when a debtor is in default. |
| Recourse | The ability of an investor/ purchaser to seek payment against an investment from o the originator of the investment. For example, in a securitisation transaction, the right of the investor to seek payment from the originator, or in the case of a negotiable instrument, the right to seek payment from the endorser of the instrument. |
| Riba | An excess or increase. Technically, it means an increase over principal in a loan transaction or in exchange for a commodity accrued to the owner (lender) without giving an equivalent counter-value or recompense (‘iwad), in return, to the other party. Riba means an increase which is without an ‘iwad or equal counter-value. |
| Riba | An increase, which in a loan transaction or in exchange of a commodity, accrues to the owner (lender) without giving an equivalent counter value or recompense in return to the other party. It covers interest both on commercial and consumer loans, and is prohibited according to Sharia’a. |
| Riba Al-Fadl | Riba Al-Fadl, or riba in excess, is the quality premium when exchanging low quality with better quality goods e.g. dates for dates, wheat for wheat, etc. In other words an excess in the exchange of Ribawi goods within a single genus. The concept of Riba Al-Fadl refers to sale transactions while Riba Al-Nasiah refers to loan transactions. |
| Riba Al-Nasiah | Riba Al-Nasiah, or riba of delay, is due to an exchange not being immediate with or without excess in one of the counter values. It is an increment on principal of a loan or debt payable. It refers to the practice of lending money for any length of time on the understanding that the borrower would return to the lender at the end of the period, the amount originally lent together with an increase on it, in consideration of the lender having granted him time to pay. Interest, in all modern conventional banking transactions, falls under the purview of Riba Al-Nasiah. As money in present banking system is exchanged for money with excess and delay, it falls under the definition of riba. There is a general accord reached among scholars that it is prohibited under Sharia’a law. |
| Salaf or Loan / Debt | The word Salaf literally means a loan which draws forth no profit for the creditor. In a wider sense this includes loans for specified periods, i.e. short, intermediate and long-term loans. Salaf is another name for Salam wherein the price of the commodity is paid in advance while the commodity or the counter- value is supplied in the future. Thus the contract creates a liability for the seller. |
| Salam | Salam means a contract in which advance payment is made for goods to be delivered later. The seller undertakes to supply some specific goods to the buyer at a future date in exchange for an advance price fully paid at the time of contract. According to the normal rules of the Sharia’a, no sale can be effected unless the goods are in existence at the time of the bargain. However Salam sale forms an exception given by the Prophet to the general rule provided the goods are defined and the date of delivery is fixed. It is necessary that the quality of the commodity intended to be purchased is fully specified leaving no ambiguity potentially leading to a dispute. The objects of the Salam sale are goods and cannot be gold, silver or currencies. These are regarded as monetary values the exchange of which is covered under rules of Sarf, i.e. mutual exchange should be hand to hand without delay. With this latter exception Salam covers almost everything which is capable of being definitely described as to quantity, quality and workmanship. |
| Sarf | Basically, in pre-Islamic times this was the exchange of gold for gold, silver for silver and gold for silver or vice versa. In Sharia’a law such exchange is regarded as ‘sale of price for price’ (Bai al Thaman bil Thaman), and each price is consideration of the other. It also means the sale of monetary value for monetary value – currency exchange. |
| Sarf | Buying and selling of currencies. |
| Securitization | The process of homogenizing and packaging financial instruments into a new fungible one. Acquisition, classification, collateralization, composition, pooling and distribution are functions within this process. |
| Servicer | The organisation that is responsible for collecting loan payments from individual borrowers and for remitting the aggregate amounts received to the owner or owners of the loans. |
| Sharia’a | The term Sharia’a has two meanings: Islamic Law, and the totality of divine categorisations of human acts (Islam). The second meaning of the term means Sharia’a rules do not always function as rules of law in the western sense, as they include obligations, duties, and moral considerations not generally thought of as “law”. Sharia’a rules, therefore, admitting of both a legal and moral dimension, have as their purpose the fostering of obedience to Allah the Almighty. In the legal terminology, Sharia’a means the law as extracted by the Mujtahid from the sources of law |
| Sharia’a | Islamic law, originating from the Qur’an (the holy book of Islam), as well as practices and explanations rendered by the prophet Muhammad and ijtihad of ulamak (personal effort by qualified Sharia’a scholars to determine the true ruling of the divine law in a subject matter on which the revelation is not explicit). |
| Shirkah | A contract between two or more persons who launch a business or financial enterprise to make profits. In the conventional books of Fiqh, the partnership business may include both Musharaka and Mudaraba. |
| Special Purpose Vehicle (SPV) | An organization constructed with a limited purpose or life. In relation to securitisation, it means the entity which would hold the legal rights over the assets transferred by the originator. The SPV is deemed to be a bankruptcy remote vehicle. |
| Suftajah | A credit instrument issued to a creditor to enable him to use or cash it at another predetermined venue and at the future date. |
| Sukuk | A document or certificate, which evidences the undivided pro-rata ownership of underlying assets. The Sak (singular of Sukuk) is freely tradable at par, premium or discount, depending on which Sharia’a contract is being applied. |
| Sunnah | Custom, habit or way of life. Technically this refers to the utterances of the Prophet Muhammad other than the Qur’an known as the Hadith, or his personal acts, or sayings of others, tacitly approved by the Prophet. |
| Tabarru’ | This is a donation/gift the purpose of which is not commercial but is seeking the pleasure of Allah. Any benefit that is given by one person to another without getting anything in exchange is called Tabarru’. |
| Tadlis al-‘aib | Refers to the activity of a seller intentionally hiding the defects of goods. This activity is prohibited according to Sharia’a principles. |
| Takaful | A Sharia’a-compliant system of insurance in which the participants donate part or all their contributions, which are used to pay claims for damages suffered by some of the participants. The company’s role is restricted to managing the insurance operations and investing the insurance contributions |
| Takaful | This is a form of Islamic insurance based on the principle of ta’awun or mutual assistance. It provides mutual protection of assets and property and offers joint risk sharing in the event of a loss by one of its members. Takaful is similar to mutual insurance in that members are the insurers as well as the insured. |
| Tanajush | Refers to a conspiracy between a seller and a buyer wherein the buyer is willing to purchase the goods at a higher price. This is done so that others would rush to buy the goods at a higher price, resulting in the seller obtaining a higher profit. This transaction is not permissible in Islam. |
| Tapir | Spending wastefully on objects which have been explicitly prohibited by the Sharia’a, irrespective of the amount of expenditure. |
| Taskeek | Islamic securitisation (asset monetization) achieved through the process of the issuance of sukuk is known, in Arabic, as Taskeek. |
| Ta’widh | Penalty agreed upon by the contracting parties as compensation that can rightfully be claimed by the creditor when the debtor fails or is late in meeting his obligation to pay back the debt. |
| Third party credit enhancement | A credit enhancement provided in a securitisation transaction by third party guarantees, such as bank letter of credit, or monoline insurance contracts, etc. |
| True sale | The treatment for legal or accounting or sale purposes in a securitisation transaction where there is a sale of receivables and where the receivables or assets are not seen as a financing transaction. In this case the assets have been transferred from the originator in the legal sense that the assets cannot form part of any bankruptcy claims. |
| Ujrah | Financial payment for the utilisation of services or manfaah. This can be in the form of salary, wage, allowance, commission and the like. |
| ‘Uqud al-Ishtirak | Contract of partnership. |
| ‘Uqud al-Mu’awadat | Contracts of exchange. |
| ‘Uqud al-Tabarruat | Charitable contract. |
| ‘Urbun | A deposit or earnest money which forms a part payment of the price of goods or services paid in advance, but will be forfeited in the event the transaction is cancelled. The forfeited money is considered as hibah (gift). |
| Usufruct | Usufruct is the right to use and derive profit or benefit from property belonging to another. It is often used as the asset underpinning an Ijara-based Sukuk. |
| Wa’ad | Wa’ad means an undertaking or promise by one party in favour of another, to do a Sharia’a-compliant act such as selling or buying an asset at a future date or on the occurrence of a certain event. |
| Wadiah Yad Dhamanah | Goods or deposits, which have been deposited with another person, who is not the owner, for safekeeping. As wadiah is a trust, the depository becomes the guarantor and, therefore guarantees repayment of the whole amount of the deposits, or any part thereof, outstanding in the account of depositors, when demanded. The depositors are not entitled to any of the profits but the depository may provide returns to the depositors as a token of appreciation. |
| Wakala | A contract of agency in which one person appoints someone else to perform a certain task on his behalf, usually against a certain fee. |
| Wakalah | A contract, which gives power to a person to nominate another person to act on his behalf, as long as he is alive, based on the agreed terms and conditions.Wakala is an agency relationship between the Wakeel (agent) and Muwakil (principal) whereby the Wakeel will invest the Muwakil’s funds in certain Shari’a-compliant assets. The Wakeel is entitled to a fee for his services and, in addition, any profit made above an agreed profit rate may be paid to the Wakeel as an incentive fee pursuant to the term of a Wakala agreement. |
| Wakalah Istithmar Sukuk | This is a hybrid sukuk which may combine both asset-backed and asset-based features, as well as tangible and intangible underlying assets. This combination allows it to be traded in the secondary market. These sukuk are commonly issued by the Islamic Development Bank based in Saudi Arabia. |
| Zakat | Literally, this means blessing, purification, increase, or cultivation of good deeds. It is a religious obligation of alms-giving, on a Muslim, to pay 2.5% of certain kinds of wealth annually to one of the eight categories of needy Muslims. |
| Zakat | A tax, which is prescribed by Islam on all persons having wealth above a certain amount. According to the Islamic belief Zakat purifies wealth and souls. The objective is to take away a part of the wealth of the well-to-do and to distribute it among the 8 categories stated in the Quran. |
Al Ghunm bil Ghurm
This provides the rationale and the principle of profit sharing in Shirkah arrangements. Earning profit is legitimised only by engaging in an economic venture involving risk sharing which ultimately contributes to economic development.
Amanah
This refers to deposits held in trust. A person can hold a property in trust for another, sometimes by express contract and sometimes by implication of a contract. Amanah entails an absence of liability for loss except in the breach of duty. Current accounts are regarded as Amanah (trust). If the bank gets authority to use Current accounts funds in his business, Amanah transforms into a loan. As every loan has to be repaid, banks are liable to repay the full amount of the Current accounts.
Arbun
Down payment. A non-refundable deposit paid by a buyer retaining a right to confirm or cancel the sale.
Asset backed sukuk
Sukuk which are characteristically non-recourse Sukuk with the underlying assets forming the sole source of profit and capital payments. Sukuk owners generally do not have recourse to the originator.
Asset based sukuk
Sukuk in which the asset is present for the purpose of Sharia’a requirements rather than to serve as the source of profit and capital payments. Sukuk owners generally do have recourse to the originator.
Assignment
In relation to receivables, it means the legal transferring of receivables from one person to another. In relation to a mortgage, it would mean the transfer of a mortgage by the mortgagee (borrower and occupier) to another person.
Bai’ al-Dayn
A transaction that involves the sale and purchase of securities or debt certificates that confirms with the Sharia’a. Securities or debt certificates will be issued by a debtor to a creditor as evidence of indebtedness.
Bai’ al-Dayn
A transaction that involves the sale and purchase of securities or debt certificates that conforms to the Sharia’a. Securities or debt certificates will be issued by a debtor to a creditor as evidence of indebtedness. Popular in Malaysia
Bai’ al-‘Inah
A contract, which involved the sale and buy back transaction of assets by a seller. A seller will sell the asset to a buyer on a cash basis. The seller will later buy back the same asset on a deferred payment basis where the price is higher than the cash price. It can also be applied when a seller sells an asset to a buyer on a deferred basis. A seller will later buy back the same asset, on a cash basis, at a price, which is lower than the deferred price.
Bai’ al-‘Inah
A contract, which involves the sale and buy back transaction of assets by a seller. A seller will sell the asset to a buyer on a cash basis. The seller will later buy back the same asset on a deferred payment basis where the price is higher than the cash price. This can also be applied when a seller sells an asset to a buyer on a deferred basis. A seller will later buy back the same asset on a cash basis at a price lower than the deferred price.
Bai’ al-Istijrar
A contract between the client and the supplier, whereby the supplier agrees to supply a particular produce on an ongoing basis, for example monthly, at an agreed price and on the basis of an agreed mode of payment.
Bai’ al-Istijrar
A contract between the client and the supplier, whereby the supplier agrees to supply a particular product on an on going basis, for example monthly, at an agreed price and on the basis of an agreed mode of payment.
Bai’ al-Muzayadah
An action by a person to sell his asset in the open market, which is accompanied by the process of bidding among potential buyers. The asset for sale will be awarded to the person who has offered the highest price.
Bai’ al-Muzayadah
An action by a person to sell his asset in the open market, which is accompanied by the process of bidding among potential buyers. The asset for sale will be awarded to the person who has offered the highest price. In other words a sale and purchase transaction based on an auction/tender.
Bai’ al-Salam
A contract whereby the payment is made in cash at the point of contract but the delivery of the asset purchased will be deferred to a pre-determined date.
Bai’ al-Wafa’
A contract with the condition that when the seller pays back the price of the goods sold, the buyer returns the goods to the seller.
Bai’ bil Wafa
Sale with a right of the seller enabling him to repurchase (redeem) the property by refunding the purchase price. According to the majority of Fuqaha this is not permissible.
Bai’ Bithaman Ajil (BBA)
A contract that refers to the sale and purchase transactions for the financing of assets on a deferred and an instalment basis with a pre-agreed payment period. The sale price will include a profit margin.
Bai’ Bithaman Ajil (BBA)
A widely used contract in Malaysia that refers to the sale and purchase transaction for the financing of assets on a deferred and as an instalment basis with a pre-agreed payment period. The sale price will include a profit margin. BBA Sukuk issued in Malaysia usually involves a Bai’ al-‘Inah element. If the issuer has an asset the procedure is as above. If the Issuer does not have an asset they will source it from the parent company. Most commonly the the parent company of the issuer will provide the asset using a hibah (gift) contract. The issuer will then sell and buy back the asset and will then return the asset to the original owner through another hibah transaction.
Bai’ Muajjal
Literally this means a credit sale. Technically, a financing technique adopted by Islamic banks that takes the form of Murabaha Muajjal. It is a contract in which the seller earns a profit margin on his purchase price and allows the buyer to pay the price of the commodity at a future date in a lump sum or in instalments. He has to expressly mention the cost of the commodity and the margin of profit is mutually agreed upon.
Bankruptcy remote
A key concern in securitisation transactions is to ensure that the transfer of assets of the originator to the SPV is not affected by bankruptcy or distress of the originator. This necessitates certain legal precautions in structuring the assignment of receivables and also in constituting the SPV to ensure that neither can be taken to liquidation by the shareholders of the originator. Further, the structure should also ensure that the SPV would not be treated as the subset of the originator by substantive consolidation. Such a structure is called a bankruptcy remote structure.
BBA. Sukuk Al-Bai-Bithaman Ajil
Refers to a Sukuk based on sale and purchase contract transaction for financing asset on a deferred and an installment basis with a pre-agreed payment period. The sale price will include a profit margin. The literal Arabic translation is sale (bai) with a deferred (ajil) price (bithaman)
Beneficial interest
The interest of the investors on whose behalf the trustee or the SPV holds securities/ receivables. In a securitisation deal, the receivables/ cash flows are legally held by the SPV or trust, for the benefit of the investors; hence the investors are beneficiaries and their interest is beneficial interest.
Credit enhancement
Credit support techniques are used to improve the credit quality of a Sukuk/bond so that it can obtain a high rating. Most securitizations use credit enhancement to allow their senior classes of bonds to obtain triple-A ratings. Common examples of credit enhancement include the following:
• Subordination - the credit quality of a deal's senior class of bonds is improved by subordinating the junior classes (also called senior subordinated structure).
• Overcollateralization - the par amount of securities issued in a deal is less than the aggregate principal amount of underlying financial assets being securitized.
• Excess spread – the difference between the interest rate on securitized financial assets and the interest rate on the bonds backed by those assets, which can be applied to offset losses.
• Reserve fund - within the structure of securitization, an account containing cash or high-quality securities from which withdrawals can be made to offset losses or shortfalls on securitized assets.
• Guarantee - either the sponsor of a transaction or a third party, such as a bond insurer, can guarantee bonds.
Dayn or Debt
A Dayn comes into existence as a result of a contract or credit transaction. It is incurred either by way of rent or sale or purchase or in any other way which leaves it as a debt to another. Duyun (debts) should be returned without any profit since they are advanced to help the needy and meet their demands and, therefore, the lender should not impose on the borrower more than what he had given on credit.
Dhaman
Contract of guarantee, security or collateral.
Dhaman
A contract of guarantee whereby a guarantor wiII underwrite any claim and obligation that should be fulfilled by an owner of the asset. This concept is also applicable to a guarantee provided on a debt transaction in the event a debtor fails to fulfil his debt obligation.
Excess spread
Refers to the excess of the income inherent in the portfolio of receivables, over and above the SPV's discounting rate and the expenses of the transaction. Represents the profit of the originator in the securitisation transaction. Excess spread is the difference between the gross yield on a pool of securitized assets and the cost of financing those assets, including applicable servicing fees. Excess spread can be a source of credit enhancement for securitized assets, provided that it is available to absorb losses on the assets.
Fiqh
Islamic law. The science of the Sharia'a. Practical jurisprudence or human articulations of divine rules encompassing both law and ethics. Fiqh may be understood as the jurists’ understanding of the Sharia’a, or jurists’ law .Fiqh al-Muamalat is Islamic commercial jurisprudence, or the rules of transacting in a Sharia’a-compliant manner. It is an important source of Islamic banking and economics.
Gharar
This means any element of absolute or excessive uncertainty in any business or contract. It potentially leads to undue loss to a party and unjustified enrichment of another. This is prohibited.
Gharar
Gharar is an element of deception either through ignorance of the goods, the price, or through faulty description of the goods, in which one or both parties stand to be deceived through ignorance of an essential element of the exchange. As an example, gambling is a form of Gharar because the gambler is ignorant of the result of the gamble.Gharar is divided into three types, namely gharar fahish (excessive), which vitiates the transaction, ghara yasir (minor), which is tolerated and gharar mutawassit (moderate), which falls between the other two categories. Any transaction can be classified as forbidden activity because of excessive gharar.
Halal
Anything permitted by the Sharia’a.
Haq Maliy
Haq maliy are rights on the financial assets. Examples of such rights are haq dayn (debt rights) and haq tamalluk (ownership rights).
Haram
Anything prohibited by the Sharia’a.
Hawalah
Literally, this means transfer. Legally, it is an agreement by which a debtor is freed from a debt by another party becoming responsible for it or by the transfer of a claim of a debt shifting the responsibility from one person to another. It also refers to the document by which the transfer takes place.
Hibah
Hibah means Gift.
Hibah
A gift awarded to a person.
Hiwalah
A contract that allows a debtor to transfer his debt obligation to a third party.
Hybrid Sukuk Structures
Each structure pertaining to a Sukuk is transaction-specific and is determined, in particular, by reference to the relevant assets available to underpin the Sukuk, the relevant jurisdiction in which such assets are located and (if different) the relevant jurisdiction in which the obligor is incorporated. For many financial institutions issuing Sukuk, a hybrid structure (using a Wakala and Mudaraba) has recently been used. Although more complex than the earlier structures given the fact that they typically adopt multiple components within the structure, these hybrid structures may be structured in such a way as to facilitate the use of real estate assets without the need to register a legal transfer of real estate. Depending on the particular circumstances, a hybrid structure may be created to include both “tangible” and “non-tangible” assets. This has the additional advantage of allowing issuers to issue Sukuk on a more “asset efficient” basis than previously, for example by allowing a commodity Murabaha transaction to form part of the asset base. However, the Bay’ Al-Dayn principle relating to tradability means that the proportion of the asset base that can be represented by non-tangible assets, such as a commodity Murabaha transaction, is limited.
Ibra’
An act by a person to withdraw his rights i.e. his rights to collect payment from a person who has the obligation to repay the amount borrowed from him.
Ijara
Leasing. This is the sale of a definite usufruct of any asset in exchange for definite reward. It refers to a contract of land leased at a fixed rent payable in cash and also to a mode of financing adopted by Islamic banks. It is an arrangement under which the Islamic banks lease equipment, buildings or other facilities to a client, against an agreed rental.
Ijara
A manfaah (usufruct) type of contract whereby a lessor (owner) leases out an asset or equipment to its client at an agreed rental fee and pre-determined lease period upon the aqad (contract). The ownership of the leased equipment remains in the hands of a lessor.
Ijarah Thumma Bai’
A contract which begins with an Ijara contract for the purpose of renting out/ leasing the lessor’s asset to the lessee. Consequently, at the end of the lease period, a lessee will purchase the asset at an agreed price from the lessor by executing a purchase (Bai’) contract.
Ijara Sukuk
These certificates are issued on stand-alone assets identified on the balance sheet. The assets can be parcels of land to be leased or leased equipment such as aircraft and ships. The rental rates of returns on these Sukuk can be both fixed and floating depending on the particular originator. The income generated under an Ijara Sukuk comes from the underlying rent receivables
Ijara-wa-Iqtina
A mode of financing, by way of hire purchase, adopted by Islamic banks. It is a contract under which the Islamic bank finances equipment, building or other facilities for the client against an agreed rental together with a unilateral undertaking by the bank or the client that, at the end of the lease period, the ownership in the asset would be transferred to the lessee. The undertaking or the promise does not become an integral part of the lease contract in order to make it conditional. The rental, as well as the purchase price, is fixed in such a manner that the bank gets back its principal sum along with some profit. This is usually determined in advance.
Ijma
Consensus of all or majority of the leading qualified jurists on a certain Sharia’a matter at a certain moment in time.
Ijtihad
This refers to an endeavour of a qualified jurist to derive or formulate a rule of law to determine the true ruling of the divine law in a matter on which the revelation is not explicit or certain. This would be on the basis of Nass, or evidence, found in the Qur’an and the Sunnah.
‘Inah
A double sale by which the borrower and the lender sell and then resell an object between them, once for cash and once for a higher price on credit, with the net result being a loan with interest.
‘Inan (A type of Shrikah)
This is a form of partnership in which each partner contributes capital and has a right to work for the business, not necessarily equally.
Issuer
In context of securitisations this refers to the SPV which issues the securities to the investors.
Istihsan
This is a doctrine of Islamic law that allows exceptions to strict legal reasoning, or guiding choice among possible legal outcomes, when considerations of human welfare so demand.
Istisna’a
This is a contractual agreement for manufacturing goods and commodities, allowing cash payment in advance and future delivery or a future payment and future delivery. A manufacturer or builder agrees to produce or build a well described good or building at a given price on a given date in the future. The price can be paid in instalments, step by step as agreed between the parties. Istisna’a can be used for financing the manufacture or construction of houses, plant, projects and building of bridges, roads, power stations etc.
Istisna’a
A purchase order contract of assets whereby a buyer will place an order to purchase an asset that will be delivered in the future. In other words a buyer will require a seller or a contract to deliver or construct the asset that will be completed in the future according to the specifications given in the sale and purchase contract. Both parties to the contract will decide on the sale and purchase prices as they wish and the settlement based on the schedule of the work completed.
Istisna’a Sukuk
A sukuk which refers to a purchase contract of an asset whereby a buyer will place an order to purchase the asset which will be delivered in the future. In other words, the buyer will require a seller or a contractor to deliver or construct the asset that will be completed in the future according to the specifications given in the sale and purchase contract. Both parties of the contract will decide on the sale and purchase prices as they wish and the settlement can be delayed or arranged based on the schedule of the work completed.
Ittifaq Dhimni
A sale and re-purchase of the underlying asset whereby the prices are agreed by the parties prior to the completion of the contract. This is an external agreement, which must be reached before the contract can be concluded to allow for the bidding process (Bai’ al-Muzayadah) to take place.
Jahala
Ignorance, lack of knowledge; indefiniteness in a contract, sometimes leading to Gharar.
Ji’ alah
Contract of reward; a unilateral contract promising a reward for a specific act or accomplishment.
Jua’alah
Literally, Jua’alah constitutes wages, pay, stipend or reward. Legally, it is a contract for performing a given task against a prescribed fee in a given period. A similar contract is ‘Ujrah’ in which any work is done against a stipulated wage or fee.
Kafalah
Same meaning as Dhaman.
Kafalah (Suretyship)
Literally, Kafalah means responsibility, or Suretyship, Legally in Kafalah a third party becomes a surety for the payment of debt. It is a pledge given to a creditor that the debtor will pay the debt, fine etc. Suretyship in Islamic law is the creation of an additional liability with regard to the claim, not to the debt itself.
Khilabah
A form of fraud, either in word or deed by a party to the trading contracts, with the intention of inducing the other party into making a contract. This is prohibited according to Sharia’a.
Khiyanah
Refers to deception by not disclosing the truth or breaching an agreement in a hidden way. This is prohibited according to Sharia’a.
Khiyar
Option or a power to annul or cancel a contract.
Limited Resource
The right of recourse is limited to a particular amount or a particular security. For example, in a securitisation transaction, the right of recourse being limited to the over-collateralisation or cash collateral placed by the originator would be a case of limited recourse.
Maisir
An ancient Arabian game of chance played with arrows without heads and feathers, for stakes of slaughtered and quartered camels. It came to be identified with all types of gambling.
Maisir
Any activities that involve betting whereby the winner takes all the bets and the loser will lose his bet. This is prohibited according to Sharia’a.
Mal
Something that has value and can be gainfully used according to Sharia’a.
Maslaha
This is a concept in traditional Sharia’a Law. It is invoked to prohibit or permit something on the basis of whether or not it serves the public's benefit or welfare. The concept is related to that of Istislah. While the meaning of maslaha is 'public interest', the meaning of Istislah is 'to seek the best public interest'.
Mithli (Fungible goods)
Goods that can be returned in kind, i.e. gold for gold, silver for silver, US$ for US$, wheat for wheat, etc.
Mudaraba
A contract, which is made between two parties to finance a business venture. The parties are a rabb al-mal or an investor who solely provides the capital and a mudarib or an entrepreneur who solely manages the project. If the venture is profitable, the profit will be distributed based on a pre-agreed ratio. In the event of a business loss, the loss wiII be borne solely by the provider of the capital.
Mudaraba Sukuk
Sukuk which apply the Sharia’a rules for the Mudaraba Sharia’a contract
Mudaraba (Trust Financing)
This is an agreement made between two parties one of whom provides 100 per cent of the capital for the project who has no control over the management of the project, and another party know as a mudarib, who manages the project using his entrepreneurial skills. Profits arising from the project are distributed according to a predetermined ratio. Losses are borne by the provider of capital.
Mudarib
The managing partner in a mudaraba contract
Mudarib
The manager with whom the profits are shared once the work is undertaken by the individual contracted in the Mudaraba contract. This manager is usually the entrepreneur rather than the financier, and he provides the management, business acumen, and the products/services the business entails.
Mujtahid
Legal expert, or a jurist who expends great effort in deriving a legal opinion or interpreting the sources of Sharia’a law.
Muqasah
Debt settlement by a contra transaction.
Murabaha
A contract that refers to the sale and purchase transaction for the financing of an asset whereby the cost and profit margin (mark-up) are made known and agreed by all parties involved. The settlement for the purchase can be settled either on a deferred lump sum basis or on an instalment basis, and is specified in the agreement.
Murabaha (Cost plus financing)
This is a contract sale between the bank and its client for the sale of goods at a price which includes a profit margin agreed by both parties. As a financing technique it involves the purchase of goods by the bank as requested by its client. The goods are sold to the client with an agreed mark-up.
Murabaha Sukuk
A sukuk which is based on the process of direct structuring of securities wherein a special purpose vehicle (SPV),created by the company that needs funds in consultation with an investment bank, invests the funds raised through sale of Sukuk in Murabaha operations. The company purchases the asset from the SPV on a Murabaha basis. The periodic instalments paid by the company in future to the SPV account for the repayment of the cost and the profit component.
Musawamah
Musawamah is a general kind of sale in which price of the commodity to be traded is bargained between seller and the purchaser without any reference to the price paid or cost incurred by the former.
Musharaka
A partnership arrangement between two parties or more to finance a business venture whereby all parties contribute capital either in the form of cash or in kind for the purpose of financing the business venture. Any profit derived from the venture will be distributed based on a pre-agreed profit sharing ratio, but a loss will be shared on the basis of equity participation.
Musharaka (Joint Venture financing)
This Islamic financing technique involves a Joint Venture between two parties who both provide capital towards the financing of a project. Both parties share profits on a pre-agreed ratio, but losses are shared on the basis of equity participation. Management of the project may be carried out by both the parties or by just one party. This is a very flexible arrangement where the sharing of the profits and management can be negotiated and pre-agreed by all parties.
Musharaka Sukuk
Under the Musharaka Sukuk the Sukuk holders’ contribute a capital amount to the issuer. The issuer then enters into a joint venture with the party seeking finance (the originator) where the issuer provides the capital received from the Sukuk holders, and the originator supplies the assets and/or their own capital required for the business to function. The profits from the Musharaka business are distributed to the issuer and the originator at a predetermined basis. Any losses are shared in proportion to the capital contribution, and the issuer pays a periodic distribution amount to the Sukuk holders from the Musharaka profit distribution.
Obligator
The party who is legally liable to pay the debt. A binding legal agreement, by which somebody is bound to pay a sum of money related to a debt. The obligator is the organization that benefits from the sukuk issuance.
Obligor
An obligor is also referred to as a 'debtor.' The debtor from whom the originator has the right to receivables. In the context of securitisation, the term means the parties making payments on the assets being securitised. These payments are the source of cash flows from which investors are repaid. The obligor is a person or entity who is legally, or contractually, obliged to provide some benefit or payment to another. In the financial context, the term obligor refers to a bond issuer, who is contractually bound to make all principal repayments and interest payments on outstanding debt. The recipient of the benefit or payment is known as the obligee.
Off balance sheet
A debt or asset which does not show up on the balance sheet of the entity that originated the asset or debt. In a securitisation transaction, if the transaction qualifies for a true sale treatment, the assets transferred by the originator are off the balance sheet of the originator, and so is the amount received on account of such transfer.
Originator
The entity assigning receivables in a securitisation transaction. The originator is usually the asset owner. The originator is usually the asset owner. During the origination process of creating a home loan or mortgage, a borrower submits a variety of financial information to the mortgage lender, who uses it to determine the type of loan the borrower is eligible for and what interest rate he or she will pay. The lender will also rely on the borrower's credit report and other information to determine loan eligibility.
Purchase Undertaking
A procedure whereby the sukuk originator agrees to repurchase the assets from the issuer at maturity of the sukuk, or upon a pre-defined early termination event, for an amount equal to the principal repayment.
Qabdh
Qabdh means possession, which refers to a contract of exchange. Generally, qabdh depends on the perception of ‘urf or the common practices of the local community in recognising that the possession of a good has taken place
Qard Hasan
A contract of loan between two parties on the basis of enhancing social welfare or to fulfil a short-term financial need of the borrower. The amount of repayment must be equivalent to the amount borrowed. It is however legitimate for a borrower to pay more than the amount borrowed as long as it is not stated or agreed at the point of contract.
Qard (Loan of fungible objects)
Legally, Qard means to give anything having value in the ownership of the other by way of virtue so that the latter could avail of the same for his benefit with the condition that same or similar amount of that thing would be paid back on demand or at the settled time. It is that loan which a person gives to another as a help, charity or advance for a certain time. The repayment of the loan is obligatory. The Prophet is reported to have said “…Every loan must be paid…” But if a debtor is in difficulty, the creditor is expected to extend time or even to voluntarily remit the whole or a part of the principal. The literal meaning of Qard is ‘to cut’. It is so called because the property is really cut off when it is given to the borrower.
Qimar
Qimar means gambling. Technically, it is an arrangement in which possession of a property is contingent upon the happening of an uncertain event. By implication it applies to a situation in which there is a loss for one party and a gain for the other without specifying which party will lose and which will gain.
Qiyas
Literally this means measure, example, comparison or analogy. Technically, it means a derivation of the law on the analogy of an existing law if the basis (‘ilaih) of the two is the same. It is one of the sources of Sharia’a law.
Rahn
Pledge or Collateral. Legally, Rahn means to pledge or lodge a real or corporeal property of material value, in accordance with the law, as security, for a debt or pecuniary obligation so as to make it possible for the creditor to recover the debt or some portion of the goods or property. In the pre-Islamic contracts, Rahn implied a type of earnest money which was lodged as a guarantee and material evidence or proof of a contract, especially when there was no scribe available to put it into writing
Rahn
An act whereby a valuable asset is used as collateral for a debt. The collateral will be utilised to settle the debt when a debtor is in default.
Recourse
The ability of an investor/ purchaser to seek payment against an investment from o the originator of the investment. For example, in a securitisation transaction, the right of the investor to seek payment from the originator, or in the case of a negotiable instrument, the right to seek payment from the endorser of the instrument.
Riba
An excess or increase. Technically, it means an increase over principal in a loan transaction or in exchange for a commodity accrued to the owner (lender) without giving an equivalent counter-value or recompense (‘iwad), in return, to the other party. Riba means an increase which is without an ‘iwad or equal counter-value.
Riba
An increase, which in a loan transaction or in exchange of a commodity, accrues to the owner (lender) without giving an equivalent counter value or recompense in return to the other party. It covers interest both on commercial and consumer loans, and is prohibited according to Sharia’a.
Riba Al-Fadl
Riba Al-Fadl, or riba in excess, is the quality premium when exchanging low quality with better quality goods e.g. dates for dates, wheat for wheat, etc. In other words an excess in the exchange of Ribawi goods within a single genus. The concept of Riba Al-Fadl refers to sale transactions while Riba Al-Nasiah refers to loan transactions.
Riba Al-Nasiah
Riba Al-Nasiah, or riba of delay, is due to an exchange not being immediate with or without excess in one of the counter values. It is an increment on principal of a loan or debt payable. It refers to the practice of lending money for any length of time on the understanding that the borrower would return to the lender at the end of the period, the amount originally lent together with an increase on it, in consideration of the lender having granted him time to pay. Interest, in all modern conventional banking transactions, falls under the purview of Riba Al-Nasiah. As money in present banking system is exchanged for money with excess and delay, it falls under the definition of riba. There is a general accord reached among scholars that it is prohibited under Sharia’a law.
Salaf or Loan / Debt
The word Salaf literally means a loan which draws forth no profit for the creditor. In a wider sense this includes loans for specified periods, i.e. short, intermediate and long-term loans. Salaf is another name for Salam wherein the price of the commodity is paid in advance while the commodity or the counter- value is supplied in the future. Thus the contract creates a liability for the seller.
Salam
Salam means a contract in which advance payment is made for goods to be delivered later. The seller undertakes to supply some specific goods to the buyer at a future date in exchange for an advance price fully paid at the time of contract. According to the normal rules of the Sharia’a, no sale can be effected unless the goods are in existence at the time of the bargain. However Salam sale forms an exception given by the Prophet to the general rule provided the goods are defined and the date of delivery is fixed. It is necessary that the quality of the commodity intended to be purchased is fully specified leaving no ambiguity potentially leading to a dispute. The objects of the Salam sale are goods and cannot be gold, silver or currencies. These are regarded as monetary values the exchange of which is covered under rules of Sarf, i.e. mutual exchange should be hand to hand without delay. With this latter exception Salam covers almost everything which is capable of being definitely described as to quantity, quality and workmanship.
Sarf
Basically, in pre-Islamic times this was the exchange of gold for gold, silver for silver and gold for silver or vice versa. In Sharia’a law such exchange is regarded as ‘sale of price for price’ (Bai al Thaman bil Thaman), and each price is consideration of the other. It also means the sale of monetary value for monetary value – currency exchange.
Sarf
Buying and selling of currencies.
Securitization
The process of homogenizing and packaging financial instruments into a new fungible one. Acquisition, classification, collateralization, composition, pooling and distribution are functions within this process.
Servicer
The organisation that is responsible for collecting loan payments from individual borrowers and for remitting the aggregate amounts received to the owner or owners of the loans.
Sharia’a
The term Sharia’a has two meanings: Islamic Law, and the totality of divine categorisations of human acts (Islam). The second meaning of the term means Sharia’a rules do not always function as rules of law in the western sense, as they include obligations, duties, and moral considerations not generally thought of as “law”. Sharia’a rules, therefore, admitting of both a legal and moral dimension, have as their purpose the fostering of obedience to Allah the Almighty. In the legal terminology, Sharia’a means the law as extracted by the Mujtahid from the sources of law
Sharia’a
Islamic law, originating from the Qur’an (the holy book of Islam), as well as practices and explanations rendered by the prophet Muhammad and ijtihad of ulamak (personal effort by qualified Sharia’a scholars to determine the true ruling of the divine law in a subject matter on which the revelation is not explicit).
Shirkah
A contract between two or more persons who launch a business or financial enterprise to make profits. In the conventional books of Fiqh, the partnership business may include both Musharaka and Mudaraba.
Special Purpose Vehicle (SPV)
An organization constructed with a limited purpose or life. In relation to securitisation, it means the entity which would hold the legal rights over the assets transferred by the originator. The SPV is deemed to be a bankruptcy remote vehicle.
Suftajah
A credit instrument issued to a creditor to enable him to use or cash it at another predetermined venue and at the future date.
Sukuk
A document or certificate, which evidences the undivided pro-rata ownership of underlying assets. The Sak (singular of Sukuk) is freely tradable at par, premium or discount, depending on which Sharia’a contract is being applied.
Sunnah
Custom, habit or way of life. Technically this refers to the utterances of the Prophet Muhammad other than the Qur’an known as the Hadith, or his personal acts, or sayings of others, tacitly approved by the Prophet.
Tabarru’
This is a donation/gift the purpose of which is not commercial but is seeking the pleasure of Allah. Any benefit that is given by one person to another without getting anything in exchange is called Tabarru’.
Tadlis al-‘aib
Refers to the activity of a seller intentionally hiding the defects of goods. This activity is prohibited according to Sharia’a principles.
Takaful
A Sharia’a-compliant system of insurance in which the participants donate part or all their contributions, which are used to pay claims for damages suffered by some of the participants. The company’s role is restricted to managing the insurance operations and investing the insurance contributions
Takaful
This is a form of Islamic insurance based on the principle of ta’awun or mutual assistance. It provides mutual protection of assets and property and offers joint risk sharing in the event of a loss by one of its members. Takaful is similar to mutual insurance in that members are the insurers as well as the insured.
Tanajush
Refers to a conspiracy between a seller and a buyer wherein the buyer is willing to purchase the goods at a higher price. This is done so that others would rush to buy the goods at a higher price, resulting in the seller obtaining a higher profit. This transaction is not permissible in Islam.
Tapir
Spending wastefully on objects which have been explicitly prohibited by the Sharia’a, irrespective of the amount of expenditure.
Taskeek
Islamic securitisation (asset monetization) achieved through the process of the issuance of sukuk is known, in Arabic, as Taskeek.
Ta’widh
Penalty agreed upon by the contracting parties as compensation that can rightfully be claimed by the creditor when the debtor fails or is late in meeting his obligation to pay back the debt.
Third party credit enhancement
A credit enhancement provided in a securitisation transaction by third party guarantees, such as bank letter of credit, or monoline insurance contracts, etc.
True sale
The treatment for legal or accounting or sale purposes in a securitisation transaction where there is a sale of receivables and where the receivables or assets are not seen as a financing transaction. In this case the assets have been transferred from the originator in the legal sense that the assets cannot form part of any bankruptcy claims.
Ujrah
Financial payment for the utilisation of services or manfaah. This can be in the form of salary, wage, allowance, commission and the like.
‘Uqud al-Ishtirak
Contract of partnership.
‘Uqud al-Mu’awadat
Contracts of exchange.
‘Uqud al-Tabarruat
Charitable contract.
‘Urbun
A deposit or earnest money which forms a part payment of the price of goods or services paid in advance, but will be forfeited in the event the transaction is cancelled. The forfeited money is considered as hibah (gift).
Usufruct
Usufruct is the right to use and derive profit or benefit from property belonging to another. It is often used as the asset underpinning an Ijara-based Sukuk.
Wa’ad
Wa’ad means an undertaking or promise by one party in favour of another, to do a Sharia’a-compliant act such as selling or buying an asset at a future date or on the occurrence of a certain event.
Wadiah Yad Dhamanah
Goods or deposits, which have been deposited with another person, who is not the owner, for safekeeping. As wadiah is a trust, the depository becomes the guarantor and, therefore guarantees repayment of the whole amount of the deposits, or any part thereof, outstanding in the account of depositors, when demanded. The depositors are not entitled to any of the profits but the depository may provide returns to the depositors as a token of appreciation.
Wakala
A contract of agency in which one person appoints someone else to perform a certain task on his behalf, usually against a certain fee.
Wakalah
A contract, which gives power to a person to nominate another person to act on his behalf, as long as he is alive, based on the agreed terms and conditions.Wakala is an agency relationship between the Wakeel (agent) and Muwakil (principal) whereby the Wakeel will invest the Muwakil’s funds in certain Shari’a-compliant assets. The Wakeel is entitled to a fee for his services and, in addition, any profit made above an agreed profit rate may be paid to the Wakeel as an incentive fee pursuant to the term of a Wakala agreement.
Wakalah Istithmar Sukuk
This is a hybrid sukuk which may combine both asset-backed and asset-based features, as well as tangible and intangible underlying assets. This combination allows it to be traded in the secondary market. These sukuk are commonly issued by the Islamic Development Bank based in Saudi Arabia.
Zakat
Literally, this means blessing, purification, increase, or cultivation of good deeds. It is a religious obligation of alms-giving, on a Muslim, to pay 2.5% of certain kinds of wealth annually to one of the eight categories of needy Muslims.
Zakat
A tax, which is prescribed by Islam on all persons having wealth above a certain amount. According to the Islamic belief Zakat purifies wealth and souls. The objective is to take away a part of the wealth of the well-to-do and to distribute it among the 8 categories stated in the Quran.