Islamic finance refers to the means by which corporations in the Muslim world, including banks and other lending institutions, raise capital in accordance with Sharia, or Islamic law. It also refers to the types of investments that are permissible under this form of law.
The Islamic finance industry has expanded rapidly over the past decade, growing at 10-12% annually. Today, Sharia-compliant financial assets are estimated at roughly US$2 trillion, covering banks and non-bank financial institutions, capital markets, money markets and insurance (“Takaful”). Here is summary of commonly used terms and concepts in the Islamic banking and finance industry as published by CIMA:
Fiqh al-muamalah – Islamic commercial law
Haram [Haraam] – unacceptable or prohibited
Hiba [Hibah] – gift
Hiwalah [Hawala] – transfer of debt/right to claim
Ijarah – a lease contract
Ijtihad – interpretation
Istihsan – equity consideration Istisna’ – is a contract to build, manufacture, construct or develop the object of sale at a definite price, over a defined period of time, according to agreed specifications between the parties.
Mudarabah [Mudaraba, Mudharabah, Modaraba] (capital provider – Rabb al-mal, entrepreneur – Mudarib) – a Mudarabah contract is a profit sharing contract. Under a Mudarabah contract, the capital provider agrees to share the profits between themselves and the entrepreneur at an agreed ratio or percentage.
Murabahah – a Murabahah contract refers to a cost plus mark-up transaction between parties.
Musawamah – negotiated sale, a general kind of sale in which the price of the commodity to be traded is bargained between the seller and the purchaser without any reference to the price paid or cost incurred by the seller.
Musharakah [Musyarakah] – a Musharakah contract is a form of equity partnership investment. It is similar to equity investment in a conventional capital market but the investments made must be confined to stocks and financial securities or other assets that are consistent with the principles of Shari’ah.
Qard Hassan – interest free loan
Riba – interest or usury
Salam – refers to the purchase of a commodity for deferred delivery in exchange for immediate payment
Shari’ah [Shariah, Sharia, Shari’a, Sharia’a, Syariah] – sacred law revealed by God Almighty
Shirkah – partnership
Sukuk – certificates of investment
Tawarruq – buy spot and sell deferred payment or vice versa to facilitate cash liquidity
Wakalah – is a contract between an agent and principal. This contract enables the agent to render services and be paid a fee (Ujrah)
Waqf – permanent endowment.
For your convenience, a separate PDF copy of CIMA’s extensive A-Z glossary of Islamic finance terms and contracts is available here.