Islamic Banking Concepts
Are you confused by the Arabic terms used in Islamic banking and finance? Unfamiliar with the various types of financial products offered? This glossary of Islamic banking concepts may help:
Wadiah Yad Dhamanah (savings with guarantee)
Refers to 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 share of the profits but the depository may provide returns to the depositors as a token of appreciation.
Refers to an agreement made between a capital provider and another party who acts as the entrepreneur. This arrangement will enable the entrepreneur to carry out business projects and profits are distributed based on a pre-agreed profit sharing ratio. In the case of losses, the losses are borne by the provider of the funds.
Musyarakah (joint venture)
Refers to a partnership or joint venture for a specific business, whereby the distribution of profits will be apportioned according to an agreed ratio. In the event of losses, both parties will share the losses on the basis of their equity participation.
Murabahah (cost plus)
Refers to the sale of goods at a price, which includes a profit margin as agreed to by both parties. Such sales contract is valid on the condition that the price, other costs and the profit margin of the seller are stated at the time of the agreement of sale.
Bai’ Bithaman Ajil (deferred payment sale)
Refers to the sale of goods on a deferred payment basis at a price, which includes a profit margin agreed to by both parties.
Bai’ al-Dayn (debt trading)
Refers to the buying and selling in the secondary markets of debt certificates, securities, trade documents and papers which are Shariah compliance. Only documents evidencing real debts arising from bona fide merchant transactions can be traded.
Bai’ al-Inah (sell and buy back)
It refers to a contract which involves sell and buy back transactions of an asset by a seller to the customer. The seller will sell the asset on cash basis but the customer will buy back the asset on deferred payment at a price higher than the cash price.
Ijarah Thumma al-Bai’ (leasing and subsequently purchase)
Refers to an Ijarah (leasing/renting) contract to be followed by Bai’ (purchase) contract. Under the first contract, the hirer leases the goods from the owner at an agreed rental over a specified period. Upon expiry of the leasing period, the hirer enters into a second contract to purchase the goods from the owner at an agreed price.
Refers to an arrangement under which the lessor leases equipment, building or other facilities to a client at an agreed rental fees or charges, as agreed by both parties.
Qard (interest-free loan)
A loan extended on a goodwill basis and the borrower is only required to repay the principal amount borrowed. However, he may pay an extra amount at his absolute discretion, as a token of appreciation.
Bai’ Salam (future delivery)
Refers to an agreement whereby payment is made in advance for delivery of specified goods in the future.
Bai’ Istijrar (supply contract)
Refers to an agreement 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.
Refers to a contract of guarantee by the contracting party or any third party to guarantee the performance of the contract terms by contracting parties.
Rahnu (collateralised borrowing)
Refers to an arrangement whereby a valuable asset is placed as collateral for debt or right of claim. The collateral may be disposed in the event of default.
Wakalah (nominating another person to act)
Refers to a situation, where a person nominates another person to act on his behalf.
Refers to a transfer of funds/debt from the depositor’s/debtor’s account to the receiver’s/ creditor’s account whereby a commission may be charged for such service.
Sarf (foreign exchange)
Refers to the buying and selling of foreign currencies.
Refers to commissions or fees charged for services.
Refers to gifts award voluntarily in return for any transactions given or provided.
Reprinted from Bank Negara Malaysia