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Special Comment


Table of Contents:

Glossary of Arabic Terms Used in Islamic
Finance 1
The Five Core Principles of Islamic Banking
and Finance 3


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Khalid Howladar
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Anouar Hassoune
Vice President/Senior Credit Officer

June 2008
Islamic Finance: Glossary of
Usual Terms and Core
Principles

Glossary of Arabic Terms Used in
Islamic Finance
adl: a trusted and honourable person, selected by both parties to a
transaction. Somewhat analogous to a trustee.
amana/amanah: literally means reliability, trustworthiness, loyalty and
honesty, and is an important value of Islamic society in mutual dealings. It
also refers to deposits in trust, sometimes on a contractual basis.
bai/bay: contract of sale, sale and purchase.
bai al-salam: advance payment for goods. While normally the goods
need to exist before a sale can be completed, in this case the goods are
defined (such as quantity, quality, workmanship) and the date of delivery
fixed. Usually applied in the agricultural sector where money is advanced for
inputs to receive a share in the crop.
fatwa (pl. fatawa): an authoritative legal opinion based on the Shariah.
fiqh: practical Islamic jurisprudence. Can be regarded as the jurists
understanding of the Shariah.
gharar: uncertainty in a contract or sale in which the goods may or may not be
available or exist (e.g. the bird in the air or the fish in the water). Also, ambiguity in
the consideration or terms of a contract as such, the contract would not be valid.
hadith: the narrative record of the sayings, doings and implicit approval or
disapproval of the Prophet.






2 June 2008 Special Comment Moodys Global Credit Research - Islamic Finance: Glossary of Usual Terms and Core Principles

Special Comment Moodys Global Credit Research
Islamic Finance: Glossary of Usual Terms and Core Principles
halal: permissible, allowed, lawful. In Islam, there are activities, professions, contracts and transactions that
are explicitly prohibited (haram) by the Quran or the Sunnah. Barring these, all others are halal. An activity
may be economically sound but may not be allowed in Islamic society if it is not permitted by the Shariah.
Hanifite laws: an Islamic school of law founded by Iman Abu Hanifa. Followers of this school are known as
Hanafis.
haram: unlawful, forbidden (see halal). Describes activities, professions, contracts and transactions that are
explicitly prohibited by the Quran or the Sunnah.
hawala: bill of exchange, promissory note, cheque or draft. A debtor passes on the responsibility of payment
of his debt to a third party who owes the former a debt. Thus, the responsibility of payment is ultimately shifted
to a third party. Hawala is used in developing countries as a mechanism for settling international transactions
by book transfers.
ijarah/ijara: lease, hire or the transfer of ownership of a service for a specified period for an agreed lawful
consideration. This is an arrangement under which an Islamic bank leases equipment, a building or other
facility to a client for an agreed rental.
ijarah wa iqtina/ijarah muntahla bittamleek: a leasing contract used by Islamic financial
institutions that includes a promise by the lessor to transfer the ownership of the leased property to the lessee,
either at the end of the lease or by stages during the term of the contract.
ijtihad: literally effort, exertion, industry, diligence. As a legal term, it means the effort of a qualified Islamic
jurist to interpret or reinterpret sources of Islamic law in cases where no clear directives exist.
istisnaa/istisna: a contract of sale of specified goods to be manufactured with an obligation on the
manufacturer to deliver them on completion. It is a condition in istisna that the seller provides either the raw
material or the cost of manufacturing the goods.
maisir/maysir: the forbidden act of gambling or playing games of chance with the intention of making an
easy or unearned profit.
mudaraba/mudarabah: a form of contract in which one party (the rab-al-maal) brings capital and the
other (the mudarib) personal effort. The proportionate share in profit is determined by mutual consent, but the
loss, if any, is borne by the owner of the capital, unless the loss has been caused by negligence or violation of
the terms of the contract by the mudarib. A mudaraba is typically conducted between an Islamic financial
institution or fund as mudarib and investment account holders as providers of funds.
mudarib: the managing partner or entrepreneur in a mudaraba contract (see above).
murabaha: a contract of sale with an agreed profit mark-up on the cost. There are two types of murabaha
sale: in the first type, the Islamic bank purchases the goods and makes them available for sale without any
prior promise from a customer to purchase them, and this is termed a normal or spot murabaha; the second
type involves a promise from a customer to purchase the item from the bank, and this is called murabaha to
the purchase order. In this latter case, there is a pre-agreed selling price that includes the pre-agreed profit
mark-up. Normally, it involves the bank granting the customer a murabaha credit facility with deferred payment
terms, but this is not an essential element.
musharaka/musharakah: an agreement under which the Islamic bank provides funds that are mingled
with the funds of the business enterprise and possibly others. All providers of capital are entitled to participate
in management, but are not necessarily obliged to do so. The profit is distributed among the partners in a pre-
determined manner, but the losses, if any, are borne by the partners in proportion to their capital contribution.
It is not permitted to stipulate otherwise.
qard al hasana/qard hassan: a virtuous loan in which there is no interest or mark-up. The borrower
must return the principal sum in the future without any increase.
rab-al-maal: the investor or owner of capital in a mudaraba contract (see above).
rahn: a mortgage or pledge.



3 June 2008 Special Comment Moodys Global Credit Research - Islamic Finance: Glossary of Usual Terms and Core Principles

Special Comment Moodys Global Credit Research
Islamic Finance: Glossary of Usual Terms and Core Principles
riba: interest. Sometimes equated with usury, but its meaning is broader. The literal meaning is an excess or
increase, and its prohibition is meant to distinguish between an unlawful exchange in which there is a clear
advantage to one party in contrast to a mutually beneficial and lawful exchange.
riba al-fadi riba al-buyu: a sale transaction in which a commodity is exchanged for the same commodity
but unequal in amount or quality, or the excess over what is justified by the counter-value in an
exchange/business transaction.
salam: a contract for the purchase of a commodity for deferred delivery in exchange for immediate payment.
Sharia/Shariah/Shariah: in legal terms, the law as extracted from the sources of law (the Quran and
the Sunnah). However, Shariah rules do not always function as rules of law as they incorporate obligations,
duties and moral considerations that serve to foster obedience to the Almighty.
Sukuk: participation securities, coupons, investment certificates.
Sunnah: the way of the Prophet Mohammed including his sayings, deeds, approvals and disapprovals as
preserved in the hadith literature. It is the second source of revelation after the Quran.
takaful: a Shariah-compliant system of insurance based on the principle of mutual support. The companys
role is limited to managing the operations and investing the contributions.
tawarruq: literally monetisation. The term is used to describe a mode of financing, similar to a murabaha
transaction, where the commodity sold is not required by the borrower but is bought on deferred terms and
then sold to a third party for a lower amount of cash, so becoming monetised.
ummah: the community or nation. Used to refer to the worldwide community of Muslims.
wakala: agency, an agency contract that generally includes in its terms a fee for the agent.
zakah/zakat: a tax that is prescribed by Islam on all persons having wealth above an exemption limit at a
rate fixed by the Shariah. Its objective is to collect a portion of the wealth of the well-to-do and distribute it to
the needy. The way it is distributed is set out in the Quran. It may be collected by the state, but otherwise it is
down to each individual to distribute the zakat.
The Five Core Principles of Islamic Banking and Finance
Islamic banking and finance essentially abides by five core rules, three being banning principles and two being
positive obligations:
The ban on interest (riba). No financial transaction should be based on the payment or receipt of interest.
Profit from indebtedness or the trading of debts is seen to be unethical. Instead, the investor and investee
should share in the risks and profits generated from a venture, an asset or a project.
The ban on uncertainty (gharar). Uncertainty in the terms of a financial contract is considered unlawful,
but not risk per se. Consequently, speculation (maysir) is forbidden. Therefore, financial derivatives are
usually not permissible under Shariah-compliant finance despite the possible application for risk mitigation
or risk transfer.
The ban on unlawful (haram) assets. No financial transaction should be directed towards economic
sectors considered unlawful as per the Shariah, such as the arms dealing, tobacco, or gambling
industries, as well as all enterprises for which financial leverage (indebtedness) would be deemed
excessive (including conventional banks).
The profit-and-loss sharing (PLS) obligation. Parties to a financial contract should share in the risks
and rewards derived from such financing or investment transaction.
The asset-backing obligation. Any financial transaction should be based on a tangible, identifiable
underlying asset.



4 June 2008 Special Comment Moodys Global Credit Research - Islamic Finance: Glossary of Usual Terms and Core Principles

Special Comment Moodys Global Credit Research
Islamic Finance: Glossary of Usual Terms and Core Principles


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Report Number: 109441
Authors Editor Production Associate
Khalid Howladar
Anouar Hassoune
Justin Neville Fabian Alvarez