Glossary of Islamic Banking Terms

The following has been adapted from the SBP Publication, ‘Islamic Banking and Finance:
Theory and Practice’ by Muhammad Ayub, Sr. J.D. IBD, SBP)

Amanah This refers to deposits 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 breach of
duty. Current Accounts are regarded as Amanah (trust). If the bank gets
authority to use Current Account funds in its 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 a sale.

Al-‘Aariyah (Gratuitous loan of non-fungible objects) (Al-‘Aariyah means the loan of a

particular piece of property, the substance of which is not consumed by its
use, without anything taken in exchange, In other words, it is the gift of
usufruct of a property or commodity that is not consumed on use. It is
different from Qard in that it is the loan of fungible objects which are
consumed on use and in which the similar and not the same commodity has
to be returned. It is also a virtuous act like Qard. The borrowed commodity
is treated as liability of the borrower who is bound to return it to its owner.

Bai‘ Muajjal Literally this means a credit sale. Technically it is 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 installments. The bank has to expressly mention the cost of
the commodity and the margin of profit is mutually agreed. The price fixed
for the commodity in such a transaction can be the same as the spot price
or higher or lower than the spot price.

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Bai' 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 being paid in advance a price fully
paid at the time of contract. According to the normal rules of the Shariah,
no sale can be affected unless the goods are in existence at the time of the
bargain, but Salam sale forms an exception given by the Prophet himself 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 leading to potential
disputes. The objects of this sale are goods and cannot be gold, silver or
currencies because these are regarded as monetary values exchange of
which is covered under rules of Bai al Sarf, i.e. mutual exchange which
must be hand to hand without delay. Barring this, Bai' Salam covers almost
everything which is capable of being definitely described as to quantity,
quality and workmanship.

Bai' bil Wafa Sale with a right in the seller, having the effect of a condition, to
repurchase (redeem) the property by refunding the purchase price.
According to the majority of Fuqaha this is not permissible.

Daman 1) Contract of guarantee, security or collateral; 2) Responsibility of

entrepreneur/manager of a business; one of two basic relationships toward
property, entailing bearing the risk of its loss.

Dayn Means Debt .A Dayn comes into existence as a result of any 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) ought to 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.

Falah Falah means to thrive, to become happy or to have luck and success.
Technically it implies success both in this world and in the Akhirah
(Hereafter). The Falah presumes belief in one God, the Apostlehood of
Prophet Muhammad, Akhirah and conformity to the Shariah in behaviour.

Fiqh Islamic law. The science of the Shariah.

Gharar This means any element of absolute or excessive uncertainty in any

business or a contract about the subject of contract or its price, or mere
speculative risk. It has the potential to lead to undue loss to a party and
unjustified enrichment of the other, which is prohibited.

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Al Ghunm bil This provides the rationale and the principle of profit sharing in Shirkah
Ghurm arrangements. Earning a profit is legitimized only by engaging in an
economic venture, applying risk sharing principles and thereby
contributing to the economy.

Hadith (see Sunnah)

Halal Anything permitted by the Shariah.

Haram Anything prohibited by the Shariah. Examples are wine and pork.

Hawalah Literally, this means a transfer. Legally, it is an agreement by which a

debtor is freed from a debt by another becoming responsible for it or the
transfer of a claim of a debt by shifting the responsibility from one person
to another – contract of assignment of debt. It also refers to the document
by which the transfer takes place.

Hibah Gift.

Ijara Means letting on a lease. It refers to the sale of a definite usufruct of any
asset in exchange for a 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.

Ijarah-wal- Means a mode of financing, by way of hire-purchase, adopted by Islamic

Iqtina‘ 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 to make it conditional. The rentals as well as the purchase
price are fixed in such a manner that the bank gets back its principal sum
along with some profit, which is usually determined in advance.

Ijtihad Refers to the 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, on the basis of Nass or evidence found
in the Holy Qur’an and the Sunnah. Express injunctions have no room for
Ijtihad. Implied injunctions can be interpreted in different ways by way of
inference from the accepted principles of the Shariah

‘Illah This is the attribute of an event that entails a particular Divine ruling in all
cases possessing that attribute. ‘Illah is the basis for applying analogy for
determining permissibility or otherwise of any act or transaction.

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Ijma‘ Consensus of all or a majority of the leading qualified jurists on a certain
Shariah matter in a certain age.

‘Inah ( A kind of Bai): this is 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
in equal shares.

Istihsan This is a doctrine of Islamic law that allows exception to strict legal
reasoning, or guiding choice among possible legal outcomes, when
considerations of human welfare so demand.

Israf: This refers to immoderateness, exaggeration and waste and covers

spending on lawful objects but exceeding moderation in quantity or
quality; spending on superfluous objects while necessities are unmet;
spending on objects which are incompatible with the economic standard of
the majority of the population. See also Tabzir

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. Price can be paid in installments, step by step as agreed between the
parties. Istisna’a can be used for financing the manufacture or construction
of houses, plant, projects, and the building of bridges, roads and highways.

Jahala Ignorance, lack of knowledge; indefiniteness in a contract, sometime

leading to Gharar.

Kali bil-Kali The term Kali refers to something delayed. It appears in a maxim
forbidding the sale of al-Kali bil-Kali i.e. the exchange of a delayed
counter value for another delayed counter value.

Al-Kafalah (Suretyship) Literally, Kafalah means responsibility, amenability or

suretyship. Legally in Kafalah a third party becomes surety for the
payment of a 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 or assumption only of the
liability and not of the debt.

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Kharaj bi-al- Gain accompanies liability for loss. This is a Hadith forming a legal
Daman maxim and is a basic principle of Islamic finance – see also Al-Ghunm bil
Ghurm.

Khiyar Means an option or the power to annul or cancel a contract.

Khiyar al- Means the power to annul a contract possessed by both contracting parties
Majlis as long as they do not separate.

Khiyar al- A right, stipulated by one or both of the parties to a contract, to cancel the
Shart contract for any reason for a fixed period of time.

Mal-e- Things the use of which is lawful under the Shariah; or wealth that has a
Mutaqawam commercial value. Legal tender of the modern age that carries monetary
value is included in Mal-e-Mutaqawam. It is possible that certain wealth
has no commercial value for Muslims. Examples would be pork or wine.

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.

Mubah Means an object that is lawful (i.e. something which is permissible to use
or trade in).

Mudarabah A form of partnership where one party provides the funds while the other
provides expertise and management. The latter is referred to as the
Mudarib. Any profits accrued are shared between the two parties on a pre-
agreed basis, while loss is borne by the provider(s) of the capital.

Murabaha Literally this means a sale on mutually agreed profit. Technically, it is a

contract of sale in which the seller declares his cost and the profit.
Murabaha has been adopted by Islamic banks as a mode of financing. As a
financing technique, it can involve a request by the client to the bank to
purchase a certain item for him. The bank does that for a definite profit
over the cost which is stipulated in advance.

Musawamah Musawamah is a general kind of sale in which the 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.

Maisir An ancient Arabian game of chance played with arrows without heads and
feathering, for stakes of slaughtered and quartered camels. It came to be
identified with all types of hazard and gambling.

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Musharakah Musharakah means a relationship established under a contract by the
mutual consent of the parties for sharing of profits and losses in a joint
business. It is an agreement under which the Islamic bank provides funds
which are mixed with the funds of the business enterprise and others. All
providers of capital are entitled to participate in management, but not
necessarily required to do so. The profit is distributed among the partners
in pre-agreed ratios, while the loss is borne by every partner strictly in
proportion to respective capital contributions.

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 (‘illah) of the two is the same. It is one of the sources of
Islamic law.

Riba Means an excess or increase. Technically, it means an increase over the

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; every increase which is
without an ‘iwad or equal counter-value.

Riba Al-Fadl Riba Al-Fadl (excess) is the quality premium in exchanging low quality
with better quality goods e.g. dates for dates, wheat for wheat, etc. – 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.

Qabul Acceptance, in a contract; see also Ijab.

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Qard (Loan of fungible objects): 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. 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 a 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 Holy 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. Qard is, in fact, a particular kind
of Salaf. Loans under Islamic law can be classified into Salaf and Qard, the
former being loan for a fixed time and the latter payable on demand. (see
Salaf)

Riba Al- Riba Al-Nasiah or Riba of delay is due to an exchange not being
Nasiah 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 banking
transactions, falls under the purview of Riba Al-Nasiah. As money in the
present banking system is exchanged for money with excess and delay, it
falls, under the definition of Riba.

Ribawi Goods subject to Fiqh rules on Riba in sales, variously defined by the
schools of Islamic Law: items sold by weight and by measure, foods, etc.

Al- Rahn means 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. The
institution of earnest money was not accepted in Islamic law and the
common Islamic doctrine recognized Rahn only as a security for the
payment of a debt.

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Salaf Means loan/debt .The word Salaf literally means a loan which draws forth
no profit for the creditor. In wider sense, it includes loans for specified
periods, i.e. short, intermediate and long-term loans. Salaf is another name
for Salam as well wherein the price of the commodity is paid in advance
while the commodity or the counter value is supplied in future; thus the
contract creates a liability for the seller. Amount given as Salaf cannot be
called back, unlike Qard, before it is due. (see Qard)

Al-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 Islamic law such an
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 sale of
monetary value for monetary value – currency exchange.

Shariah The term Shariah refers to divine guidance as given by the Holy Qur’an
and the Sunnah of the Prophet Muhammad and embodies all aspects of the
Islamic faith, including beliefs and practice.

Shirkah Means a contract between two or more persons who launch business or
financial enterprise to make profits. In the conventional books of Fiqh, the
partnership business is discussed under the option of Shirkah and that may
include both Musharakah and Mudarabah.

Sunnah Means custom, habit or way of life. Technically, it refers to the utterances
of the Prophet Muhammad other than the Holy Qur’an. These utterances
are known as Hadith, or his personal acts, or sayings of others, tacitly
approved by the Prophet.

Tabarru’ Means a donation/gift the purpose of which is not commercial but is done
to seek the pleasure of Allah. Any benefit that is given by a person to other
without getting anything in exchange is called Tabarru’ It is absolutely at
the lender’s own discretion and without any prior condition or inducement
for reward.

Tabzir Spending wastefully on objects which have been explicitly prohibited by

the Shariah irrespective of the quantum of expenditure. See also Israf.

Ujrah A contract of agency in which one person appoints someone else to

perform a certain task on his behalf, usually against a certain fee.