Glossary

Gharar

Uncertainty. One of three fundamental prohibitions in Islamic prohibitions in Islamic finance (the other two being riba and maysir). Gharar is a sophisticated concept that covers certain types of uncertainty or contingency in a contract. The prohibition on gharar is often used as the grounds for criticism of conventional financial practices such as short selling, speculation and derivatives.

Ijarah

Islamic leasing. Unlike capital itself, fixed payments can be determined for assets or rentals. Ijarah wa iqtinah extends the concept of Ijarah to a hire and purchase agreement.

Maysir

Gambling. One of the three fundamental prohibitions in Islamic finance (the other two being riba and gharar). The prohibition on maysir is often used as the grounds for criticism of conventional financial practices such as speculation, conventional insurance and derivatives.

Mudarabah

Investment partnership. The contract is between a financier and an entrepreneur or investment manager. Risks and rewards are shared. Both get their agreed share in the case of profits. Conversely, the financier bears any loss of capital, while the entrepreneur/manager loses his time and effort. In contemporary application, the bank can be the financier (as in venture capital) or the manager (as in investment accounts). See also mudarib.

Mudarib

The entrepreneur or investment manager in a Mudarabah. The mudarib invests the financier's funds in a project or portfolio in exchange for a share of the profits. See also Mudarabah.

Murabahah

Resale at a stated profit. As used in personal financing, the bank purchases something from a third party and resells it to the customer at a stated profit and on a deferred payment basis. In this way, the customer can buy consumer goods without taking an interest-based loan.

Musharakah

Profit and loss sharing. An equity financing arrangement widely regarded as the purest form of Islamic financing: partners contribute capital to a project and share its risks and rewards. Profits can be divided up in any agreed ratio. Losses must always be borne in proportion to the capital of each partner. As in the Mudarabah, the bank can use this tool for deposit taking or equity financing (as in joint venture).

Riba

Interest. The legal notion extends beyond just interest, but in simple terms riba covers any return of money on money -whether the interest is fixed or floating, simple or compounded, and at whatever the rate. Riba is strictly prohibited in the Islamic tradition.

Shariah

Islamic law as revealed in the Quran and through the example of Prophet Muhammad. A Shariah compliant product meets the requirements of Islamic law. A Shariah committee consists of Islamic scholars are appointed to supervise and guide Islamic financial institution in the development of Shariah compliant products.

Tawarruq

Reverse Murabahah. As used in personal financing, a customer with a genuine need buys something on credit from the bank on a deferred payment basis and then immediately resells it for cash to a third party. In this way, the customer can obtain cash without taking an interest-based loan.

Wadiah

Al-Wadiah is an Arabic term, which literally means safe custody. In an Al-Wadiah banking arrangement, customer deposits the money to the Bank on safe custody (Wadiah) basis.


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