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REFERENCE: A Glossary Of Islamic Finance Terms

Chris Hamblin, Compliance Matters , Editor, 20 December 2013

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In this glossary is listed most of the terms used in Islamic finance to cover areas that wealth managers dealing with this area might find useful and informative.

Islamic finance is an area about which this news service writes given the importance and economic muscle of certain Muslim jurisdictions and the wealth of an affluent Muslim population around the world. For those who are unfamiliar with the topic, many of the terms used in the field need to be explained and spelled out. In the following item, here is a handy glossary that we hope readers find useful.

Bank Negara Malaysia (the Bank) is issuing a series of policy documents or "exposure drafts" on Shariah contracts to facilitate end-to-end compliance with Shariah law. In doing so, it has inadvertently given the Anglo-Saxon world a first-class glossary of Islamic banking terms as interpreted by a conventional banking regulator. Private banks and asset-management firms that deal with Islamic banks - whose due diligence tends to leave much to be desired - are likely to need such a glossary, the terms and definitions of which we list here. All items below are from the bank's recent exposure drafts, for which it has invited written comments from the regulated community. The deadline for replies is 10 January 2014. Whenever two definitions clash, we include both.

The terms:

Mudarabah      Profit-sharing contract. OR...

A contract between a capital provider (rabbul mal) and

an entrepreneur (mudarib) under which the rabbul mal provides capital to be managed by the mudarib and any profit generated from the capital is shared between the rabbul mal and mudarib according to mutually agreed profit-sharing ratio (PSR) whilst financial losses are borne by the rabbul mal provided that such losses are not due to the mudarib’s misconduct (ta`addi), negligence (taqsir) or breach of specified terms (mukhalafah al-shurut).

Mudarib                      The entrepreneur in a mudarabah venture.

Mukhalafah al-shurut  Breach of terms and conditions.

Mukhalafah al-quyud  Breach of restrictions

Muqassah        Offsetting.

Murabahah      Contract a sale and purchase of an asset where the acquisition cost and the mark-up are disclosed to the purchaser. OR... A sale and purchase of an asset where the acquisition cost and the mark-up are disclosed to the purchaser.

Musawamah    Sale contract without the disclosure of the asset cost price and profit margin to the buyer.

Musharakah     Profit-and-loss-sharing contract.

Musharakah Mutanaqisah       An arrangement entered into by two or more parties on a particular asset or venture which allows one of the partners to gradually acquire the shareholding of the other partner through an agreed redemption method during the tenure of the contract.

Mudi`              Safekeeping depositor.

Muqassah        Offsetting.

Mahal al-sharikah        Musharakah venture

Muwakkil                    Principal

Makful `anhu  The guaranteed party is a debtor or a party

guaranteed by the guarantor.

Makful lahu     The beneficiary is a creditor or a party who has the right to claim the liability (debt) from the guaranteed party (makful `anhu) or the guarantor (kafil).

Ma ya’ul ila luzum      A debt that will become legally binding in the future.

Qabd haqiqi    Taking physical possession. It refers to a state where a person has taken actual possession and the rights to control an asset.

Qabd hukmi    Taking constructive possession. It refers to a state where a person has not taken actual possession but has the legal right to control an asset.

Qard                A contract of lending a fungible asset to a party who will benefit from it and who will subsequently return an equivalent replacement. OR...loan contract.

Rahn                Pledge/Charge.

Riba                 Any excess compensation without any corresponding counter-value recognised by Shariah.

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