ISLAMIC BANKING TERMINOLOGY
ISLAMIC BANKING MODES & TERMINOLOGY
Al-wadeah
: Al-wadeah Current Account on the
principles of Al-wadeah. The Bank commits to refund money deposited in these
Accounts on the demand of customers. On the other hand the Bank takes
permission from customers that the Bank may utilize their money. Customers may
operate these Accounts as their desires. No profit is disbursed in these
Accounts and depositors do not bear any loss.
Al-Wadeeah
(BB) :
Fund which is deposited with Banks by the depositors with clear permission
to utilize /invest the same is called Al-Wadeeah. Islamic banks receive
deposits in Current Accounts on the basis of this Al-Wadeeah Principle. Islamic
banks obtain permission from the Al-Wadeeah depositors to utilise the Funds at
its own responsibility and the depositors would not share any profit or loss
earned/incurred out of using of this funds by the bank. The banks have to pay
back the deposits received on the principle of Al-Wadeeah on demand of the
holders. The depositors have to pay government
taxes and other charges, if any.
Bai‘
Muajjal : Literally it means a credit sale.
Technically, 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. He has to expressly mention
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.
Bai-Istijrar: The term "Bai-Istijrar" has been derived from
Arabic words بيع and جر (Bai and Zarra). The word بيع means to purchase and to
sell and the word جر means to hoist, to lift up, pick up, bring up.
"Istijrar" (استجرار ) means to purchase goods from time to time in
different quantities. In Islamic jurisprudence ‘Istijrar’ is an agreement where
a buyer purchases something under a single agreement in different instalments.
However, no offer and acceptance or bargain is required each time. The deal
will be considered as a single agreement where all terms and conditions are
finalized.
"Bai-Istijrar" is called
such a buying and selling where a person keeps
on taking delivery of required commodities part by part from time to
time from a supplier and no offer(Ijaab) & acceptance (Qobul) and
bargaining between them is taken place
each time of making and taking delivery.
Bai-as-Sarf: Bai-
as-Sarf is a contract of exchange of money for money. This contract is tightly
regulated under Shari`ah because it can be easily manipulated for the purpose
of producing an interest-bearing loan, which is prohibited in Islam.
In pre-Islamic times gold was
exchanged for gold, silver for silver and gold for silver or vice versa. In
Islamic law such exchange is regarded as sale of price for price and each price
is consideration of the other. It also means sale of monetary value for
monetary value i.e. currency exchange.
Ibn Rushd examines the three forms
of sale that can arise in a market where goods and money are in existence:
"When two commodities are
exchanged, one may serve as a currency and the other as a priced commodity, or
both may be currencies. When a currency is exchanged for a currency the sale is
called 'sarf', and when a currency is exchanged for a priced commodity, the
transaction is sale property ('bay'). Similar is the sale of a priced commodity
for another priced commodity (barter)"
In respect of Bank, Bai-as-Sarf is a
contract/agreement between the Bank and the Client under which the Bank
purchase the foreign currency against the Foreign documentary bill in advance
from the Client at specified/agreed exchange rate.
“Bai-as-Sarf (FDB) ” is practiced
for providing post shipment finance facility against Foreign Currency export
Bills and “Bai-as-Sarf (FCD) ” is done for providing advance finance facility
against Foreign Currency Cheque /Draft.
Hire
Purchase under Shirkatul Meelk :Under
this mode Bank may supply implements/ equipment/goods on rental basis. The
ownership of the implements/equipment/goods will be with the Bank and the
client jointly and the portion of the client will remain to the Bank as
mortgage until the closure of the investment account, but the client will be
authorized to possess the equipment for certain period. The client, after
completion of the installments, will be the owner of the implements/
equipment/goods.
Hire Purchase under Shirkatul Melk
is a Special type of contract which has been developed through practice.
Actually, it is a synthesis of three contracts:
Shirkat
Ijarah
Sale
These
may be defined as follows:
Shirkatul
Melk
Shirkat means partnership. Shirkatul
Melk means share in ownership. When two or more persons supply equity, purchase
an asset, own the same jointly, and share the benefit as per agreement and bear
the loss in proportion to their respective equity, the contract is called
Shirkatul Melk contract.
Ijarh
The term Ijarah has been derived
from the Arabic works (Air) and (Ujrat) which means consideration, return,
wages or rent. This is really the exchange value or consideration, return, wages, rent of service
of an asset. Ijarah has been defined as
a contract between two parties, the Hire and Hirer where the Hirer enjoys or
reaps a specific service or benefit against a specified consideration or rent
from the asset owned by the Hire. It is a hire agreement under which a certain
asset is hired out by the Hire to a Hirer against fixed rent or rentals for a
specified period.
Related
Terminologies or Elements of Ijara
According to the majority of Fuqaha,
there are three general and six detailed elements of Ijarah.
The wording : This includes offer and acceptance.
Contracting parties : This includes
a Hire, the owner of the property, and a Hirer, the party that benefits from
the use of the property.
Subject matter of the contract :
This includes the rent and the benefit.
The
Hire (Muajjir)-
The individual or organization hires/rents out the property of service
is called the Hire (muajjir).
The
Hirer (Mustajir)- The individual or organization hires/takes the hire of
the property or service against the consideration rent / wages / remuneration
is called the Hirer (mustajir).
The
benefit / asset (Maajur) - The benefit which is hired / rented out is
called the benefit (maajur).
The
Rent (Aj’r or Ujrat) -
The consideration either in monetary terms or in kinds fixing quantity
of goods / money to be paid against the
benefit of the asset or service of the asset is called the rent or ujrat or
aj’r.
Sale
This is a sale contract between a
buyer and a seller under which the ownership of certain goods or asset is
transferred by seller to the buyer against agreed upon price paid / to be paid
by the buyer.
Thus, in Hire Purchase under
Shirkatul Melk mode both the Bank and the Client supply equity in equal or
unequal proportion for purchase of an asset like land, building, machinery,
transports etc. Purchase the asset with that equity money, own the same
jointly, share the benefit as per agreement and bear the loss in proportion to
their respective equity. The share, part or portion of the asset owned by the
Bank is hired out to the Client partner for a fixed rent per unit of time for a
fixed period. Lastly the Bank sells and transfers the ownership of it’s share /
part / portion to the Client against payment of price fixed for that part
either gradually part by part or in lump sum within the hire period or after
the expiry of the hire agreement.
Bai
Murabaha: The term ‘Bai-Murabaha’ has been
derived from Arabic words ﻊﻴﺒ and ﺢﺑﺭ (Bai’un and Ribhun). The word ﻊﻴﺒ means
purchase and sale and the word ﺢﺑﺭ means an agreed upon profit. ﺍﻠﻤﺮﺍﺒﺢ ﻊﻴﺒ
‘Bai-Murabaha’ means sale on agreed upon profit.
Bai-Murabaha may be defined as a
contract between a buyer and a seller under which the seller sells certain
specific goods (permissible under Islamic Shariah and the Law of the land), to
the buyer at a cost plus agreed profit payable in cash or on any fixed future
date in lump-sum or by installments. The profit marked-up may be fixed in
lump-sum or in percentage of the cost price of the goods.
Bai-Salam
: Bai-Salam means a contract in which
advance payment is made for goods to be delivered later on. The seller
undertakes to supply some specific goods to the buyer at a future date in
exchange of an
advance price fully paid at the time
of contract. According to normal rules of the Shariah , no sale can be effected unless
the goods are in existence at the time of the bargain, but Salam sale forms an exception given by the
Holy
Prophet (SAW) 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 dispute. 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 is 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.
Compensation: "Compensation" means such financial penalty as is
imposed by a Islamic Banking Company over and above the amount of installment
when a client fails to repay Bank's investment on due dates as per the
agreement executed by him.
jarah : Letting on lease.Sale of a definite
usufruct of any asset in exchange of
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 equipments, buildings or other facilities to
a client, against an agreed rental.
Investment : “Investment" means any such
modes of financing which Islamic Bank Company does in accordance with
principles of Shariah or as per the Shariah approved modes like Mudaraba,
Musharaka, Bai-Murabaha, Bai-Muajjal, Istisna, Lease, Hire-purchase under Shirkatul
Melk, etc.
Istisna’a : It 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
providing the facility of financing the manufacture or construction of houses,
plants, projects, and building of bridges, roads and highways.
Gharar : It 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 leads
to undue loss
to a party
and unjustified enrichment of other, which is prohibited.
Heba : Heba is a term
defined in the Shariah law or Islamic law which means gift. Heba is affected
through a deed which needs to be registered with the proper authorities to
ensure it's effectiveness. Heba is usually done when one wants to gift their
property to someone else.
Ijab : Offer, in a
contract.
Kobul: Kobul means the
acceptance of offer. Kobul is acceptance of offer or to agree with offer or to attract
anything.
Kafalah
(Suretyship) : Literally,
Kafalah means responsibility,
amenability or suretyship, Legally
in Kafalah a
third party become surety for the payment of 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 the assumption only of a
liability and not of the debt.
Kafalah:
A
contract of guarantee or surety that provides assurance in terms of performance
and value when the object of the transaction is exposed to adverse change due
to varying outcomes.
Kafalah is the
guarantee for a loan and all loans must be repaid in due course according to
Islamic law. The law allows the lenders to demand some sort of security for the
loan in the cases where the borrower fail to repay the loan.
Kafil: Al-kafil is the
one who joins his liability to that of the principal (al-makful or al-makful
anhu) in claims regarding debts, personal injury or material assets.
Al-kafil
is also spelled "al-kafeel".
Al-Kafil
is an Arabic word for guarantor.
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.
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.
Mudaraba
(BB):
Mudaraba is a partnership of labour
and capital, where one partner provides full capital and the other one manages
the business. The capital provider is called Sahib-Al-Maal and the user of the
capital is called Mudarib. As per Shariah principles, the Mudarib will conduct
the business independently following Shariah principles. The Sahib-Al-Maal may
provide advices, if he deems fit but he can not impose any decision over the
Mudarib. Profit, if any, is divisible between the Sahib-Al-Maal and the Mudarib
at a predetermined ratio, while loss, if
any, is borne by the Sahib-Al-Maal.
Mudarib can not avail of any salary or remuneration against his labour as a
manager or conductor of the enterprise/business. The deposits, received by
Islamic banks under this principle are called Mudaraba Deposits. Here, the depositors
are called Sahib-Al-Maal and the bank is called Mudarib. The Mudaraba deposits include:
i) Mudaraba Savings Deposits (MSD)
ii) Mudaraba Short Notice Deposits
(MSND)
iii) Mudaraba Term Deposits (MTD).
Different Islamic banks have
developed various deposit schemes on the basis of this Mudaraba principle such
as monthly deposit-based Hajj Scheme, Monthly/One time depositbased Term
Deposit Scheme, Monthly Mudaraba Profit Deposit Scheme, Monthly Mudaraba Marriage
Savings Scheme, Mudaraba Savings Bond etc.
Murabaha : Literally it
means a sale on mutually agreed profit. Technically, it
is a contract
of sale in
which the seller
declares his cost
and the profit.
This 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.
Musharakah: Musharakah means
a relationship established under a
contract by the
mutual consent of
the parties for
sharing of profits
and losses in the 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.
Qabul: Acceptance, in
a contract; see also Ijab.
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 that loan which
a person gives to
another as a
help, charity or
advance for a
certain time. The
repayment of 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/Investments under Islamic law can be
classified into Salaf and Qard, the former
being loan for
fixed time and
the latter payable
on demand.
Quard Hassan:
This
is a benevolent loan/Investment that
obliges a borrower to repay the lender the principal amount borrowed on
maturity. The borrower, however, has the discretion to reward the lender for
his loan by paying any amount over and above the amount of the principal
provided there will be no reference (explicit or implicit) in this regard. If a
bank provides its client any loan, it can receive actual expenditure relating
to the loan as service charge only once. It can not charge annually at a
percentage rate.If a loan is provided against the money deposited by a client
in the bank, it has the right not to pay any profit against the amount of money
given as loan. But profit should be paid on the rest of the amount deposited as
per previous agreement.
Riba : An excess or
increase. Technically, it means an
increase over 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 exchange of
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.
Riba Al-Nasiah: Riba Al-Nasiah
or riba of delay is due to exchange not
being 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
purview of Riba Al-Nasiah.
As money in
present banking system
is exchanged for
money with excess
and delay, it falls, under the
definition of riba. A general accord
reached among scholar about its prohibition.
Salaf or 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 of
Salam as well
wherein 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)
Shariah : The term
Shariah refers to
divine guidance as
given by the Holy Qur’an and the Sunnah of the Prophet Muhammad (PBUH)
and embodies all aspects of the Islamic faith, including beliefs and practice.
Shirkah : A contract
between two or more persons who launch a business or financial enterprise to
make profits. In the conventional books
of Fiqh,
the partnership business
has been discussed
under the option
of Shirkah that, broadly, may
include both Musharakah and Mudarabah.
Sunnah : Custom, habit
or way of life. Technically, it refers
to the utterances of the Prophet Muhammad (PBUH) other than the Holy Quran
known as Hadith, or his personal acts, or sayings of others, tacitly approved
by the Prophet.
Salam and
Parallel Salam:
Salam means advance purchase. It is a mode of business under which the buyer
pays the price of the goods in advance on the condition that the goods would be
supplied / delivered at a particular future time. The seller supplies the goods
within the fixed time.
Parallel Salam:
Parallel
Salam is a Salam contract whereby the seller depends, for executing his
obligation, on receiving what is due to him - in his capacity as purchaser from
a sale in a previous Salam contract, without making the execution of the second
Salam contract dependent on the execution of the first one.
The
following conditions are essential in the contracts of Murabaha, Bai-Muajjal
and Salam. The respective contracts must include the following aspects
regarding the goods:
*
Number/Quantity
*
Quality
*
Sample
*
Price and amount of profit
*
Date of supply/time limit
*
Place of supply
*
Who will bear the cost of supply?
*
Timeframe for payment in case of Bai-Murabaha and Bai-Muajjal.
Istisna and
parallel Istisna:
A contract executed between a buyer and a seller under which the seller pledges
to manufacture and supply certain goods according to specification of the buyer
is called Istisna. An Istisna agreement is executed when a manufacturer or a
factory owner accepts a proposal placed to him by a person or an Institution to
produce/manufacture certain goods for the latter at a certain negotiated price.
Here, the person giving the order is called
Mustasni, the receiver of the order is called Sani and the goods manufactured
as per order is called Masnu. An order placed for manufacturing or producing
those goods which under prevailing customs and practice are produced or
manufactured will be treated as Istisna contract.
Parallel
Istisna:
If it is not stipulated in the contract that
the seller himself would produce/provide the goods or services, then the seller
can enter into another contract with third party for getting the goods or
services produced/ provided by the third party. Such a contract is called
Parallel Istisna.
This
may be treated as a sub-contract. The main features of this contract are:
i) The original Istisna contract remains valid
even if the Parallel Istisna contract fails and the seller will be legally
liable to produce/ provide the goods or services mentioned in the Istisna
contract.
ii) Istisna and Parallel Istisna contracts are
treated as two separate contracts.
iii) The seller under the Istisna contract
will remain liable for failure of the sub-contract.
Waqf: Awqaf (also
spelled awkaf, singular waqf/wakf) is an Arabic word meaning assets that are
donated, bequeathed, or purchased for being held in perpetual trust for general
or specific charitable causes that are socially beneficial. In many ways, the
concept of waqf is similar to the Western concept of endowment.
Wakala: Wakalah refers
to a contract where a party, as principal (muwakkil) authorizes another party
as his agent (wakil) to perform a particular task on matters that may be
delegated, with or without imposition of a fee.
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