AAOIFI CPSS key terms

Any guaranteed increase or advantage stipulated in a loan or exchange of money, or an unjustified excess in a sale, which Shari'ah prohibits. It covers both interest on debt and unequal exchange of like commodities.

Excessive uncertainty or ambiguity in the essential elements of a contract, such as price, subject matter, or delivery, that makes the outcome unknown to the parties and renders the contract impermissible.

Gambling or speculation in which a party gains only at another's loss, with the outcome depending purely on chance. Shari'ah forbids it as a basis for earning or transferring wealth.

A sale in which the seller discloses the cost of the asset and adds a stated profit margin, with payment usually deferred. The bank must own the asset before selling it to the customer.

A murabaha arrangement where the customer first promises to buy the asset once the institution acquires it. The promise is binding on the customer but the institution bears ownership risk before resale.

A partnership in which two or more parties contribute capital to a venture and share profits according to an agreed ratio and losses in proportion to their capital contributions.

A partnership in which one party gradually buys out the other's share, so ownership transfers over time. Commonly used for home and asset financing with rental payments on the outstanding share.

A profit-sharing contract where one party supplies capital and the other supplies expertise and management. Profits are split by an agreed ratio, while monetary losses fall on the capital provider.

The capital provider in a mudarabah contract who entrusts funds to a manager. The provider bears financial loss absent misconduct and shares profits per the agreed ratio.

The managing partner in a mudarabah who invests the capital provided and shares in profits per the agreed ratio. The manager loses only effort if the venture fails without negligence.

A lease contract transferring the usufruct of an asset to a lessee for a stated rent over a period. The lessor retains ownership and bears major ownership obligations and risks.

A lease that ends with transfer of ownership of the leased asset to the lessee, either by gift, sale, or gradual purchase. The transfer must be documented separately from the lease itself.

A forward sale in which the buyer pays the full price in advance for a defined quantity of a fungible commodity to be delivered at a future date. The subject matter must be precisely specified.

A manufacturing or construction contract for a specifically described item to be produced or built. Payment may be made in stages, and the price can be tied to agreed milestones.

Investment certificates representing undivided ownership in tangible assets, usufruct, or a defined project or activity. Holders earn returns from the underlying assets rather than interest on debt.

A cooperative insurance arrangement in which participants contribute to a pooled fund used to cover defined losses, with surplus and risk shared according to Shari'ah-compliant principles.

A voluntary donation or contribution made by a participant in a takaful arrangement to a pooled fund, intended to help cover losses of other participants rather than to purchase coverage.

A unilateral promise by one party to do something in the future, such as purchase an asset. It is morally binding and may be made legally enforceable by the institution under stated conditions.

A promise that the promisor is legally obligated to fulfil, enforceable by the beneficiary. Used in murabaha and similar structures to ensure the customer completes the purchase.

An obligatory annual levy on qualifying wealth held by a Muslim above a minimum threshold, payable to specified categories of recipients. Institutions calculate it on zakatable assets.

The minimum threshold of wealth that makes a Muslim liable to pay zakat. Wealth below the threshold is exempt, and the threshold is measured in gold or silver equivalents.

An independent body of Shari'ah scholars that reviews an institution's products and operations and issues rulings on compliance with Shari'ah. Its opinions govern the institution's conduct.

A ruling or opinion issued by qualified Shari'ah scholars on a specific question. In an institution, fatwas from its supervisory board shape product approvals and compliance decisions.

The state of an institution's activities conforming to Shari'ah rules as interpreted by its supervisory board. Compliance covers contracts, investments, and operational practices.

An independent examination of an institution's operations and transactions to assess whether they conform to Shari'ah rules and the supervisory board's fatwas, with findings reported to governance bodies.

A function within the institution that performs ongoing checks of business units and transactions against Shari'ah requirements, reporting to the Shari'ah supervisory board and senior management.

The risk of loss or reputational harm arising from non-compliance with Shari'ah rules, including flawed contracts or prohibited income. It is managed through review and remediation processes.

The process of separating and disposing of income deemed impermissible, such as incidental interest, by giving it away to charity rather than recognising it as profit.

A financial statement reporting an entity's assets, liabilities, and equity at a point in time. Islamic institutions present it with Shari'ah-relevant classifications and disclosures.

A financial statement showing revenues, expenses, and other comprehensive results for a period. It distinguishes income from the institution's own funds and from restricted investment accounts.

A financial statement reconciling opening and closing equity by showing contributions, withdrawals, profits, and reserves. It helps users trace movements in owners' and restricted funds.

A financial statement reporting cash generated and used across operating, investing, and financing activities during a period, helping users assess liquidity and solvency.

A reserve built from profits to smooth the returns paid to investment account holders across periods. It is disclosed separately and managed within Shari'ah constraints.

An amount set aside from the profits of investment account holders to cushion future losses. It belongs to those account holders and is presented separately from owners' equity.

Customers whose funds are invested by the institution on a profit-sharing basis, often under mudarabah. They bear investment risk and receive returns per the agreed ratio.

An account where holders authorise the institution to invest their funds without imposing specific restrictions on where or how the money is placed, sharing resulting profits.

An account where holders direct the institution to invest funds in specified assets or purposes. Returns and risks relate to those restricted investments.

Sukuk whose returns derive from ownership of tangible assets or their usufruct, giving holders a proportionate interest. This differs from asset-based structures that rely on debt obligations.

The system of rules, practices, and processes by which an institution is directed and controlled, covering board responsibilities, accountability, and protection of stakeholders' interests.

A committee of the board responsible for overseeing financial reporting, internal controls, and internal and external audit. It also reviews Shari'ah review findings and compliance reports.

A set of principles and rules governing the conduct of directors, officers, and employees, covering honesty, integrity, confidentiality, and avoidance of conflicts of interest.

A situation where a person's personal interests or relationships could improperly influence their professional decisions. Such situations must be disclosed and managed or avoided.

The ability to make objective judgements free from influences that could compromise them. It applies to directors, auditors, and Shari'ah board members, requiring disclosure of relationships.

The duty to protect information obtained in a professional capacity and not disclose it without authority, except where law or regulation requires disclosure.