IBSL Diploma in Islamic Banking Exam flashcards

32 cards. Read the term and the definition here. The deck at the top of this page is optional.

Riba al-fadl

An excess received when two identical ribawi commodities are exchanged in unequal quantities, such as 100 grams of gold for 90 grams. It is prohibited even when settlement is immediate; equality and hand-to-hand delivery are required.

AAOIFI

The Accounting and Auditing Organization for Islamic Financial Institutions, established in 1991 and based in Bahrain, issues Sharia, accounting, auditing and governance standards that many regulators adopt or reference.

Maqasid al-Sharia

The higher objectives of Islamic law: protecting religion, life, intellect, offspring and wealth. Islamic financial rulings are interpreted to serve these objectives and broader public benefit, known as maslaha.

Gharar

Excessive uncertainty in a contract's essential terms, such as the subject matter or price being unknown or undeliverable. Minor uncertainty is tolerated, but excessive gharar makes a sale void.

Qiyas

A secondary source of Sharia meaning analogy: a new case receives the ruling of an existing case because both share the same effective cause, termed the 'illah.

Al-ghunm bil ghurm

A Sharia maxim meaning that entitlement to profit comes with liability for loss, so a financier may earn a return only by owning the asset or bearing genuine commercial risk.

Murabaha

A cost-plus sale in which the bank buys an asset, owns and bears risk on it, then sells it to the customer for cost plus a disclosed profit, usually payable in instalments.

Ijara muntahia bittamleek

A lease ending in ownership: the bank buys the asset, leases it to the customer for rentals, and transfers title at maturity through a separate sale, gift or binding promise.

Musharaka mutanaqisa

Diminishing partnership: the bank and customer jointly own an asset, and the customer progressively buys out the bank's share from instalments, with profit shared in agreed proportions.

Salam

A forward sale where the buyer pays the full price at the contract date for a precisely specified fungible commodity delivered later; the goods must be available in the market at delivery.

Tabarru'

A voluntary donation contributed by takaful participants into a shared fund used to indemnify any participant who suffers a defined loss; it creates mutual protection rather than an insurance exchange.

Wakala takaful model

A takaful operating model in which the participants' fund appoints the operator as agent, or wakil, for a disclosed fee, and any underwriting surplus is distributed to participants rather than shareholders.

Ijara sukuk

Certificates representing ownership of a tangible leased asset, often held through a special purpose vehicle that leases it to the originator; rentals fund periodic distributions and the certificates are tradable.

Asset-based sukuk

Sukuk where investors hold a beneficial interest in underlying assets but have no direct recourse to them if the originator defaults; returns depend mainly on the originator's creditworthiness.

Sharia screening

Filtering of investment universes for Sharia compliance: excluding prohibited sectors such as conventional finance, alcohol and gambling, then applying financial ratio limits on interest income and leverage.

Purification (tazkiyah)

Cleaning non-compliant income from a portfolio by donating the proportion of dividend or gain attributable to impermissible sources to charity, so that the remaining return is acceptable.

Investment account holders

Depositors whose funds the bank invests on a mudaraba basis. They receive a share of profit per an agreed ratio and bear investment losses absent misconduct, but typically hold no voting rights.

Unrestricted PSIA

Profit-sharing investment accounts where the bank pools funds without restricting the investment mandate, offers no return guarantee, and invests in a pool managed for both account holders and shareholders.

Profit equalisation reserve

A reserve built by deducting part of gross profit before allocating to investment account holders and shareholders, used to smooth distributions across periods; it requires Sharia approval and disclosure.

Weighted average daily balance

The sum of each day's balance multiplied by the number of days it is held, divided by the days in the period, used to allocate investment pool profit to each account holder.

Mudaraba profit-sharing ratio

The pre-agreed percentage split of realised profit between the capital provider, or rabb al-mal, and the manager, or mudarib. It applies to profit only, never to a loss borne by capital alone.

Displaced commercial risk

The risk that an Islamic bank gives up part or all of its own profit share to investment account holders, to pay returns competitive with market rates and prevent withdrawal of funds.

Hamish jiddiyyah

A security deposit taken from a customer before the bank purchases an asset for a murabaha or ijara, covering the bank's loss if the customer later refuses to buy.

Rate of return risk

The risk that returns paid to investment account holders do not track market rates, causing them to withdraw funds; it affects the pool's asset and liability matching.

IFSB capital adequacy formula

Under IFSB standards, eligible capital is divided by credit, market and operational risk-weighted assets plus the alpha share of risk arising from assets funded by unrestricted profit-sharing accounts.

Dual regulatory supervision

Islamic banks are overseen by a financial regulator for prudential matters and by a Sharia governance structure, either an institutional or a central Sharia board, for religious compliance.

Sharia Supervisory Board

An independent body of Sharia scholars appointed by the bank that issues binding fatwas on products, contracts and practices, and reports annually to shareholders on compliance.

Sharia non-compliance risk

The risk arising from failure to comply with Sharia rules, evidenced by products, documents or income sources that breach a fatwa or standard, exposing the bank to loss and reputational harm.

Internal Sharia review

An independent in-house function that examines transactions, contracts and product documentation against Sharia rulings after the fact, reporting to the Sharia board and senior management.

Cash waqf

A charitable endowment made in money rather than property, whose principal is preserved and invested so that the returns fund charitable purposes; it is used for social financing and microfinance.

Qard hasan

A benevolent interest-free loan repayable in the same amount, given for welfare or liquidity relief; the lender recovers principal only and must not gain any benefit from it.

Islamic microfinance

Provision of small-scale Sharia-compliant finance, through murabaha, salam, qard hasan or group kafala, to poor and low-income entrepreneurs, aiming at inclusion without interest.