IBSL Diploma in Islamic Banking Exam key terms

Any guaranteed increase or advantage charged for the use of money or granted for delay in repayment, which Sharia prohibits. In banking it appears mainly as interest on loans and as penalties structured to resemble interest.

Excessive uncertainty or ambiguity in the essential terms of a contract, such as the price, the object sold, the timing or the delivery. Minor uncertainty is tolerated, but material ambiguity that could cause dispute invalidates the deal.

Gambling: seeking gain through chance rather than through productive effort or a genuine exchange of values. It is prohibited because one party's gain depends on another's loss without any real underlying activity.

The rules derived from the Quran and the Sunnah, expanded by scholarly consensus and reasoning, that guide a Muslim's conduct including financial dealings. It is the source of legitimacy for every Islamic banking structure.

The agreement of qualified Muslim scholars of a particular era on a Sharia ruling. It ranks as a secondary source in Sunni jurisprudence and gives stability where the primary texts are silent or open to more than one reading.

Analogical reasoning that carries a ruling from an established case to a new case sharing the same effective cause. Sharia boards use it to assess products and practices that did not exist when the classical texts were written.

Independent scholarly effort to reach a Sharia ruling on a new matter by interpreting the sources. It supports product innovation, but the reasoning must stay within the limits of the legal school the institution follows.

A ruling on a specific question of Sharia issued by a qualified scholar or body. In Islamic finance fatwas set the permitted structure and conditions for a product and are recorded in the institution's Sharia decisions register.

A sale where the bank discloses the cost of the asset it acquired and adds an agreed profit margin, then sells it to the customer for deferred payment. The bank must genuinely own and bear risk in the asset first.

Buying a commodity on deferred payment and then selling it to a third party for immediate cash, so the customer receives liquidity. Sharia boards require each step to be real, with genuine ownership, possession and no pre-agreed repurchase.

A profit-sharing partnership between a capital owner and a manager who contributes effort. Profit is divided on a pre-agreed ratio of the actual profit; monetary loss falls on the capital owner unless the manager was negligent or breached the mandate.

A partnership where two or more parties contribute capital and share profit as agreed and loss in proportion to their capital contributions. Partners normally have joint rights to manage the venture and share its assets.

A joint ownership arrangement where the bank and customer hold units in an asset; the customer gradually buys the bank's units and pays rent for the share the bank still owns, ending as sole owner.

A lease of an asset's usufruct for a stated period against a rental. The bank as owner carries ownership obligations such as major maintenance and insurance, while the customer uses the asset and pays rent.

A lease ending in transfer of the asset to the lessee, usually through a separate sale at the end of the term or through a documented promise. Rent must remain genuine for the lease period.

A forward sale where the buyer pays the full price at once for a precisely described fungible commodity to be delivered at a later date. Its use is mainly agricultural and trade financing; specifications must remove ambiguity.

A contract to make or build a described asset for an agreed price, with delivery and payment terms set by the parties. Banks use it for project, manufacturing and infrastructure finance, paying construction in stages.

An agency contract where one party acts on another's behalf, for a fee or without charge. Banks use it for services, for managing investment pools and for deposit products that pay a discretionary incentive.

A third-party guarantee that a debtor's obligation will be met. Islamic banks issue guarantees, such as bid bonds and performance guarantees, and charge a fee for the service rather than for the money itself.

A benevolent loan repaid in the same amount with nothing added. Islamic banks treat current account balances as such loans to the bank and may use the structure for charitable or welfare financing.

A deposit where the bank has discretion to pool and invest the funds in its asset book and shares profit on an agreed ratio. Holders bear investment losses unless the bank breached its fiduciary duties.

Cooperative protection in which participants contribute to a shared fund that pays claims, based on mutual help rather than a commercial transfer of risk. An operator manages the fund and the underwriting for a fee.

A donation, including the contribution a takaful participant makes to the risk pool. Because it is framed as a gift for mutual protection, the strict rules against uncertainty and exchange in the contribution are avoided.

Protection bought by a takaful operator from another operator to spread large or catastrophic risks. It follows the same cooperative, donation-based principles so that the arrangement stays free of prohibited uncertainty and interest.

Certificates giving holders an undivided beneficial interest in tangible assets, usufruct or a project, so returns come from the underlying rather than from a debt. Each issue is built on a specific Sharia contract.

Sukuk backed by leased assets: investors hold the assets, lease them and receive rentals as periodic return, while the issuer undertakes to buy the assets back at maturity from the proceeds.

The process of testing a business or security against prohibited activities and financial ratios, such as interest income or leverage limits, before an Islamic fund may hold it. Screens are set by the fund's board.

The regulatory test for directors, Sharia board members and senior managers, covering honesty, competence, financial soundness and, for Islamic banks, adequate knowledge of Sharia principles and their application to finance.

A reserve built by setting aside part of gross income before profit is shared with investment account holders, used to smooth returns between good and bad periods. It is reported within the equity of investment account holders.

An amount set aside from the investment account holders' share of profit, after allocation, to absorb future losses that would otherwise fall on them. It belongs to the account holders, not to shareholders.

The agreed proportion in which profit from mudarabah or musharakah activity is split between the parties. It must be stated as a share of actual profit, never as a fixed amount or a percentage of capital.

The Accounting and Auditing Organisation for Islamic Financial Institutions, a standard-setter issuing financial accounting standards, Sharia standards, and auditing, ethics and governance standards that many regulators adopt or use as guidance.

The risk of financial loss, income being reclassified as impermissible, or reputational damage when a product, contract or process departs from Sharia rules or the Sharia board's rulings. It is managed through review, audit and clear product approval procedures.

The risk that movements in market rates leave the bank unable to offer investment account holders competitive returns while assets are locked into fixed pricing, causing withdrawal or margin pressure.

The Islamic Financial Services Board, an international body setting prudential and supervisory standards on capital adequacy, risk management, governance and transparency for institutions offering Islamic financial services. Supervisors in several jurisdictions base their rules on these standards.

An independent panel of qualified scholars appointed by the institution to approve product structures, issue rulings, supervise compliance and report to shareholders. Its decisions bind the bank's operations and are disclosed publicly.

An independent review of transactions, contracts, policies and systems against Sharia rules and the board's rulings, reporting exceptions and required corrections to management, the Sharia board and where required the regulator.

The obligatory annual charge on qualifying Muslim wealth held for a lunar year above a minimum threshold, distributed to specified categories of recipients. Banks may calculate and pay it on behalf of shareholders and depositors.

A permanent endowment of property or funds dedicated to charitable or public purposes, where the principal is preserved and only the benefits are used. Increasingly used to fund microfinance, education and social projects.

Small-scale Sharia-compliant finance, savings and support services for low-income clients, delivered through structures such as murabaha, salam, qard hasan or group-based schemes, often combined with training. Providers aim at both social impact and financial sustainability.