IQIF cheat sheet

Riba (interest/usury) is prohibited in both its pre-agreed excess (riba al-fadl) and deferred-exchange (riba al-nasi'ah) forms; returns must attach to ownership, effort, or risk.

Gharar (excessive uncertainty) voids a contract when it affects price, object, or delivery; minor incidental gharar is tolerated in practice.

Maysir (gambling) and qimar are prohibited; returns contingent purely on chance are impermissible.

Prohibited (haram) subject matter voids the transaction: alcohol, pork, conventional insurance, pornography, and interest-based finance are standard exclusions.

Core profit-sharing modes: musharakah (joint partnership) and mudarabah (capital provider plus entrepreneur, where the entrepreneur supplies effort).

Core exchange modes: murabahah (cost-plus sale), salam (prepaid forward), istisna (manufacturing contract), and ijarah (lease).

Money is treated as a medium of exchange, not a commodity; a sale of money for money with excess is riba.

Risk sharing (al-ghunm bil-ghurm) links entitlement to profit with liability for loss; a guaranteed return with no loss exposure is invalid.

Maqasid al-Shariah (preservation of religion, life, intellect, lineage, wealth) frames the permissibility test for new products.

Murabahah is a sale, not a loan: the bank must own the asset before selling it, and the profit is a sale markup (often disclosed as a rate for reference only).

Ijarah transfers usufruct, not ownership; the lessor bears major maintenance and ownership risk, and the lease must be for a defined period and rent.

Mudarabah deposits are typically structured as unrestricted investment accounts, where the bank acts as mudarib and shares profit per an agreed ratio.

Profit distribution on investment accounts follows a profit-sharing ratio (e.g., 60:40) applied to realized profit, not to a pre-fixed percentage of capital.

Loss in a mudarabah is borne by the capital provider unless the mudarib breached fiduciary duty or was negligent.

Salam and istisna are used for agricultural and manufacturing financing; salam requires full prepayment and a specified quantity, quality, and delivery date.

Tawarruq (commodity murabahah) is used for liquidity and personal financing; Shariah boards vary on its permissibility and often require strict controls.

Late payment charges are usually donated to charity rather than recognized as bank income.

The Islamic interbank market uses commodity murabahah or similar structures because interest-bearing deposits are impermissible.

Sukuk are certificates representing ownership in an underlying asset, usufruct, or project; they are not debt obligations with a guaranteed coupon.

Common sukuk structures include ijarah (lease-based), musharakah, mudarabah, wakalah, murabahah, and hybrid forms.

Sukuk returns must derive from the underlying asset's cash flows or profit, not from a guaranteed interest rate.

Equity screening typically applies business-activity screens (e.g., no alcohol, gambling, conventional finance) plus financial ratio screens.

Common financial screens: total interest-bearing debt and interest income as a percentage of total assets or market capitalization, with thresholds varying by index provider.

Purification (cleansing) requires donating the impermissible income portion of a dividend to charity.

Shariah-compliant indices (e.g., Dow Jones Islamic Market, FTSE Shariah) publish their screening methodologies, and constituents change when screens are breached.

Islamic funds use wakalah or mudarabah fee models; performance fees must be structured as a share of profit, not a guaranteed percentage.

Derivatives are generally restricted, though some Shariah boards permit wa'd (promise) structures and salam/istisna for hedging.

Takaful is based on mutual cooperation (ta'awun) and donation (tabarru'), not on a bilateral risk sale with an uncertain payout.

The two common models are mudarabah (operator shares surplus and profit) and wakalah (operator earns an agency fee plus a performance fee).

Contributions (premiums) are split into a risk fund (tabarru') and a participant account; the risk fund covers claims.

Underwriting surplus is distributed among participants under the chosen model, after reserving for claims and expenses.

The operator must not guarantee the risk fund; any interest-free loan (qard hasan) from the operator to cover a deficit is repaid from future surplus.

Re-takaful is the equivalent of reinsurance and must itself be Shariah-compliant.

Conventional insurance is generally impermissible due to gharar, maysir, and riba in invested funds.

Takaful investment portfolios must avoid prohibited sectors and interest-bearing instruments.

Regulatory frameworks often require separate licensing, capital adequacy, and reporting for takaful operators.

A Shariah supervisory board (SSB) is an independent body of scholars that reviews and approves products, contracts, and policies.

The SSB issues fatwas and rulings; the institution must implement them, and non-compliance can trigger remediation and, in some jurisdictions, regulatory action.

Internal Shariah audit and Shariah compliance review are separate functions from the SSB's advisory role.

Shariah risk is the risk of non-compliance with Shariah rules, and it is managed through policies, training, and audit.

Annual Shariah audits typically report to the SSB and the board, with findings tracked to closure.

Conflicts of interest and confidentiality rules apply to SSB members; independence and competence are key fit-and-proper criteria.

Some regulators require SSB members to be registered or approved and limit the number of boards a scholar may sit on.

Zakat calculation and distribution may be a governance requirement in certain jurisdictions, with separate accounting.

Documentation must reflect the actual Shariah structure; using a conventional loan document for a murabahah creates Shariah and legal risk.

Murabahah: cost plus disclosed profit; the bank must own the asset and bear ownership risk before selling to the customer.

Ijarah: lease of a specified asset for a specified rent and period; ownership remains with the lessor, who bears ownership-related risk.

Ijarah muntahia bittamleek: lease ending in a transfer of ownership, structured via a separate gift or sale at the end.

Musharakah: partners contribute capital and share profit per agreement and loss in proportion to capital.

Mudarabah: one party provides capital, the other provides effort; profit is shared per ratio, and loss falls on the capital provider absent misconduct.

Salam: full prepayment for a specified quantity, quality, and delivery date; the seller must deliver at the agreed time.

Istisna: manufacturing or construction contract with a specified price and delivery; payment can be in stages and the price can be paid later.

Wakalah: agency contract where the agent acts for a fee; used for fund management and some deposit structures.

Kafalah (guarantee) and rahn (pledge/collateral) are supporting contracts, not profit-generating instruments by themselves.

Dual banking systems exist in many jurisdictions, with separate Islamic banking laws, licensing, and capital rules alongside conventional frameworks.

IFSB standards provide capital adequacy, risk management, and governance guidance for Islamic financial institutions.

AAOIFI standards cover Shariah governance, accounting, auditing, and ethics; adoption varies by jurisdiction.

Basel III capital rules apply to Islamic banks, but profit-sharing investment accounts require specific treatment (e.g., displaced commercial risk).

Displaced commercial risk arises when a bank forgoes part of its profit share to pay investment account holders a competitive return.

Some jurisdictions require a central Shariah board or national Shariah authority; others rely on institution-level SSBs.

Legal enforceability of Shariah contracts depends on national law; courts may apply civil law, so documentation must be carefully drafted.

Deposit insurance schemes may be adapted for Islamic banks, covering investment accounts only under specific conditions.

Cross-border Islamic finance transactions must satisfy both home and host country regulation and Shariah requirements.

Key risk categories: credit, market, liquidity, operational, Shariah non-compliance, and rate-of-return risk.

Rate-of-return risk is the risk that returns on investment accounts differ from market benchmarks, affecting competitiveness and displaced commercial risk.

Equity investment risk applies to musharakah and mudarabah assets, which require capital charges under IFSB rules.

Murabahah receivables are typically measured at amortized cost; ijarah assets are treated as leased assets with depreciation.

Sukuk liabilities are classified based on the underlying structure (e.g., amortized cost or fair value), not automatically as debt.

Zakat and charity funds are usually reported separately from the institution's own income.

Profit distribution to investment account holders is calculated after deducting the bank's share as mudarib or wakil.

Shariah non-compliance income (e.g., late payment penalties) is typically donated and not recognized as revenue.

IFRS 9 expected credit loss models apply to Islamic financing assets, with adaptations for murabahah and ijarah.