Shariah RFP M3 flashcards

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

Riba

Any stipulated increase on a loan of money or unequal exchange of identical commodities; prohibited in Shariah finance, covering both riba al-nasiah (interest for delay) and riba al-fadl (excess in exchange).

Gharar

Excessive uncertainty or ambiguity in a contract's essential terms, such as price, subject matter, or delivery date. Minor uncertainty is tolerated; excessive uncertainty makes a transaction void.

Maysir

Gambling or speculative gain from pure chance, where one party's gain depends on another's loss. Prohibited; applies to conventional derivatives and lottery-like structures.

Shariah Supervisory Board

Independent body of qualified Shariah scholars that issues fatwas, approves products, and conducts periodic compliance audits for an Islamic financial institution.

AAOIFI

Accounting and Auditing Organization for Islamic Financial Institutions; issues Shariah, accounting, governance and auditing standards widely used as the global baseline for Islamic finance.

Purification (Tazkiyah)

Donation to charity of the proportion of income or dividend attributable to impermissible sources, such as interest, so the remaining return is Shariah-compliant.

Business activity screen

Excludes companies whose primary revenue comes from prohibited sectors such as alcohol, gambling, conventional banking, pork, tobacco, or adult entertainment; tolerated incidental revenue varies by methodology.

Interest-bearing debt ratio

Financial screen comparing total interest-bearing debt to total assets or market capitalization; AAOIFI-style threshold is commonly below 33%, and methods differ on denominator.

Interest income ratio

Impermissible interest revenue divided by total revenue; commonly must stay below 5% under AAOIFI-aligned screening, otherwise the stock is non-compliant.

Dividend purification ratio

Impermissible revenue share multiplied by the dividend received, giving the amount to donate; calculated from the company's latest financial statements.

Asset-based sukuk

Sukuk where investors hold beneficial ownership in underlying assets but have limited recourse; Shariah scholars debate tradability because ownership may be synthetic.

Shariah index methodology

Ruleset from providers such as DJIM, MSCI Islamic, FTSE Shariah, or S&P Shariah, each with different sector and ratio thresholds, so compliance is methodology-specific.

Shariah-compliant universe

Set of securities passing business and financial screens; typically smaller and more concentrated than conventional benchmarks, raising sector and stock concentration risk.

Purification drag

Reduction in reported return caused by donating impermissible income; estimate as impermissible revenue ratio multiplied by portfolio income and subtract from expected return.

Shariah rebalancing trigger

Scheduled review when financial ratios or business activities change; common practice is quarterly review plus immediate review after corporate actions, index changes, or mergers.

Wakala deposit

Agency arrangement where an institution manages funds for a fee or expected profit, used for Shariah-compliant liquidity instead of interest-bearing cash accounts.

Profit-sharing ratio

Agreed percentage split of realized profit between capital provider and manager in mudarabah or musharakah; losses are shared in proportion to capital unless caused by manager negligence.

Shariah non-compliance risk

Risk of loss from a product or activity breaching Shariah rules, triggering income purification, remediation costs, or reputational damage and possible regulatory action.

Murabaha sukuk tradability

Murabaha sukuk represent a debt receivable, so Shariah rules generally require holding to maturity and allow trading only at par, not at a premium or discount.

Islamic benchmark rate

Profit rate benchmark such as Islamic interbank benchmark rate or sukuk yield, used instead of a conventional risk-free rate in performance and valuation models.

Tracking error (Shariah)

Standard deviation of portfolio return minus Shariah benchmark return; wider when the compliant universe excludes large sectors such as conventional financials.

Purification-adjusted return

Gross portfolio return minus the donated impermissible income; performance reporting should show both gross and purification-adjusted figures for comparability.

Shariah risk profile

Client's tolerance for Shariah-compliant risk, including preference for strict screening versus tolerance of mixed-activity companies with purification.

Zakatable assets

Wealth subject to zakat, including cash, gold, silver, business inventory, and Shariah-compliant investments held for one lunar year above nisab.

Suitability assessment

Documented evaluation of client objectives, horizon, liquidity needs, risk tolerance, knowledge, and Shariah preferences before recommending investments.

Transition plan

Schedule for exiting non-compliant holdings, often phased to manage tax and market impact, with purification of income earned during the transition.

Ethical preference conflict

Situation where a client's ESG or personal ethical preference conflicts with Shariah screening outcomes, requiring documented prioritization in the mandate.

Shariah investment mandate

Contractual document defining screening methodology, prohibited sectors, purification method, zakat handling, benchmark, and reporting obligations for the portfolio.

Fatwa disclosure

Statement in client documentation identifying the Shariah ruling and scholar body authorizing the product, with date and scope of approval.

Wakala agreement

Contract setting agency scope, fee or expected profit, investment restrictions, and termination terms between client and institution.

Suitability report

Record of client information, recommendation rationale, Shariah preferences, and risks disclosed, signed or acknowledged before execution.

Profit-sharing fee

Advisory compensation structured as a share of realized profit under mudarabah or musharakah, avoiding fixed interest-like charges on the client.