NIBAF Islamic Banking Certificate key terms

An increase or excess charged on a loan or exchange of money without a corresponding counter-value, prohibited in Shariah. It includes riba al-qard (loan interest) and riba al-buyu (excess in trade of specific commodities).

Excessive uncertainty or ambiguity in a contract's essential elements, such as price, object, or delivery, that could lead to dispute. Minor gharar is tolerated, but excessive gharar invalidates contracts.

Gambling or speculation where the outcome depends purely on chance and one party gains at another's loss without productive effort. Prohibited in Shariah and avoided in Islamic finance.

The body of Islamic law derived from the Quran and Sunnah, governing all aspects of a Muslim's life including financial transactions. In Islamic finance, it provides the principles and rules for contracts and operations.

Islamic jurisprudence; the human understanding and interpretation of Shariah sources to derive practical rulings. Fiqh al-muamalat deals specifically with financial transactions.

A non-binding legal opinion issued by a qualified Islamic scholar on a specific issue. In Islamic finance, fatwas are often issued by a Shariah Supervisory Board to certify products or practices.

An independent body of Shariah scholars appointed by an Islamic financial institution to ensure its products and operations comply with Shariah. It issues fatwas, reviews contracts, and provides guidance.

A cost-plus financing sale where the bank purchases an asset and sells it to the customer at a marked-up price, payable on deferred terms. The bank must own and bear risk of the asset before selling.

A profit-sharing contract between a capital provider (rabb al-mal) and an entrepreneur (mudarib) where profits are shared according to a pre-agreed ratio, while financial losses are borne solely by the capital provider unless due to the mudarib's misconduct.

A joint partnership where all partners contribute capital and share profits according to an agreed ratio and losses in proportion to their capital contributions. It can be used for project financing or working capital.

A leasing contract where the bank purchases and leases an asset to a customer for a specified rental over a period. The bank retains ownership and bears ownership-related risks and maintenance responsibilities.

Islamic financial certificates representing ownership in a tangible asset, usufruct, or project, structured to comply with Shariah. Sukuk holders receive returns from the underlying asset's income rather than interest.

A cooperative insurance system based on mutual assistance and donation (tabarru), where participants contribute to a pool to cover losses. It avoids gharar and riba by structuring contributions as donations and sharing risk.

A pledge or collateral provided by a debtor to a creditor to secure a debt. In Islamic finance, the creditor may hold the collateral but cannot benefit from it beyond securing the debt.

A guarantee provided by a third party to assure the performance of an obligation or payment of a debt. The guarantor becomes liable if the original party defaults, often used in trade finance.

An agency contract where one party (the principal) appoints another (the agent) to act on its behalf in a specific matter, often for a fee. Used in various banking services including fund management.

A benevolent loan extended without any interest or profit, where the borrower is obligated to repay only the principal. It is encouraged for charitable purposes and social welfare.

A forward sale contract where the buyer pays the full price in advance for a specified quantity of a fungible commodity to be delivered at a future date. The commodity, quality, quantity, and delivery date must be precisely defined.

A contract for manufacturing or construction where one party commissions another to produce a specific asset according to agreed specifications, with payment terms flexible (advance, installments, or deferred).

A partnership where the bank and customer jointly own an asset, and the customer gradually buys the bank's share over time. Rentals are paid for the bank's share until ownership fully transfers to the customer.

The set of institutional arrangements and mechanisms ensuring that an Islamic financial institution operates in accordance with Shariah principles. It includes the Shariah Supervisory Board, internal Shariah review, and audit.

An independent examination of an Islamic financial institution's operations, contracts, and transactions to assess compliance with Shariah rulings and principles, often conducted by internal or external auditors.

A core principle in Islamic finance where parties share profits according to an agreed ratio and bear losses in proportion to their capital contributions, as in mudarabah and musharakah.

An excess in the exchange of specific commodities (such as gold, silver, wheat, barley, dates, salt) of the same kind, where unequal quantities are exchanged. It is a form of riba prohibited to ensure fairness.

Interest charged for deferment of payment, where a lender charges an additional amount for extending the time of repayment. This is the most common form of riba prohibited in Islam.

The company managing a takaful fund, responsible for underwriting, investing contributions, and paying claims. It earns a fee (wakalah) and may share surplus, operating separately from participants' funds.

Reinsurance for takaful companies, where risk is shared with other takaful or retakaful operators. It must comply with Shariah principles, avoiding conventional reinsurance due to riba and gharar.

A measure of a bank's financial strength, calculated as capital divided by risk-weighted assets. Islamic banks follow specific standards, such as those from IFSB, which account for profit-sharing investment accounts.

The rate of return earned on profit-sharing investment accounts (PSIA) in Islamic banks, determined by the actual profits generated from investments, not guaranteed in advance.

An account where depositors place funds with an Islamic bank on a mudarabah basis, sharing profits according to an agreed ratio. The bank acts as mudarib and does not guarantee principal or returns.

A market where Islamic banks and financial institutions lend and borrow funds among themselves on a Shariah-compliant basis, often using commodity murabaha or other permissible contracts.

The process of filtering investments or businesses to ensure they do not involve prohibited activities (e.g., alcohol, gambling, interest) and meet acceptable financial ratios. Used in Islamic investing and banking.

An obligatory annual almsgiving of a portion of a Muslim's wealth (usually 2.5% of savings) to specified categories of recipients. Islamic banks may facilitate zakat calculation and distribution.

A voluntary donation or contribution made with no expectation of return, often used in takaful to create a pool of funds for mutual assistance. It is distinct from a commercial exchange.

The risk of financial loss or reputational damage arising from non-compliance with Shariah rules and principles, including failure to follow fatwas or SSB decisions.

A rebate or waiver of a portion of a debt, often granted by an Islamic bank to a customer for early settlement of a murabaha obligation. It must be discretionary and not stipulated as a condition.

A set-off or offset of mutual debts between parties, allowing them to settle obligations by cancelling equivalent amounts. Permissible in Islamic finance as a form of payment settlement.

The exchange of money for money, which must be spot and equal in quantity if of the same currency, to avoid riba. Governs currency trading and exchange transactions in Islamic finance.