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Islamic finance – what an Islamic regulator says the terms mean in plain English

Chris Hamblin, Clearview Publishing, 20 December 2013

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The Malaysian banking regulator has embarked on a massive overhaul of its country's Islamic banking business, the better to promote services to the rest of the Islamic world of high-net-worth clients. In the process it has come up with an invaluable glossary of terms in regulatory English.

Bank Negara Malaysia, the banking regulator, is issuing a series of policy documents or 'exposure drafts' on Shariah contracts to facilitate end-to-end compliance with Shariah law in its jurisdiction. In doing so, it has inadvertently given the Anglo-Saxon world a first-class glossary of Islamic banking terms as interpreted by a conventional banking regulator.

In the banking regulator's terminology, “Islamic financial institutions” or “IFIs” are the following.

(a) Licensed Islamic banks and licensedtakaful operators (see glossary below) under the Islamic Financial Services Act 2013.

(b) Licensed banks and licensed investment banks under the Financial Services Act 2013 which are approved under s15(1)(a) to do Islamic banking business.

(c) Prescribed institutions under theDevelopment Financial Institutions Act which are approved under s129(1) to do Islamic banking business or Islamic financial business.

Compliance officers at private banks and asset-management firms that deal with Islamic banks – whose due diligence tends to leave much to be desired – are likely to need such a glossary, the terms and definitions of which we list here. All items are from the Bank's recent exposure drafts, for which it has invited written comments from the regulated community. The deadline for replies is 10 January 2014.

Amanah Trusteeship.

Aqd al-amanah Contract based on a fiduciary relationship.

Amin Trustee

Ahl li al-tabarru` Legal capacity to perform a benevolent act.

Bai` `inah An arrangement that involves sale of an asset to the purchaser on a deferred basis and subsequent purchase of the asset at a cash price lower than the

deferred sale price or vice versa, and which complies with the specific requirements of bai` `inah.

Dhamanah Guarantee.

Dayn lazim A legally binding debt.

Fara’id The rules of estate distribution according to the Shariah.

Gharamah Penalty.

Hamish jiddiyyah A security deposit placed to secure the undertaking to purchase an asset before execution of the sale and purchase agreement contract. OR...

A deposit placed to secure purchase of an asset before execution of the murabahah contract.

Hiwalah Assignment of debt from the liability of the original debtor to the liability of a third person so that the original debtor becomes free of liability.

Hibah Contract of transfer of ownership of an asset during the lifetime of the donor without any consideration or reward in return.

Hibah ruqba A conditional hibah which contingent upon the demise of either of the parties.

Hiwalah Contract of assignment of debt from the liability of the original debtor to the liability of a third person so that the original debtor becomes free of liability.

Ibra’ Rebate.

Ijarah Lease or service contract that involves benefit/usufruct of a certain asset or work for an agreed payment or commission within an agreed period OR...

A contract that transfers ownership of a permitted usufruct or service for a specified period in exchange for a specified consideration.

I`arah Transfer of usufruct of a non-perishable asset to someone with the requirement to return the asset without any counter-value

Ijma` Consensus of Muslim jurists

Istisna` An agreement to sell to a purchaser a non-existent asset that is to be constructed, built or manufactured according to the agreed specifications and delivered on a specified future date at a predetermined price of the istisna` asset.

Kafil Guarantor.

Kafalah A contract of conjoining guarantor’s liability to the guaranteed party’s liability in a way that the obligation of the guaranteed party is established as a joint liability of the guarantor and guaranteed person. OR...

A guarantee.

Kafalah al-`ayn Guarantee of a physical asset.

Kafalah al-dayn Guarantee of a debt liability.

Kafalah bi al-mal Commercial or financial guarantee.

Khiyar al-`ayb Option arising from a defect; the option of dissolving or continuing the contract upon discovery of a defect in the asset purchased.

Majlis al-`aqd Place of the contract session.

Maradh al-maut Terminal illness.

Mawhub lahu Donee.

Marhun Collateral

Mudarabah Profit-sharing contract. OR...

A contract between a capital provider (rabbul mal) and an entrepreneur (mudarib) under which the rabbul mal provides capital to be managed by the mudarib and any profit generated from the capital is shared between the rabbul mal and mudarib according to mutually agreed profit-sharing ratio (PSR) whilst financial losses are borne by the rabbul mal provided that such losses are not due to the mudarib’s misconduct (ta`addi), negligence (taqsir) or breach of specified terms (mukhalafah al-shurut).

Mudarib The entrepreneur in a mudarabah venture.

Mukhalafah al-shurut Breach of terms and conditions.

Mukhalafah al-quyud Breach of restrictions

Muqassah Offsetting.

Murabahah Contract a sale and purchase of an asset where the acquisition cost and the mark-up are disclosed to the purchaser. OR...

A sale and purchase of an asset where the acquisition cost and the mark-up are disclosed to the purchaser.

Musawamah Sale contract without the disclosure of the asset cost price and profit margin to the buyer.

Musharakah Profit-and-loss-sharing contract.

Musharakah Mutanaqisah An arrangement entered into by two or more parties on a particular asset or venture which allows one of the partners to gradually acquire the shareholding of the other partner through an agreed redemption method during the tenure of the contract.

Mudi` Safekeeping depositor.

Muqassah Offsetting.

Mahal al-sharikah Musharakah venture

Muwakkil Principal

Makful `anhu The guaranteed party is a debtor or a party

guaranteed by the guarantor.

Makful lahu The beneficiary is a creditor or a party who has the right to claim the liability (debt) from the guaranteed party (makful `anhu) or the guarantor (kafil).

Ma ya’ul ila luzum A debt that will become legally binding in the future.

Qabd haqiqi Taking physical possession. It refers to a state where a person has taken actual possession and the rights to control an asset.

Qabd hukmi Taking constructive possession. It refers to a state where a person has not taken actual possession but has the legal right to control an asset.

Qard A contract of lending a fungible asset to a party who will benefit from it and who will subsequently return an equivalent replacement. OR...loan contract.

Rahn Pledge/Charge.

Riba Any excess compensation without any corresponding counter-value recognised by Shariah.

Ribawi asset Assets which are subject to specific rules in sales to avoid the implication of riba. These assets consist of six (6) types and are classified into two (2) categories:

(a) Medium of exchange (currency) represented by gold and silver and any items used as currency; and

(b) Staple food represented by wheat, barley, dates, and salts.

If an exchange involves the same type of asset such as gold for gold or wheat for wheat, then it must be of equal counter-value and on spot basis. If the exchange involves assets of different type but within the same category such as the exchange of gold for paper currency, then it has to be done on spot basis.

Rabbul mal Capital provider.

Salam A contract in which advance payment is made for an asset to be delivered at a future date.

Takaful An arrangement based on mutual assistance under which takaful participants agree to contribute to a common fund providing for mutual financial benefits payable to the takaful participants or their beneficiaries upon the occurrence of pre-agreed events

Ta`addi Misconduct.

Takhliyah Relinquishing or abandoning the rights of ownership.

Taqsir Negligence.

Tamkin Enabling the person who has the ownership of an asset transferred to him to make full use and assume liability of the asset.

Tawarruq An arrangement that involves sale of in which an asset to the purchaser is purchased with on a deferred basis, and subsequently subsequent sale of the asset sold to a third party on spot a cash basis to obtain cash or vice versa. OR...

Purchasing an asset with a deferred price, either on the basis of musawamah or murabahah, and subsequently selling it to a third party to obtain cash.

Tawliyah Sale of a good at its cost price.

Ta`widh Compensation.

Tasarruf fuduli Unauthorized transaction

`Urf Customary practice.

`Urf tijari Common business practice which is accepted by the community and does not contradict Shariah rulings.

`Urbun Earnest money paid to secure purchase of an asset in an exchange contract which is considered part of the price if the buyer decides to continue the contract and is not refundable.

`Urf tijari Common business practice which is acceptable by the community and does not contradict the Shariah rulings.

Wa`d An expression of commitment given by one party to another to perform certain action(s) in the future. OR...promise or commitment or pledge or covenant.

Wakalah A contract in which a party (muwakkil) authorises another party as his agent (wakil) to perform a particular task in matters that may be delegated, either voluntarily or with imposition of fee.

Wadi` Custodian.

Wadi`ah yad amanah Safekeeping based on trusteeship.

Wadi`ah yad dhamanah Safekeeping based on guarantee.

Wasi Nominee.

Wakalah Agency contract

Wakalah bi al-istithmar Agency contract for investment

Wakalah bi ujrah Fee based agency

Wakalah muqayyadah Restricted agency

Wakalah mutlaqah Unrestricted agency

Wakil Agent

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