Key Islamic Finance Terms:
In the interconnected world of finance, Islamic banking and finance stand out for their unique principles rooted in ethical and moral values. They eschew interest and emphasize risk-sharing, asset-backed financing, and socially responsible investments. As such, navigating this sphere requires a firm grasp of its distinct terminologies. This glossary of Islamic banking terms serves as an indispensable resource, paralleling the comprehensive repositories found on an Islamic banking wiki or an Islamic finance wiki. These Islamic finance terms are a primer for the uninitiated and a refresher for the adept, capturing the essence of the concepts that galvanize the industry. Thus, we embark on a scholarly pursuit to demystify the lexicon of this venerable financial tradition.
Islamic Banking Terms |
Definition & Explanation |
| Âlim | One who has attained a considerable amount of Islamic knowledge. |
| Amânah | A trust or something with which you have been entrusted. For further details, refer to the chapter on amânah. |
| Auliyâ’ | Plural of “walî”. A walî is a friend of Allah. |
| Bâtil | In Islamic jurisprudence it refers to an act which is invalid |
| Barakah | Literally means “blessings”. It also refers to the experiencing of abundance in things which are of little value. |
| Bay‘us salam | Technically, it refers to a contract of sale causing an immediate payment of the price and admitting a delay in the delivery of the goods. |
| Bid‘ah | Literally means an “innovation”. In Islam it refers to the introduction of new things into Islam which have no basis in the Quran or Hadith and regarding these things as acts of îbâdah. A bid‘ah is a major sin in Islam. |
| Du‘â | Supplication, prayer or devotional phrases. |
| Fâsid | In Islamic jurisprudence it refers to an action which is considered to be improper. |
| Farâ’id | Plural of fard. |
| Fard | Literally means “compulsory”. In Islam it refers to those acts and things which are compulsory on a Muslim. Abandoning or abstaining from a fard act is a major sin. Rejecting a fard act amounts to kufr. |
| Fidyah | Redemption from the omission of certain religious duties by a material donation or a religious act. |
| Ghusl | The act of washing the entire body from head to toe without leaving single place dry. |
| Hâfiz | One who has memorized the Quran. |
| Halâl | That which is lawful or permissible in Islam. |
Hawala |
An informal method of transferring money without any physical money actually moving. It is based on trust and the balance is settled through future transactions. |
| Harâm | That which is unlawful or prohibited in Islam. |
| Ibâdah | Literally means “worship”. In Islam it refers to all those acts with which one renders worship to Allah. |
Ijarah |
An Islamic leasing agreement, in which the bank buys and leases out an asset, over a period of time for a pre-determined rental fee. |
| Ijârah fâsidah | Improper leasing or hiring. For further details, refer to the relevant chapter. |
Islamic Banking Principles |
Islamic banking principles are based on the concept of risk-sharing, where both parties involved in a financial transaction share the risks and rewards equally. This is in contrast to conventional banking, where the lender charges interest and bears no risk. |
| Jahannam | Hell. |
| Janâzah | Funeral procession. The deceased person is also referred to as a janâzah. |
| Jannah | Paradise. |
| Kafan | The cloth in which the deceased is enshrouded. |
| Kaffârah | Literally means “penance, atonement, expiation.” In Islamic law it refers to redemption from the omission of certain religious duties by a material donation or a ritual act. |
| Kuffâr | Plural of kâfir. A kâfir is one who rejects Allah and does not believe in Muhammad sallallâhu ‘alayhi wa sallam as the final messenger of Allah. |
| Kufr | Refers to the state of disbelief. |
| Mahr | Dowry. |
| Makrûh | That which is disliked or detestable. |
| Maradul maut | Refers to the last sickness of a person after which he passes away. |
| Masâ’il | Plural of mas’ala. |
| Mas’ala | Literally means “an issue, problem or question”. In Islamic jurisprudence it refers to a rule or regulation. |
Mudaraba |
A profit-sharing partnership between capital provider and entrepreneur, where profits are distributed according to pre-agreed ratios, and losses are borne only by the capital provider unless negligence is proven. |
| Murabahah | A form of credit which enables a buyer to make purchases without having to take out an interest-bearing loan. The bank buys the goods and sells them to the customer on a deferred payments basis, adding a mark-up for profit. |
Musharakah |
Joint enterprise or partnership structure in Islamic finance where parties share the profits and losses of a joint venture. |
| Mujâhidîn | Plural of mujâhid. Refers to a person who is engaged in jihâd or war against the kuffâr. |
| Mustahab | That which is preferable or desirable. |
| Mutawakkil | One who practices tawakkul. |
| Nafs | The soul. |
| Nûr | Light. |
| Qard Hassan |
An interest-free loan extended on a goodwill basis, primarily for welfare-oriented purposes or to bridge short-term funding requirements, with the borrower only required to repay the principal amount. |
| Riba | The term refers to interest, which is prohibited in Islamic financial practices. It is usually used to refer to the concept of unjust, exploitative gains made in trade or business under Islamic law. |
| Shafî | One who holds the right of pre-emption. |
Shariah-compliant Investments |
Shariah-compliant investments are those that adhere to Islamic principles and are free from any prohibited elements, such as interest (riba), gambling (maysir), and uncertainty (gharar). These investments follow the principles of risk-sharing and profit-sharing. |
| Shaytân | The accursed devil. |
| Shuf‘ah | The right of pre-emption. |
| Sukuk | Islamic equivalent of bonds; however, unlike conventional bonds which merely confer ownership of a debt, Sukuk grant the investor a share of an asset along with the commensurate cash flows and risk. |
| Sunnah | An act carried out or sanctioned by Rasûlullâh sallallâhu ‘alayhi wa allam. |
Takaful |
An Islamic insurance concept which is grounded in Islamic muamalat (banking transactions), observing the rules and regulations of Islamic law. |
| Tawakkul | The act of placing one’s complete faith and trust in Allah. |
| Ulamâ | Plural of ‘âlim. |
Wadiah |
A system where individuals deposit funds in a bank and receive a “gift” from the bank, guaranteeing the safety of the deposit. |
| Wâjib | Literally means “obligatory”. In Islamic jurisprudence it refers to an act which has not been established by an absolute proof. Leaving out a wâjib without any valid excuse makes one a fâsiq and entails punishment. |
| Wakîl | Representative. |
| Wasîyyah | Bequest. |
| Wilâyat | Literally means “friendship”. In Islamic sûfism it refers to that stag where a person gains close proximity to Allah. |