Sharia Glossary


Gharrar 

(excessive uncertainty) an element that is to be avoided in any transaction. Gharrar refers to a lack of knowledge or uncertainty that could result in an outcome detrimental to one party.

Ijarah

A form of leasing contract used by Islamic Financial Institutions, which includes the promise to transfer the ownership of the leased property to the lessee for a specified period. Ijarah allows a profit to be made by the financial institution, by charging rent for the use of the asset. This sum is usually determined in advance, and allows the bank to get back its initial sum plus some profit.

Istisn’a

This is a contract that refers to an agreement for manufacturing goods and commodities according to the ultimate buyer’s specifications. The contract agrees to allow cash payment in advance and future delivery, or future payment and future delivery as the asset is non-existent until manufactured. In accordance to the contract the asset is to be delivered on a specified future date at an agreed selling price.

Mudarabah

This is an agreement made between two parties, one of whom provides the capital but has no control over the management of the project. The other party manages the project using its specialist knowledge. Profits generated from the project are distributed between the two parties according to a fixed ratio which is agreed in the contract. Any financial losses are taken by the capital provider, who is the only party that bears any financial loss.

Murabaha

(cost plus financing) a type of contract of sale between the bank and its client for the transaction of goods, which includes a profit margin for the bank agreed by both parties. Repayment is usually paid in equal or unequal instalments. 

Parallel Salam

A contract taken out to counterbalance the delivery implications of the Salam contract. The paralleling practice is similar to offsetting in conventional finance transactions. Parallel Salam is also referred to as back-to-back-Salam.

Qard Hassan

This is a form of loan that is given without charging extra commission. Only the actual amount borrowed is required to be repaid. This type loan of loan is identified in the Quran as a means of charity or helping others in need. At his/her discretion the debtor may pay an extra amount beyond the initial loan amount to the lender as a token of appreciation.

Salaam

This is a forward sale contract for the purchase of a commodity where the immediate payment of a commodity is made in exchange for the product to be delivered later, on a specified date in the future. The objects of this sale cannot be gold, silver, or currencies based on these metals.

Sukuk 

The Islamic equivalent of a bond. A financial certificate or a document of ownership in leased assets.

Takaful

A type of Islamic mutual protection insurance, where the participants contribute money into a common fund. In Arabic Takaful means joint guarantee, therefore as part of a group the members agree to jointly share or jointly guarantee amongst themselves any losses that may be made. The money pooled may be used to finance any claims for damages suffered by any of the participants.   

Tawarruq

(reverse Murabaha) is a Sharia Compliant cash based financing mechanism used for the buying and selling of commodities. A buyer purchases a commodity on a deferred payment basis by way of Murabaha, the commodity is then sold on to another party for an on the spot cash payment. This method is frequently used to deliver money to a person wishing to avoid paying interest on a loan.

Wa’ad

An Islamic Financial Contract in the form of a promise. This binding promise is made by one party, as a way of expressing ones willingness on a specific subject matter; in particular they are made in regards to future transactions.