Islami Banking Info.......... Glossary: al-wadiah = safe keeping bai’muajjal = deferred-payment sale bai’salam = pre-paid purchase baitul mal = treasury fiqh = jurisprudence Hadith = Prophet’s commentary on Qur’an hajj = pilgrimage halal = lawful haram = unlawful ijara = leasing iman = faith mithl = like mudaraba = profit-sharing mudarib = entrepreneur-borrower muqarada = mudaraba murabaha = cost-plus or mark-up musharaka = equity participation qard hasan = benevolent loan (interest free) qirad = mudaraba rabbul-mal = owner of capital riba = interest Shariah = Islamic law shirka = musharaka Islamic banking has the same purpose as conventional banking: to make money for the banking institute by lending out capital. But that is not the sole purpose either. Adherence to Islamic law and ensuring fair play is also at the core of Islamic banking. Because Islam forbids simply lending out money at interest, Islamic rules on transactions (known as Fiqh al-Muamalat) have been created to prevent it. The basic principle of Islamic banking is based on risk-sharing which is a component of trade rather than risk-transfer which is seen in conventional banking. Islamic banking introduces concepts such as profit sharing (Mudharabah), safekeeping (Wadiah), joint venture (Musharakah), cost plus (Murabahah), and leasing (Ijar). Islamic Banking Terminology : * Bai al inah (sale and buy-back agreement): Bai al inah is a financing facility with the underlying buy and sell transactions between the financier and the customer. The financier buys an asset from the customer on spot basis. The price paid by the financier constitutes the disbursement under the facility. Subsequently the asset is sold to the customer on a deferred-payment basis and the price is payable in installments. The second sale serves to create the obligation on the part of the customer under the facility. There are differences of opinion amongst the scholars on the permissibility of Bai al inah, however this is practised in Malaysia and the like jurisdictions. * Bai bithaman ajil (deferred payment sale): This concept refers to the sale of goods on a deferred payment basis at a price, which includes a profit margin agreed to by both parties. Like Bai al inah, this concept is also used under an Islamic financing facility. Interest payment can be avoided as the customer is paying the sale price which is not the same as interest charged on a loan. The problem here is that this includes linking two transactions in one which is forbidden in Islam. The common perception is that this is simply straightforward charging of interest disguised as a sale.This is similar to Murabahah, except that the debtor makes only a single installment on the maturity date of the loan. By the application of a discount rate, an Islamic bank can collect the market rate of interest. * Bai muajjal (credit sale): Literally bai muajjal means a credit sale. Technically, it is a financing technique adopted by Islamic banks that takes the form of murabahah muajjal. It is a contract in which the bank earns a profit margin on the purchase price and allows the buyer to pay the price of the commodity at a future date in a lump sum or in installments. It has to expressly mention cost of the commodity and the margin of profit is mutually agreed. The price fixed for the commodity in such a transaction can be the same as the spot price or higher or lower than the spot price. Bai muajjal is also called a deferred-payment sale. However, one of the essential descriptions of riba is an unjustified delay in payment or either increasing or decreasing the price if the payment is immediate or delayed. * Bai Salam (future delivery): Bai salam means a contract in which advance payment is made for goods to be delivered later on. The seller undertakes to supply some specific goods to the buyer at a future date in exchange of an advance price fully paid at the time of contract. It is necessary that the quality of the commodity intended to be purchased is fully specified leaving no ambiguity leading to dispute. The objects of this sale are goods and cannot be gold, silver, or currencies based on these metals. Barring this, Bai Salam covers almost everything that is capable of being definitely described as to quantity, quality, and workmanship. * Bai Al-Istijrar (supply contract): Refers to an agreement between the client and the supplier, whereby the supplier agrees to supply a particular product on an on-going basis, for example monthly, at an agreed price and on the basis of an agreed mode of payment. * Dhamanah: A contract where a person underwrites claims or obligations that should be fulfilled by a debtor, supplier or contractor. In the event that the debtor, supplier or contractor fails to fulfil his obligations, the guarantor is responsible to fulfil such obligations. * Hibah (gift): This is a token given voluntarily by a debtor in return for a loan. Hibah usually arises in practice when Islamic banks voluntarily pay their customers a gift on savings account balances, representing a portion of the profit made by using those savings account balances in other activities. It is important to note that while it appears similar to interest, and may, in effect, have the same outcome, Hibah is a voluntary payment made (or not made) at the banks discretion, and cannot be guaranteed(akin to Dividends earned by Shares, however it is not time bound but is at the banks discretion). However, the opportunity of receiving high Hibah will draw in customers savings, providing the bank with capital necessary to create its profits; if the ventures are profitable, then some of those profits may be gifted back to its customers as Hibah. It is important to note once again that although the preceding descriptions of Hibah do sound like interest payments, there is a fundamental difference beneath: Hibah is voluntary, and at the sole discretion of the giver, whereas payment of interest is contractual obligation that is made in advance between the parties. * Hiwalah (remittance): Refers to a transfer of funds/debt from the depositors/debtors account to the receivers/creditors account where a commission may be charged for such service. * Istisna (Manufacturing Finance): * Istisna (Manufacturing Finance) is a process where payments are made in stages to facilitate step wise progress in the Manufacturing / processing / construction works. Istisna enables any construction company get finance to construct slabs / sections of a building by availing finances in installments for each slab.Istisna also helps manufacturers to avail finance for manufacturing / processing cost for any large order for goods supposed to supply in stages. Istisna helps use of limited funds to develop higher value goods/assets in different stages / contracts. * Ijarah (lease, rent or wage): Ijarah means lease, rent or wage. Generally, the Ijarah concept refers to selling the benefit of use or service for a fixed price or wage. Under this concept, the Bank makes available to the customer the use of service of assets / equipment such as plant, office automation, motor vehicle for a fixed period and price. * Ijarah thumma al bai (hire purchase): Parties enter into contracts that come into effect serially, to form a complete lease/ buyback transaction. The first contract is an Ijarah that outlines the terms for leasing or renting over a fixed period, and the second contract is a Bai that triggers a sale or purchase once the term of the Ijarah is complete. * Ijarah-wal-iqtina: A contract under which an Islamic bank provides equipment, building, or other assets to the client against an agreed rental together with a unilateral undertaking by the bank or the client that at the end of the lease period, the ownership in the asset would be transferred to the lessee. The undertaking or the ome an integral part of the lease contract to make it conditional. The rentals as well as the purchase price are fixed in such manner that the bank gets back its principal sum along with profit over the period of lease. * Ijarah and Ijarah ala al Amal: A contract whereby a lessor (owner of an asset) leases out an asset to a customer/ lessee at an agreed rental payment and pre-determined lease period upon the aqd (contract). The ownership of the property remains with the lessor while the lessee only owns the right of the use of the property. * Kafalah (guarantee): Refers to the guarantee provided by a person to the owner of a good, who had placed or deposited his good with a third party, whereby any subsequent claim by the owner for his good must be met by the guarantor and the third party. * Mudarabah: Mudarabah is a special kind of partnership where one partner gives money to another for investing it in a commercial enterprise. The capital investment should normally come from both partners. Profits generated are shared between the parties according to a pre-agreed ratio. The Mudarabah (Profit Sharing) is a contract, with one party providing 100 percent of the capital and the other party providing its specialized knowledge to invest the capital and manage the investment project. Profits generated are shared between the parties according to a pre-agreed ratio. If there is a loss, the first partner rabb-ul-mal will lose his capital, and the other party mudarib will lose the time and effort invested in the project * Commodity Murabahah: This concept refers to the sale of goods at a price, which includes a profit margin agreed to by both parties. The purchase and selling price, other costs, and the profit margin must be clearly stated at the time of the sale agreement. The bank is compensated for the time value of its money in the form of the profit margin. This is a fixed-income loan for the purchase of a real asset (such as real estate or a vehicle), with a fixed rate of profit determined by the profit margin. The bank is not compensated for the time value of money outside of the contracted term (i.e., the bank cannot charge additional profit on late payments); However, the asset remains as a mortgage with the bank until the Murabahah is paid in full. * Murâbaḥah: This concept refers to the sale of goods at a price. This includes a profit margin agreed to by both parties. The purchase and selling price, other costs, and the profit margin must be clearly stated at the time of the sale agreement. The bank is compensated for the time value of its money in the form of the profit margin. This is a fixed-income loan for the purchase of a real asset (such as real estate or a vehicle), with a fixed rate of profit determined by the profit margin. The bank is not compensated for the time value of money outside of the contracted term (i.e., the bank cannot charge additional profit on late payments); however, the asset remains as a mortgage with the bank until the default is settled. * Musharakah (joint venture): Musharakah is a relationship between two parties or more that contribute capital to a business and divide the net profit and loss pro rata. This is often used in investment projects, letters of credit, and the purchase or real estate or property. In the case of real estate or property, the bank assess an imputed rent and will share it as agreed in advance.All providers of capital are entitled to participate in management, but not necessarily required to do so. The profit is distributed among the partners in pre-agreed ratios, while the loss is borne by each partner strictly in proportion to respective capital contributions. This concept is distinct from fixed-income investing (i.e. issuance of loans). * Musawamah: Musawamah is the negotiation of a selling price between two parties without reference by the seller to either costs or asking price. While the seller may or may not have full knowledge of the cost of the item being negotiated, they are under no obligation to reveal these costs as part of the negotiation process. This difference in obligation by the seller is the key distinction between Murabahah and Musawamah with all other rules as described in Murabahah remaining the same. Musawamah is the most common type of trading negotiation seen in Islamic commerce. * Qard: A regular loan in which the client undertakes to repay the principal at a future date. Generally, no interest is charged. However, a service fee is permissible in some jurisdictions as long as such fee is based on the actual cost of administering the loan. * Qard hassan/ Qardul hassan (good loan/benevolent loan): Qard hassan is a loan extended on a goodwill basis, with the debtor only required to repay the amount borrowed. However, the debtor may, at his or her discretion, pay an extra amount beyond the principal amount of the loan (without promising it) as a token of appreciation to the creditor. In the case that the debtor does not pay an extra amount to the creditor, this transaction is a true interest-free loan. Some Muslims consider this to be the only type of loan that does not violate the prohibition on riba, for it alone is a loan that truly does not compensate the creditor for the time value of money. * Rahn (collateralised borrowing): Refers to an arrangement whereby a valuable asset is placed as a collateral for a debt. The collateral may be disposed in the event of default. * Sarf: A contract of buying and selling of currencies.Sarf (foreign exchange)Refers to the buying and selling of foreign currencies. * Sukuk (Islamic bonds): Sukuk, plural of Sakk, is the Arabic name for financial certificates that are the Islamic equivalent of bonds. However, fixed-income, interest-bearing bonds are not permissible in Islam. Hence, Sukuk are securities that comply with the Islamic law (Shariah) and its investment principles, which prohibit the charging or paying of interest. Financial assets that comply with the Islamic law can be classified in accordance with their tradability and non-tradability in the secondary markets. * Takaful (Islamic insurance): Takaful is an alternative form of cover that a Muslim can avail himself against the risk of loss due to misfortunes. Takaful is based on the idea that what is uncertain with respect to an individual may cease to be uncertain with respect to a very large number of similar individuals. Insurance by combining the risks of many people enables each individual to enjoy the advantage provided by the law of large numbers. * Ujr (fee): Refers to commissions or fees charged for services.A payment for manfa’ah i.e. usufruct on the use of another’s property. Another term related to ujrah is ajr (plural ujur), which refers to payment for a service. It is also applied to salary, wage, pay, fee(s), charge, enrolment, honorarium, remuneration, reward, etc. * Wadiah (safekeeping): In Wadiah, a bank is deemed as a keeper and trustee of funds. A person deposits funds in the bank and the bank guarantees refund of the entire amount of the deposit, or any part of the outstanding amount, when the depositor demands it. depositor, at the banks discretion, may be rewarded with Hibah as a form of appreciation for the use of funds by the bank. * Wakalah (nominating another person to act): Refers to a situation, where a person nominates another person to act on his behalf similar to a power of attorney. * Zakah (Zakat): A religious obligation of alms-giving on a Muslim to pay a certain amount of his wealth annually to one of the eight categories of needy Muslims (asnaf). The objective is to take away a part of the wealth of the well-to-do to be distributed among the asnaf. According to the Shari’ah, zakat purities wealth and souls.
Posted on: Sun, 20 Jul 2014 16:38:21 +0000
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