The key concepts of Islamic Finance

It's a real pleasure to see you again on this blog. You are always welcome. Today I would like to know if you are a lover of Islamic finance. If yes, you are in the right place; otherwise read to the end. In I present to you the concepts of Islamic finance. These key concepts will allow you to know the ABCs of Islamic finance.

I recommend you read to the end. However, if you want to take control of your personal finances in just 6 weeks, I offer you this hyper-efficient guide.

The 49 key concepts of Islamic finance

➤ Al-Ajr

It refers to the commission for fees or remuneration charged for services rendered. 

➤ Al Rahn Al

It is an arrangement whereby a valuable asset is placed as collateral for a debt. The collateral can be assigned in the event of default.

➤ Al Wadia

It is a resale of goods with a discount on the initially indicated price. 

➤ Amana/Amanah

Literally Amana refers to reliability, loyalty, honesty. Technically: an important value of Islamic society in mutual relations. The term also refers to trusts. A person may hold property on behalf of another, sometimes under contract. 

➤ Bai al Dayn

It is debt financing. That is, the provision of financial resources necessary for production, trade and services in the form of sale/purchase of commercial documents. Bai al-Dayn is a short-term facility with a maturity of not more than one year. Only documents representing debts arising from bona fide commercial transactions can be negotiated. 

➤ Bai Al-Arboon/'Arbun

It is a sales contract under which a security deposit is made in advance in partial payment of the price of the raw material purchased. This deposit is retained if the buyer does not meet his obligations. This contract is similar to a classic call option.

➤ Bai Bithaman Ajil

It is a contract for the sale of goods with deferred payment. The bank purchases the capital goods or merchandise requested by the customer and then resells them to him at an agreed price, increased by its profit margin. The customer can pay in several installments over a predefined period, or in a single payment. This contract is similar to the Murabaha contract but with deferred payment. 

➤ Bai Muajjal (deferred payment contract)

It is a contract for the sale of goods with deferred payment. The bank or lender of capital purchases the goods (assets) on behalf of the company. The bank then sells the goods to the customer at an agreed price plus a profit margin. The company can pay the full balance at a later date or make instalments over a predefined period. This contract is similar to the Murabaha contract in that it is also a sale on credit. 

➤ The Bai/Bay'

It is a term that means sale. It is used as a prefix when referring to different modes of Islamic financing. Bai al-Dayn for example.

➤ Baitul Mal

It is a concept that refers to treasury.

➤ Sharia

It is the set of texts that govern the life of a Muslim. It is the Islamic law taken from the sacred text Quran and the Sunnah.

➤ Sharia-compliant 

This is the characteristic of an operation that is deemed to be in accordance with Sharia law.

➤ Shariah Compliance Committee (Sharia Board)

It is a committee of specialists in Islamic law that provides advice to an Islamic financial institution for the development of products that comply with Sharia. It also ensures that the operations carried out by the bank are Sharia compliant. Moreover, to stay within the scope of this article, consult our article on the Strengths and weaknesses of Sharia control in Islamic banking.

➤ Koran

It is the sacred text in Islam. It gathers in the form of surahs and verses the revelations made by God to the prophet Mohammad through the angel Gabriel over about twenty years (612-632 AD). For a Muslim believer, the Quran is the light of life. This is why this text is considered the first source of Muslim law.

➤ Debt

Dayn is the name for debt in Islamic finance. These debts do not bear interest.

➤ dirham

It is the monetary unit, usually a silver coin, formerly used in several Muslim countries and still legal tender in some of these countries, such as Morocco and the United Arab Emirates.

➤ fatwa

This is an opinion, an opinion stated by specialists in Muslim law. 

➤ fiqh

This is Islamic jurisprudence. It is also called the science of Sharia. It is an important source of Islamic economics. 

➤ Gharar

It refers to uncertainty. It is one of the three fundamental prohibitions in Islamic finance. Gharar is an uncertain outcome caused by ambiguous conditions related to deferred swap contracts. 

➤ Hadith

It is the story; historical story of a word, gesture, act, omission, approval of the Prophet Mohammed.

➤ Haram

This is the character of everything that is unlawful. Everything that is not lawful is unlawful and therefore haram.

➤ Hawala

Literally this term means bill of exchange, promissory note, check or draft. Technically the debtor transmits the responsibility for the payment of his debt to a third party who is himself his debtor. Responsibility for payment thus lies ultimately with a third party.

Hawala is a mechanism that allows the settlement of international accounts by accounting transfers. It largely removes the need for a physical transfer of cash. It refers to the claim which we find in classical finance.

➤ Hawk 

This concept refers to the lunar year.

➤ Rent

It is a leasing contract under which the bank purchases an asset for a customer and then leases it back for a fixed period. 

➤ Ijara-wa-Iqtina

It is similar to the Ijara presented above, with the difference that the customer has the possibility of buying the good at the end of the contract. 

➤ Ijma

These are consensuses, unanimous agreements between all the scholars of Fiqh of an era. It is one of the four sources of Fiqh.

➤ Exceptional

It is a contract in which the manufacturer agrees to produce and deliver a good or construction at a given price on a given future date. 

➤ Jahala ignorance

This term is used when, at the time of conclusion of a sales contract, the price is not known.

➤ Ju'alal

Literally it refers to the price defined for the provision of a service. This term is sometimes used in a technical sense in the Islamic banking model. 

➤ kafalah

It is a guarantee contract by which a third party guarantees the debt of an indebted agent. The liability for the debt towards the creditor thus falls to both counterparties of the contract. As with the Hawala contract, the Kafala does not generate any costs beyond administrative costs.

➤ Maysir

It is a term that refers to gambling. One of the three fundamental prohibitions in Islamic finance. It is one of the three major prohibitions of Islamic finance alongside Riba and Gharar. The prohibition of Maysir often serves as the basis for criticism of traditional financial practices such as speculation, traditional insurance and derivatives. 

➤ Mudaraba

It is an investment partnership contract between the bank and its client. It is a financing technique used by Islamic banks in which the capital is fully provided by the bank while the other party ensures the management of the project. The profits are shared according to a distribution key fixed in advance and any losses are borne by the investor. 

➤ Mudarib

In a contract, the person or party who acts as a contractor is called Mudarib. 

➤ Muqayada

It is a contract to exchange a quantity x of one commodity for a quantity y of another commodity, not involving any exchange of money. The quantities are fixed on the basis of the market prices of the commodities exchanged.

➤ murabaha

It is a financing contract signed between the bank and its customer. It is a form of credit that allows the customer to make a purchase without having to take out an interest-bearing loan. The bank buys a good and then sells it to the customer in deferred instalments. 

➤ Musawama

It can be defined as a classic sales contract in which the buyer does not know the profit margin applied by the seller.

➤ Musharaka

It is a financing partner somewhat similar to Mudharaba in which the conditions for sharing profits are predefined and the losses are proportional to the amount invested. It is a form of private equity. 

➤ Nissab 

This is the tax threshold from which an individual pays Zakat. It is the equivalent of 85 grams of gold, or an estimated wealth of approximately 1500 euros. The Zakat tax rate is 2,54%.

➤ Qard Hasan

These are benevolent loans, without interest or profit. It is more like aid than commercial credit. This technique is rarely used by commercial establishments. On the other hand, it can be used in specific situations (in the event of difficulties of an individual or a company, or when one wishes to promote the development of emerging sectors).

➤ Rab Al Maal

Unlike the Mudarib in a mudaraba (entrepreneur) contract, the Rab-al-maal is the person who invests the capital. 

➤ Rahn

It is a contract by which an agent secures a debt through collateral (pledge). This type of contract aims to mitigate the counterparty risk borne by the creditor. The advantage of this contract is that it allows the agent to present an asset in his possession as collateral while retaining its use and ownership.

➤ Riba

This is the greatest prohibition in Islamic finance. It is one of the three fundamental prohibitions in Islamic finance alongside Gharar and Maysir. Literally it means illicit increase or addition. Technically, any increase or advantage obtained by the lender that is a condition of the loan. Any risk-free or "guaranteed" rate of return on a loan or investment falls under Riba.

➤ Salam

It is a contract that provides for the prepayment of goods to be delivered later. In reality, Salam is a reverse credit sale. That is, the customer pays for the goods today and receives them later after production or manufacturing. Although no sale is possible if the goods do not exist at the time of the contract, this type of sale is an exception according to Islamic law. It is permitted provided that the goods and the delivery date are defined. This type of sale generally involves physical goods, excluding gold and silver, which are considered monetary values.   

➤ sukuk

These are Islamic bonds. Similar to an asset-backed bond, a Sukuk is a treasury note that gives the investor a share of ownership in an underlying asset and provides them with an income as such. The issuing entity must identify the existing assets to be sold to Sukuk investors, by transfer to a special purpose entity.

Investors then enjoy the usufruct of these assets, in proportion to their investment. They generally bear the credit risk of the issuer rather than the actual risk associated with the assets held by the special purpose entity. Sukuk can be listed and rated depending on the target market but It is not mandatory. Sukuks are generally issued by companies, certain financial institutions and sovereign states. 

➤ Sunna

This term refers to the Islamic tradition drawn from the example of the life of the Prophet Muhammad. This document brings together all the sayings and interpretations of the Prophet to the people.

➤ Takaful (Takaful)

These are Islamic insurances. Takes the form of cooperative insurance with pooling of funds, according to the principle of mutual assistance. In the Takaful system, members are both insurers and policyholders. Traditional insurance is prohibited in Islam because it contains several Haram elements such as Gharar and Ribâ. You can consult our article on Islamic insurance: Takaful

➤ Tawarruq

This is a reverse Murabaha contract. It is a financial technique that allows you to obtain financing for a loan by purchasing in installments a property owned by the bankThe applicants then authorize the bank to sell, on their behalf, their share in the property to a third party in a cash sale and then deposit the proceeds of the sale into their account.

➤ Wow

It is a contractual Islamic arrangement for managing demand deposit or savings accounts. In Islamic banks, demand deposit or savings accounts do not generate interest income.

➤ wakala

This term in some way translates the agency relationship. That is to say, the designation of another person to do the work on behalf of the principal against payment of a commission.

Summary ...

You have at your disposal 49 key concepts of Islamic finance. If you have any concerns, do not forget to ask us in the comments. Thank you for your loyalty. Before you leave, here is a training that teaches you how to sell advice online. Click here to buy it.