Glossary

Murabaha: Is a sale where the cost and the profit (mark-up) are known.

Therefore, the Murabaha Transaction in Banking based on the Bank buys the commodity from the market based on the customer’s request. After owning the commodity, it will be sold to the customer on a deferred payment basis, where the cost, the mark-up profit and tenor are known and agreed between both parties (Bank & customer).

Tawarruq: Is purchasing a commodity from the market on a deferred payment basis and selling it to a third party (other than the first seller) on the spot in order to get cash.

Tawarruq in Banking is the Bank buying a commodity from the market and then selling it to the customer for a deferred payment. Once the ownership of the commodity is transferred to the customer, the latter appoints the Bank as the customer’s agent to sell the purchased commodity to a third party on the spot and then depositing the sale proceeds in the customer’s account. There are several conditions for the validity of Tawarruq contract, the most important is not to sell the commodity to the first seller otherwise it will become “Bai’a AlAina”, which is prohibited. Also, the Sell and Buy of the commodity should be real and subject to be for an accepted commodity from Sharia perspective.

Istisna’a: Is a contract between the Bank (Sane’a) and its client (Al Mustasni’) to construct, manufacture or create specified and described assets or goods with a specified and agreed cost      including all associated costs mentioned in the quotation with an agreed delivery date. However, since the bank nature of business is not as a developer or a manufacturer, the bank will sign “Parallel Istisna’a” with an expertise with the same T&Cs of the original Istisna’a agreement signed between the bank and its client.

Ijarah (leasing): Is a contract between the bank (Lessee) and its client (Lessor), where the bank buys a commodity, then leases the same to the client for an agreed tenor and payment plan. The payment under Ijaraha can be either fixed payment or variable. The bank shall issue a separate promise “Wa’ad” to sell the leased property to the lessor at the Ijaraha maturity date at a nominal price or as a free gift.

Bai Al Salam: Is a deferred selling contract of a commodity described to be delivered in future but the price is paid on the spot.

Bai Al Salam in banking means that the Bank will enter into SALAM contract either as a buyer or as a seller for a commodity that’s been known and prescribed for future delivery with spot payment. 

Sales on Installments: In this sale contract, the commodity is sold and delivered on the spot against a deferred payment. The future payment date(s) must be known, whether the repayment of the price was for the whole or a part of it. Usually the deferred payment price is repaid in installments.

Musharkah: In this contract, the bank will finance the client as its partner without fixing any profit. The bank will participate in the gain / loss with the client. Musharkah may vary depending on the nature of work and the agreement between the parties to the contract.

Qard Al Hassan (Interest free loan): Is a contract of a loan between two parties on the basis of fulfilling a short-term financial need of the borrower. The amount of repayment must be equivalent to the amount borrowed. It is however legitimate for a borrower to pay more than the amount borrowed as long as it is not stated or agreed at the point of contract.

Amanah (Safekeeping): means custody or safekeeping. In an Amanah arrangement, the customer will deposit cash or other assets in a bank for safekeeping. The bank guarantees the safety of the assets kept by it for an agreed fee.

Wakala: Is an authorization given by party (A) to party (B) to act on its behalf either in a unrestricted or restricted form.

Wakala Deposit: Is an Islamic contract by which the customer (Muwakkil) provides the capital and authorizes the Bank (Wakil) to act on his/her behalf to invest the funds in Shari’ah compliant activities for returns and profits.

Mudaraba: Is a trust based contract where capital is provided, in cash or assets by one party (Rab Al Mal) to an entrepreneur (another partner- the Mudarib). The profit split has to be agreed between the parties; however the capital provider shall bear all the loss if no misconduct, negligence or violation occurs to the terms and conditions.