Islamic Banking Concepts

Bai’ Bithaman Ajil (deferred payment sale):
Refers to the sale of goods on a deferred payment basis at a price which includes a profit margin agreed to by both parties.

Bai’ Dayn (debt-trading):
Refers to sales or purchase of debt evidenced by trade document and papers which generated from Shariah compliant business activities.

Bai’ Inah (sell and buy back):
Refers to contract of sale and purchase of an asset whereby the seller sells to buyer in cash and subsequently buys back the asset at a marked up deferred price.

Bai’ Istijrar (supply contract):
Refers to an agreement between the client and the supplier, whereby the supplier agrees to supply a particular product on an ongoing basis, for example monthly, at an agreed price and on the basis of an agreed mode of payment.

Bai’ salam (future delivery):
Refers to the purchase of a commodity for deferred delivery in exchange for immediate payment. It is a type of sale in which the price, known as the Salam capital, is paid at the time of contracting while the delivery of the item to be sold is deferred.

Hibah (gift):
Refers to gifts awarded voluntarily.

Hiwalah (transfer of debt):
Refers to transfer of debt from transferor to the payer.

Ijarah (leasing):
Refers to an arrangement under which the lessor leases equipment, building or other facility to a client at an agreed rental against a fixed charge, as agreed by both parties.

Ijarah Muntahia Bittamleek:
Refers to a leasing contract which includes a promise by the lessor to transfer the ownership in the leased property to the lessee, either at the end of the term of the Ijarah period or by stages during the term of the contract.

Ijarah Thumma al-Bai’ (leasing and subsequent purchase):
Refers to a leasing which subsequently followed by a sale contract whereby the hirer leases the goods from the owner at an agreed rental over a specified period. Upon expiry of the leasing period, the hirer enters into a second contract to purchase the goods from the owner at an agreed price. This concept is applicable for financing of consumer goods and durables.

Kafalah (guarantee):
Refers to a contract of guarantee in which one party guarantees the fulfilment of a claim or performance of an obligation which is due to another party in a case of default.

Mudharabah (profit –sharing):
Refers to an agreement made between a party, who provides the capital and another party (entrepreneur), to enable the entrepreneur to carry out business projects, which will be on a profit-sharing basis, according to pre-determined ratios agreed upon earlier. In the SPI, the agreement could be between a depositor and the SPI (as the entrepreneur) or between the SPI (as the provider of capital) and an entrepreneur. In the case of losses, the losses are borne by the provider of the funds.

Murabahah (cost-plus):
Refers to the sale of goods at a price which includes a profit margin as agreed to by both parties. Such a sales contract is valid on condition that the price, other costs and the profit margin of the seller are stated at the time of the agreement of sale.

Musyarakah (joint venture):
Refers to a partnership or joint venture for a specific business with a profit motive, whereby the distribution of profits will be apportioned according to an agreed ratio. In the event of losses, both parties will share the losses on the basis of their equity participation.

Musyarakah Mutanaqisah (diminishing partnership):
Refers to a form of partnership in which one of the partners promise to buy the equity share of the other partner gradually until the title to the asset is completely transferred to him.

Qard (loan):
Refers to an interest-free loan. The borrower is only required to repay the principal amount borrowed, but he may pay an extra amount at his absolute discretion, as a token of appreciation.

Rahnu (collateralized borrowing):
Refers to an arrangement whereby a valuable asset is placed as collateral for a debt. The collateral may be disposed in the event of default.

Sarf (foreign exchange):
Refers to the buying and selling of foreign currencies.

Tawarruq (tripartite sale):
Refers to an arrangement that involves a purchase of an asset based on musawamah or murabahah and a subsequent sale of the same asset to a third party in order to gain cash money.

Ujr (fee):
Refers to commissions or fees charged for services.

Wadiah (safe keeping):
Refers to safe keeping contract whereby the depository guarantees payment of the whole amount of deposits, or any part thereof outstanding in the account of the depositors, when demanded. The depositors are not entitles to any share of the profits (generated from usage of the deposit by depository) but the depository may provide returns to the depositors as a token of appreciation.

Wakalah (nominating another person to act):
A situation, where a person nominates another person to act on his behalf.

Wakalah Bil Istithmar:
Refers to an “investment agency” contract where the investor (the principal) appoints the bank (the agent) to undertake investment activities on behalf of the principal for a fee. The bank acts in two capacities – as agent in accepting deposits from the participant who plans to invest, and as investment manager in carrying out Shariah compliant investment activities as agreed by the parties. The bank as an agent cannot guarantee the profit expected from the investment.