Glossary on Islamic Banking

Assalamu'alaikum wrt.

Today, I would like to write about the glossary on Islamic Banking that using and practices in nowadays Islamic Banking in the world. Maybe, for those who did not familiar with the term in Islamic Banking, it is very helpful to them and I write this as an introduction before I start writing about principal, application and etc in Islamic Banking and Finance. I hope, it can be helpful to those who want to know about Islamic Banking. However, it is very basic for those who involved in Islamic Banking directly such as student undergraduate, bankers, brokers and etc.

Bai' Al-Salam: 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. According to normal rules of the Shariah, no sale can be effected unless the goods are in existence at the time of the bargain, but Salam sale forms an exception given by the Holy Prophet (SAW) himself to the general rule provided the goods are defined and the date of delivery is fixed. 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 because these are regarded as monetary values exchange of which is covered under rules of Bai al Sarf, i.e. mutual exchange is hand to hand without delay.

Mudharabah: Mudharabah is a form of partnership which involved two parties where one party provides the funds while the other provides expertise and management. The latter is referred to as the Mudarib. Any profits accrued are shared between the two parties on a pre-agreed basis in ratio such as 50:50, 40:60 or 30:70 while loss is borne by the provider(s) of the capital.

Murabahah: Literally it means a sale on mutually agreed profit. Technically, it is a contract of sale in which the seller declares his cost and the profit. This has been adopted by Islamic banks as a mode of financing. As a financing technique, it can involve a request by the client to the bank to purchase a certain item for him. The bank does that for a definite profit over the cost which is stipulated in advance.

Musharakah: Musharakah is a contract between shareholders and their partnership on capital and profits. It also known as syarikah (company) where's it is about a fund that provided together between the shareholder to financing a some of project and their profit will divided among them on a pre-agreed basis. However, if there have losses, all of them will be obligate together.

Riba: Riba means an excess or increase. Technically, it means an increase over principal in a loan transaction or in exchange for a commodity accrued to the owner (lender) without giving an equivalent counter-value or recompense (‘iwad) in return to the other party; every increase which is without an ‘iwad or equal counter-value.

Ijarah: Mean letting on lease. Sale of a definite usufruct of any asset in exchange of definite reward. It refers to a contract of land leased at a fixed rent payable in cash and also to a mode of financing adopted by Islamic banks. It is an arrangement under which the Islamic banks lease equipments, buildings or other facilities to a client, against an agreed rental.

Hibah: Hibah means Gift. In Islamic Banking, it will apper such as in wadiah saving account and current account then we will discuss later on another post, InsyaAllah.