Islamic finance refers to the structure of financial transactions and instruments that operate according to Shariah (Muslim law) in order to serve and satisfy Muslims in banking and other financial systems. Now (in 2010), almost $200 billion of funds around the world are managed by Islamic financial institutions. Islamic financial institutions and banks provide services like loans for business and house construction, project funding and Hajj (pilgrimage to Mecca) service. It has been predicted that the Islamic financial market will grow at the rate of 15 percent per year over the next decade. Terms used in Islamic finance include the following.

Riba

Riba means usury and can mean interest. Riba, usury or the charging of interest on a loan, is prohibited in Islam and in Islamic financial institutions.

Gharar

Gharar means gambling, which is prohibited in Islam. Gharar includes those financial investments that involve uncertainty, danger, fraud, risk or chance, like the sale of a commodity that is not present at the time or whose outcome is unknown.

Maysir

Maysir also refers to gambling. It is a type of transaction in which one party gets the profit and the other faces loss or in which the transaction is unclear. This act is declared unacceptable (haram) in Islam.

Mudaraba

Mudaraba is a kind of partnership in which only one partner invests the capital in some specific business and the other party works and manages it without investing any capital. The profit generated after conducting the business is divided in a predetermined ratio. Only the investor has to carry the burden of any loss.

Musharaka

This refers to an agreement signed by two or more partners. In simple terms, we can say it’s a joint venture agreement. According to the percentage of capital invested, the profit is distributed between or among the partners. If the business faces some loss, the same ratio is used for the distribution of lost capital. In Musharaka, the working partner gets a larger amount of profit than the dormant partner.

Murabaha

Murabaha is a kind of sale in which the seller tells the buyer about the cost of the production of a commodity and the profit he will get on the sale of that commodity. Honesty in the cost declaration is required for Murabaha.

Istisnaa

Istisnaa is a sale contract in which the financial transaction concerning a commodity is arranged before the commodity is manufactured. It is a type of order given to the producer to produce a certain commodity for the buyer. The producer uses his own material that is required for the production of the commodity. The prices and necessary specifications for the good should be fixed and discussed before the parties sign the contract. To ensure the security of future payment installments, the manufacturer keeps a possession of the buyer as security until the payment is fully paid off.

Bai’al-inah

Bai’al-inah is a sale and buy-back agreement in which the seller sells off his assets to a buyer at a deferred price (which includes amount and profit margin), for which the buyer pays in installments in the future. Subsequently, the seller will purchase that asset from the buyer on a cash basis. This strongly resembles the credit card system of banks.

Qard Hasan

In Islamic financing, Qard Hasan is a loan that, in accordance with Shariah, is free of profit. The debtor has to pay only the borrowed amount at the agreed-upon time or when the creditor asks for it. The debtor can give some amount to the creditor as a token of appreciation, but this is not compulsory.

Bai’al-dayn

In essence, Bai’al-dayn is debt financing in which the business is conducted through the transaction of trade papers and documents (such as government securities, certificates of deposit or bonds). It is a short-term facility that matures within a year.


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