Glossary of Terms - ijaraCDC

Glossary of Terms

Glossary of Islamic Finance Terms

Main Terms

Acquisition Payments:  Payments on Account made to acquire a property under the Promise to Purchase at a pre-agreed price.  These are often equivalent to amortization in a conventional mortgage.  In the aggregate, these are termed On Account Balance.

Additional Rent:  Reimbursement to the Lessor of real estate taxes and casualty insurance.  Such amounts may be held in escrow and segregated from the Basic Rent and Acquisition Payments to facilitate both servicing and timely payment of obligations as well as adjusted upwards or downwards according to the Lessor’s actual payments compared to prior estimates granted to consumers.

Amanah: Simply put, amanah translates into the fulfillment of trusts. The word itself has a larger meaning in Islam. It’s all about a moral responsibility toward Allah. In its most basic English translation, amanah is defined as free will.

Arab Finance: Arab finance is basically another term that can cover sharia investments. There are several elements that go into both of these financial tools including development of a profit and loss sharing model so investments are more spiritually ethical than Western options.

Bai’ al ‘inah: Bai’ al ‘inah is a sale and buy-back agreement, is a type of Islamic finance that is a banking activity that is congruent with Shariah, which are the principles of Islamic law. Bai’ al ‘inah is a part of Islamic finance, such as a Muslim mortgage, where there is transaction of buying and selling between the customer and the financial institution. The financial institution, or the financier, will purchase an asset from a customer and the price that they pay for the asset will be disbursed by the terms that the financial institution lays out. Because of this the asset that is purchased is one that the payments are deferred and the price paid will be done so in installments. The second sale in this type of Islamic finance is done so in order to make the customer obliged to the financial institution.

Bayu-al-amanah: There are three types of Bayu-al-amanah in terms of Islamic finance. They are Murabahah, which is the cost plus sale of a property as well as Tawliyah or sale at cost and Wadiah, which is the sale at specified loss. Bayu-al-amanah is an Islamic finance term meaning a fiduciary sale. The fiduciary sale is broken down into these three banking terms used for Muslim mortgage transactions. These terms show a variety of ways in which to transfer property in a contract. Selecting the right Islamic banking method will change the way your transaction takes place.

Bai’ bithaman ajil: Bai’ bithaman ajil is a type of deferred payment sale and a sale of goods on a price where the payments will be deferred. This includes a profit margin that is agreed upon by both parties in this type of Islamic finance. A Bai’ bithaman ajil is used under a type of facility that deals with Islamic finance. The deferred payment of interest can be avoided since the customer will pay the sale price and that differs from interest that is charged on a loan. The bringing together of two financial transactions is not allowed under the shariah (Islamic law). Basically in a Bai’ bithaman ajil there is interest charged that looks much like a sale.

Bai’ muajjal: Bai’ muajjal is a type of Islamic finance credit sale that is compliant with the shariah. Bai’ muajjal literally means credit sale. In a Bai’ muajjal the financial institution will earn a profit margin on the price of a purchased asset or assets and will let the buyer pay off the price and they can do so all at once or in installments. Both parties in this Islamic finance transaction must agree upon the cost of the asset, as well as the profit margin.

Bai’ muajjal is also referred to as a deferred payment sale, but one of the main descriptions of riba is a delay in payment that is not justified or the increase or decrease in the price if the payment is right away or is delayed. Riba, in terms of shariah terminology, shows an excess of payment without prudent consideration.

Bai Salam: Bai Salam is a contract transaction where an advance payment is made for particular goods or services that will be delivered at a later day. In modern banking term, this is essentially a prepaid transaction. The seller agrees to supply a specific product or service in exchange for a price (that is agreed upon and is just and fair) at the time of the contract signing.

Certificate Holder:  The party holding a Trust Participation Certification by direct endorsement of the obligors or through assignment.

Consumer Beneficiary:  The consumer participant in IJARA™ will benefit from an irrevocable trust formed by the IJARA™ Originator to hold the property.  The consumer’s Initial Payment on Account and ongoing Payments on Account will determine the degree to which the consumer is beneficiary of the Trust.

Default:  If a consumer fails to make the Monthly Payment or Rental Payment under the Lease, then the consumer will be issued a Notice of Default indicating they have failed to make contractual payments on time on their Islamic loan.  They will then have a specific period to cure defaults, after which the Lessor may invoke the Promise to Purchase and foreclose the consumer out of his or her beneficial interest in the property.

Financier/Financier Beneficiary:  The licensed lender who closes the IJARA™ Islamic finance transaction will be a beneficiary of the trust established to hold title and lease the residence to the Consumer Beneficiary.  The Financier Beneficiary will take the risks customary to those of a lender.

Gharar: This Arabic word is quite often associated with risk, deception and even uncertainty. It is quite often used to describe sales of goods that are of questionable quality. Quite often gharar describes gambling or written contracts that are not completely clear. Generally, this word is used to describe transactions that are outlawed in Islam.

Ijarah: Ijarah ultimately means wage, rent or lease. The concept involves the selling a product or service (or the use of something) for a fixed price. This can include rental properties, apartments, cars (in terms of a lease), homes, etc. A specific period of time is agreed upon and the price is fixed with no interest added. The aqd (contract) states the pre-determined lease period of time and the agreed upon rental price.

Ijarah Wa Iqtina: Many of these Islamic financing terms are similar to Western models. This is one of them since it is a lease and purchase agreement. Generally, a financier buys something that can be used several times over a long period of time like buildings or a car. The asset is leased to clients and the clients agreed to buy the asset at the end of the lease.

IJARAH™ Arrangements:  A process to acquire a home in a lease to own concept entailing an operating lease of property, a consumer’s promise to purchase the same at an agreed price, a means to foreclose the consumer out of the property through the consumer’s failure to make payments or keep the promise, a note like negotiable instrument which conveys beneficial property ownership along with the proportionate share of the consumer’s payments according to schedule, and a lessor’s promise to sell to the consumer.

Initial Payment on Account:  The equivalent to a down payment, this is the money at the closing by the consumer and may range from 3% of the cost to 20% or higher.

Islamic Equity: Equity markets are where stocks get traded and they are an important part of any economy. Simply put, Islamic equity is where sharia-compliant stocks are traded.

Istihsan: This is a word used commonly by Islamic scholars to show how they favor certain judgments over others. The literal translation is “To consider something good.”

Istisna: This is generally the term used to define a long-term contract where something is manufactured over a period of time. Essentially it is a contract where a commodity or asset is clearly laid out and prices and delivery times are agreed-upon.

Kafalah: Sharia compliant Islamic financing needs to have legal definitions to make sure everything is compliant. In its most basic term this is the part of the contract that has to do with liability and a third person in case there is any kind of default on a loan.

Another meaning is defining options for children who don’t have parental care.

Late Charge:  A flat charge levied by the obligor under the TPC in the event the Lessee fails to make a scheduled Monthly Payment.  The charge of $50 is meant to cover the Servicer’s average costs of collection.

Lessor:  A financier as beneficiary of a trust providing property to a consumer for occupancy and eventual acquisition.

Maximum Rent:  A statutory ceiling on Rent payable under the Lease.

Memorandum of Lease and Promise to Purchase:  This is the recorded document giving reference to the lease and the promise to purchase, neither of which is recorded.

Money in Islam: Like a lot of other terms relating to sharia compliance, money in Islam has a different definition than what it might appear to be on the surface. Islamic economists define money in Islam in a broader scope and include means of exchanging commodities and measuring value, as well as a metric to gauge deferred value and how to store the same.

In other words, Islam looks at commodities as having value like currencies. For example, different things like salt, barley and wheat can all a “money in Islam,” value number associated to them.

Mudaraba: This is a very common phrase in Islamic finance that is used to describe a certain kind of partnership. Basically, it’s about two people working together with one supplying capital to another who invests it. In some kind of commercial enterprise. The object is always to share profit from any success.

Mudarabah: Mudarabah is a type of Islamic finance transaction where there is a contract between 2 parties. One of the parties will give the capital and the other will supply the labor. This type of partnership of Islamic finance is compliant with the shariah. This agreement is a type of profit sharing one and the split of the profit is determined before the contract is signed.

Mudarib: A mudarib is essentially a business manager who gets a portion of the profits that arise through the mudaraba, or financial contract.  This person is usually brought in on the entrepreneurial side rather than the financial side to provide the kind of business experience needed.

Murabaha: Murabaha is a Muslim mortgage variation. During this Islamic finance option, a purchaser pays an agreed upon payment amount after a financier purchases an item (car or a home), then marks it up because of the costs they have incurred during the sale. The buyer is aware of this markup, making it an “honest declaration of cost” and thus following proper economic Islamic codes.

Musawamah: Musawama, involves a transaction where the selling price of a good or service is a process of negotiation between the seller and the buyer, with the buy being unaware of the actual cost. The seller is not obligated to inform the buyer of the price that they paid to make or obtain the particular product or service for sale. This form of transaction can only be used from the seller himself cannot determine the exact cost of the item. It should not be used in order to gain access profit from an item.

Musharaka: There are differences between a Musharaka and other types of financial transactions. One way that a Musharaka is different is that the customer and the bank or institution that deals with Islamic finance essentially enters into what is considered a joint venture partnership rather than a loan or any other type of transaction. This is because both the customer and the bank reach an agreement to use funds or assets that both the customer and the bank have, rather than the money coming just from the bank or other financial institution.

On-Account Payment: Also called Payments on Account, these are the equivalent of amortization. From a Sharia’s perspective, whether or not disbursed to the financier, these are considered like a savings account accreting to the value of the home to be acquired by the consumer at the Maturity of the Lease.

Partial Pre-Payment:  Any On-Account Payment, not in the full amount of a scheduled Payment, which exceeds the scheduled On-Account Payment in any given period.  Such payment is used to curtail or shorten the term of the On-Account accretion and thereby the Lease Maturity.

Power of Sale:  This is the traditional remedy for a financier of a residence built into the Promise to Purchase.  Once a consumer has received a Remedies Notice in light of his or her continued failure to meet his or her obligations, then the financier is able to foreclose the consumer out of any property rights and sell the property through this mechanism.

Pre-Payment:  Any On-Account Payment, in the full amount of a scheduled Payment, which exceeds the scheduled On-Account Payment in any given period for an Islamic finance transaction.  Such payment is used to curtail or shorten the term of the On-Account accretion and thereby the Lease Maturity.  Such payment may also result in an early buy-out of the Lease.

Promise to Purchase:  A document enabling a consumer to buy-out a Lease of a residence at a specific price according to a schedule.  The document further enables a financier to seize and sell property according to customary residential foreclosure rules.

Qard: Is the Islamic word used to describe a loan that is sharia compliant because it is interest-free. Another element here is the basic benevolence of the lender based on ihsan, or the idea of charity.

Qard Hassan: Qard Hassan is a contract involving a loan with two parties on the basis of social welfare. It also can fulfill a short-term need of the borrower. In modern day terms, many compare this to a payday loan. During the loan process, the repayment amount must be the same as the amount borrowed. This means no interest or riba must be applied to the loan.

Shariah Board: These sharia boards can go by several different names. However, they are all set up by an Islamic bank to make sure products are all sharia-compliant. Having one of these boards makes sure the Islamic financial institution you’re dealing with is credible.

Shariah Investments: This is a broad definition that includes a variety of sharia compliant options. One of the rules that needs to be followed strictly for any such investment is a lack of riba . Translated in its most basic term, riba is about usury. Basically, sharia investments strive to avoid any profits made from repaying a loan where there is interest charged on the money itself.

Sharia’s: Islamic rules and regulations governing how Muslims may bind and conduct themselves in their commercial, personal and spiritual affairs including the Islamic loan process.

Specific Payments:  Any required payments other than Monthly Payments.

Takaful: This is one of the concepts in Islamic financing that is at the heart of the whole sharia compliance. Takaful is about members who join together and contribute money to a pool that’s common whereby liabilities and losses are spread out. This is a fundamental concept that entails social responsibility as well as a mutual insurance and a cooperative nature.

Tawarruq: This is another critical Islamic financial product. The key to understanding this term is its literal translation is “turns to silver.” It’s another sharia compliant product that allows Muslims to raise money without running afoul of restrictions on interest. Quite often it works when a Muslim buys an asset from an Islamic financial institution and sells it to raise money.

Tawliyah: Tawliyah is a relatively broad concept in nature. It defines a type of transaction, but aside from the basis that the sale is made with neither a loss nor a gain, there is not much more to this type of transaction. It defines how the bank or the lending institution handles the sale, but there are a variety of ways that a Tawliyah sale can be handled as part of Bayu-Al-Amanah depending on the individual buyer and seller at play.

Trust Participation Certificate:  A negotiable document conveying beneficial ownership in a property held in a trust to an investor in a manner consistent with contemporary securitization.

Wadiah: This involves money be kept and deposited in an Islamic bank. It’s a clearly defined arrangement that builds on older idea where one person hands over assets to another so they may be safe. Basically, it’s a modern version of the older idea of amanah.

Wadiah can be looked at as a safekeeping of a deposit in Islamic finance. When it comes to Muslim banking, this type of deposit would be held within a trust known as Amanah. Should the depositor pay for the favor, then the depository is going to replace it in any situation where it has become lost. Using this deposit by the bank is generally going to be subject to a decision from the person responsible for making the deposit. When it comes to practical terms you can look at it as this. The bank client is going to accept usage over the deposit by the bank, but will not be entitled to participation in the profiting or the loss. The deposit, on the other hand, is completely guaranteed.

Wakala: This is a model of Islamic financing whereby an investor authorizes a manager who is looking after the assets to act on his or her behalf. The agent who is the asset manager is hired on to invest in venture capital.

Wakalah: This is the process used in sharia compliant financing that clearly outlines a contract. Usually this involves one person appointing someone to conduct a legal action for a clearly defined commission or fee.