Islamic Finance & Banking with Hamid Yunis

Issue 8 Nov / Dec 2004

First Published on November/December 2004

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As a practitioner in Islamic finance matters, I am always amazed at the variety of different interpretations that are sometimes given to concepts or words used in Shari’a compliant business/finance matters. Whilst in most Islamic finance transactions, the Islamic scholars issue a fatwa by way of certification that the transaction involved is Shari’a compliant, it is also helpful for others involved to know what a particular word means and how it should be interpreted. 

In a humble effort to assist, in our continuing series of Islamic finance articles, I thought it would be helpful to set out a few key words/phrases and what, in my experience, is their generally accepted meaning. So, here goes:

al-kharaj bildaman: The legal principle that means entitlement to revenue follows assumption of responsibility. Profits, therefore, are based on the ownership of, and responsibility for, capital;

bai’ bithaman ajil: Deferred-payment sale, credit sale;

fatwa: An authoritative legal opinion based on the Shari’a (Islamic law);

fiqh: Practical jurisprudence, or human articulations of divine rules encompassing both law and ethics;

gharar: Uncertainty or ambiguity in a contract of exchange as to the existence of the subject matter of the contract and deliverability, quantity or quality of the subject matter;

halal: Lawful; one of the five major Shari’a categorisations of human acts;

haram: Unlawful; one of the five major Shari’a categorisations of human acts;

ijarah: The transfer of ownership of a service for a specifi ed period for an agreed upon lawful consideration; istisna’a: A contract of sale of specified goods to be manufactured, with an obligation on the manufacturer to deliver them upon completion;

jahala: Lack of knowledge or ambiguity in the terms of a contract;

manfaa: Usufruct or benefit derived from an asset;

mudaraba: A partnership in profit between capital and work;

murabaha: Sale of goods with an agreed upon profi t mark-up on thecost;

musharaka: A form of partnership between an institution/entity and its clients whereby each party contributes to the partnership capital in equal or varying degrees to establish a new project or to share in an existing one. Each of the parties becomes an owner of the capital on a permanent or declining basis and has a due share of profits. Losses, however, are shared in proportion to the contributed capital. It is not permissible to stipulate otherwise;

qard hassan: A loan per amore in which there is no interest. In Islamic law, all loans are gratuitous contracts;

riba: Interest; sometimes equated with usury, though its meaning is somewhat broader. Its prohibition is meant to distinguish an unlawful exchange (in which there is a clear advantage to one of the contracting parties) from a lawful, mutually beneficial exchange and a lawful loan;

salam: A contract for the purchase of a commodity for deferred delivery in exchange for immediate payment according to specified conditions;

sukuk: Participation securities; coupons, investment certificates;

takaful: A Shari’a-compliant system of insurance in which the participants donate part or all of their contributions, which are used to pay claims for damages suffered by some of the participants;

wadia: Safe-keeping/resale of goods with a discount on the original stated cost;

wakala: Agency. An agency contract which may include in its terms a fee for the agent;

Zakah: Literally, it means blessing, purification, increase or cultivation of good deeds. In Shari’a, it is an obligation in respect of funds paid for a specified type of purpose and for specified categories.

The term Shari’a has two meanings:

(a) Islamic law and the totality of divine categorisations of human acts (Islam); and (b) the second meaning of the term means Shari’a rules do not always function as rules of law, in the Western sense, as they include obligations, duties and moral considerations not generally thought of as ‘law’.

 The important point to note in relation to the Shari’a, is that it provides a practical method of conducting, in this context, Islamic finance/business transactions. The use of words and expressions should be consistent with this underlying basis and the practicalities of the transaction involved and not merely act as a device to ‘badge’ a transaction as Shari’a compliant when it is patently not.

Hamid Yunis is a partner at Taylor Wessing and head of the firm’s Islamic Finance Group.