CIFE Study Notes: Certified Islamic Finance Executive Program

CIFE Study Notes
2012-2015 Ethica Institute of Islamic Finance

A Users Guide to the
Certied Islamic Finance Executive Program
i
2012-2015
Published by
Ethica Institute of Islamic Finance
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Table of Contents
2
1. Why Islamic Finance 9 - 14
2. Understanding Musharakah
Islamic Business Partnerships
15 - 21
3. Understanding Mudarabah
Islamic Investment Partnerships
22 - 28
4. Understanding Ijarah
Islamic Leasing
29 - 36
5. Understanding Murabaha
Cost Plus Financing
37 - 43
6. Understanding Salam and Istisna
Forward Sale and Manufacturing Contracts
44 - 52
7. Understanding Islamic Insurance 53 - 59
8. Understanding Sukuk
Islamic Securitization
60 - 66
9. Liquidity Management In Islamic Finance 67 - 73
10. Risk Management In Islamic Finance 74 - 81
11. Glossary Commonly Used Industry Terminology 82 - 104
12. Contact Ethica 105
Winner of "Best Islamic Finance Qualication" at the Global
Islamic Finance Awards, Ethica is chosen by more professionals
and students for Islamic nance certication than any other
organization in the world. With over 20,000 paying users in 44
countries, the Dubai-based institute is accredited by leading
scholars and serves banks, universities, and professionals across
over 100 organizations. Ethicas 4-month Certied Islamic
Finance Executive (CIFE) program is delivered 100% online.
Ethica's award winning CIFE is a streamlined training and
certication program designed to take complete newcomers to
an advanced level of understanding in Islamic nance in just 4
months.
The program fee is $1,495, which can be paid online or through
wire transfer and includes:
4 months access to self study videos
1 examination attempt
CIFE Certicate couriered to your home or ofce
Ethica's 1-on-1 Career Counseling
Ethica's Recruiter's Database
Ethica's 100% online delivery platform enables us to give you
dynamic and up-to-date material 24 hours a day, rather than
waiting around for outdated guidebooks, CDs, and distance
learning emails. Our training and certication is designed for
maximum knowledge transfer without burdening you with more
information than you require. All the information, including
spreadsheets, case studies, questions, exercises, and quizzes is
contained in the training modules.
Our experts are here to answer your questions over email
(questions@ethicainstitute.com).
You get access to our entire inventory of training videos during
your study-period. You can play each video as many times as
you like - 24 hours a day.
One module consists of an approximately 20 minute training
video comprising a variety of exercises, case studies, and
quizzes, along which the student is expected to conduct his or
her own self-study. Experience with hundreds of other learners
shows that the CIFE program is comfortably manageable in
about 1 to 3 months of training and about 1 month or less of
studying for the examination, enabling most users to complete
the program in less than the 4 month access period.
Certified Islamic Finance Executive
Introduction
3
There are no prerequisites for the Ethica CIFE though some prior knowledge of nance does help. If you have no prior knowledge of
Islamic nance, you've come to the right place. We designed the material specically for newcomers seeking a high level of prociency in
the practical aspects of Islamic nance in a very short amount of time.
There are no xed dates for the program either. You can start whenever you like.
The CIFE Examination: A 90 minute timed exam comprising 112 multiple choice questions. The pass mark is 70%.
How to take the exam: Login, click on 'My Account' and then click on 'Take CIFE Exam.'
Re-attempt: If you fail you can re-attempt the exam by paying a small fee.
Once you understand the 22 core modules listed below that comprise the testable material, you are ready to take the 90-minute online
CIFE examination. You can take the exam as soon as you are ready. For some that's 3 months, for others it's more: you choose your
pace. The recommended study schedule shows you how to comfortably nish the program in the allotted 4-month period with an
investment of as little as 1 hour per week.
4
Course Code Course Name Course Description
Recommended Study
Schedule
CIFE01 Why Islamic Finance? What makes Islamic nance different from conventional nance? And what
makes it better? We look at 3 real-world examples and nd out. We also
introduce you to the 4 principles that guide Islamic nance transactions.
Week 1
CIFE02 Understanding Musharakah I
(Islamic Business Partnerships)
You've heard of joint-stock companies. Now learn about the Islamic variation.
We look at Musharakah, the Islamic business partnership where partners pool
together capital, expertise or goodwill to conduct business or trade. We look at
the basic features of a Musharakah and its types, their mode of operation,
duration and the various forms of capital contribution.
Week 1
CIFE03 Understanding Musharakah II
We discuss the management of the Musharakah business and take you
through some practical applications of how Islamic banks use Musharakah. We
also look at prot and loss sharing ahead of the subsequent module's prot
calculation exercises.
Week 2
CIFE04 Understanding Musharakah III
and Quiz
We complete our discussion on general aspects of Musharakah, including how
banks handle negligence, termination, and constructive liquidation. We round
our discussion with some practical examples of Musharakah calculation, a
quick review of nancial statements and how exactly prot gets calculated.
Week 2
Recommended Study
Schedule
CIFE05 Understanding Mudarabah I (Islamic
Investment Partnerships)
Where Islamic banks meet conventional private equity type investing. Here you
learn Mudarabahs, the Islamic business partnership where one partner
supplies capital for the business and the other provides management
expertise. We explain the Mudarabah structure and contrast it with
Musharakah and Wakalah, explaining how they differ in banking practice.
Week 3
CIFE06 Understanding Mudarabah II (Islamic
Investment Partnerships)
How is an investment partnership different from an agency contract? We
discuss the relative merits of the Mudarabah and the Wakalah structure in
different situations. We also describe the Mudarib's role, the duration of
Mudarabahs and the forms of capital contribution by the investor and in some
cases even the Mudarib.
Week 3
CIFE07 Understanding Mudarabah III (Islamic
Investment Partnerships) and Quiz
We discuss the Mudarabah's management and the rules for sharing prot and
loss. We also look at some practical examples showing how Islamic banks use
Mudarabahs.
Week 4
CIFE08 Understanding Ijarah I (Islamic Leasing) What's an Islamic lease? This modules helps you nd out. We introduce Ijarah,
the Islamic lease, and look at prerequisites for their execution, legal title,
possession, maintenance, earnest money, default, and insurance. We begin
answering the question "How does an Ijarah work?" with step-by-step practical
explanations.
Week 5
CIFE09 Understanding Ijarah II (Islamic Leasing)
and Quiz
You learn the rights and obligations of the lessor and the lessee and focus on
defective assets, sub-leases, extensions and renewals, transfer of ownership,
and termination.
Week 5
CIFE10 Understanding Murabaha I (Cost Plus
Financing)
Learn about the most widely used Islamic nance product: buy an asset for the
customer; sell the asset at a premium in installments to the customer. That's a
Murabaha. In these modules we introduce Murabahas and walk you through
the rst 5 of the 7 important steps necessary for a Murabaha's valid execution.
Week 6
CIFE11 Understanding Murabaha II (Cost Plus
Financing)
Wrap up the 7 steps to executing a Murabaha: we cover steps 6 and 7 and go
on to discuss common mistakes bankers make when executing Murabahas
and how to avoid them. We also look at risk management, default, early
repayment, and prot calculation in Murabahas.
Week 6
CIFE12 Understanding Murabaha III (Cost Plus
Financing) and Quiz
So how does it work in the real world? We look at 6 practical examples of
Murabahas based on installment repayments, bullet repayments, advance
payments, and credit and import Murabaha.
Week 7
5
Recommended Study
Schedule
CIFE13 Understanding Salam And Istisna I
(Forward Sales And Manufacturing
Contracts)
What makes a forward contract Islamic? Learn here. In this module on Salam,
the Islamic forward sale, and Istisna, the Islamic manufacturing contract, we
begin with Salam. We look at the goods for which a Salam may be executed,
the pre-requisites, and the use of a Parallel Salam.
Week 7
CIFE14 Understanding Salam And Istisna II
Contracts)
We discuss security, replacement, and default before explaining how its pricing
is calculated. We then look at Istisna and discuss the major differences
between it and the Salam.
Week 8
CIFE15 Understanding Salam And Istisna III
Contracts) and Quiz
In this nal module we discuss delivery, default, and termination an Istisna. We
conclude the 3 module series with a practical product structuring exercise
where you get to choose the appropriate nancing tools in a given scenario.
Week 8
CIFE16 Understanding Islamic Insurance and Quiz You learn the difference between Islamic and conventional insurance and the
essentials that make Islamic insurance unique. You walk through a numerical
example before taking the Self-Assessment Quiz.
Week 9
CIFE17 Understanding Sukuk I (Islamic
Securitization)
You've read about them. Now learn about them. Sukuks are Islamic shares
and we show you the main features walking you through the 8 step structuring
process concluding with a study of Ijarah Sukuk.
Week 10
CIFE18 Understanding Sukuk II (Islamic
Securitization) and Quiz
We continue our discussion on Sukuk with a look at Musharakah and
Mudarabah, Sukuk and the limitations of issuing using Murabaha, Salam and
Istisna. We close with a case study of the IDB Sukuk.
Week 10
CIFE19 Liquidity Management In Islamic Finance I What do Islamic banks do with excess capital in the short- term? How do they
access capital for the long-term? You learn the answers to these and other
questions in this module. We discuss how Islamic banks manage liquidity and
begin by explaining an inter-bank Mudarabah, walking you through how a
weightage table works; useful information for other Islamic banking products.
We close the module with a look at the application of Sukuk in liquidity
management.
Week 11
6
Recommended Study
Schedule
CIFE20 Liquidity Management In Islamic Finance II
and Quiz
You look at lters for stocks, shares, Musharakah investment pools, and the
use of agency contracts to manage liquidity. We also look at local and the
foreign currency Commodity Murabahas and walk you through the steps for
executing each quiz.
Week 11
CIFE21 Risk Management In Islamic Finance I Some have said "Banking is risk management." If you don't know anything
about risk management this is the module for you. You learn the basics about
risk management in Islamic nance and discuss the most common risks facing
Islamic banks and the mitigation techniques used to address them.
Week 12
CIFE22 Risk Management In Islamic Finance II and
Quiz
Now you learn about how risk relates to each specic Islamic nance product.
We go through each major Islamic banking product, namely Murabaha, Salam,
Istisna, Ijarah, Musharakah and Mudarabah, and explain the specic risks
associated with each quiz.
Week 12
Review all modules
Reattempt all self-assessment quizzes
Examination
Review all modules
Examination
Review all modules
Examination
Week 13 - 16
7
CIFE Study Notes
A Users Guide to the

Certified Islamic Finance Executive Program
Important Note: The following CIFE Study Notes are an
accompaniment to the online training modules available at
Ethica and are not meant to replace the blended learning
experience of the complete Certied Islamic Finance
Executive program
CIFE01
Why Islamic Finance?
What makes Islamic nance different from
conventional nance? And what makes it better?
We look at 3 real-world examples and nd out. We
also introduce you to the 4 principles that guide
Islamic nance transactions.
The difference between Islamic nance and conventional nance is the difference
between buying and selling something real and borrowing and lending something
eeting.
Conventional banking transactions are interest based.
Islamic bank transactions are asset or service backed.
An asset or service cannot be compounded like an interest based loan. An asset
or service can only have one buyer or seller at any given time, whereas interest
allows cash to circulate and grow into enormous sums.
Interest creates an articial money supply that isnt backed by real assets resulting
in increased ination, heightened volatility, richer getting rich, and poorer getting
poor.

Nigerian President Obasanjo Example
Nigeria took a $ 5 billion loan in 1985 and paid it off as $44 billion in 2000 as a
result of compound interest.
How would the Islamic bank manage such a developing countrys need?
An Islamic bank could have arranged for the $4 billion construction of a natural
gas pipeline and delivered it to Nigeria for $5 billion using an Istisna.
Or taken an equity stake in a highway project and shared in prots and losses
using Musharakah or Mudarabah.
Or purchased commodities and sold them at a premium using a Murabaha.
Or structured a project nancing using an Ijarah Sukuk.
The difference
Example: Nigerian President Obasanjo
Example: Nick the homebuyer
Example: Faisal the college student
Islamic nance essentials
Transactions
Salient features
CIFE01: Why Islamic Finance?
11
Nick the Homebuyer Example
In 2009 Nick lost his job, his house, and all the money he had
spent paying off his mortgage.
The property bubble that triggered the global nancial meltdown
could not have happened if the properties had been nanced
Islamically because a conventional bank merely lends out cash.
Legally, it can keep lending this cash over and over, well above its
actual cash reserves.
An Islamic bank, on the other hand, has to take direct ownership
of an actual asset. Whether for a longer period in a lease or
partnership, or a shorter period in a sale or trade, Islamic nance
always limits the institution to an actual asset.
How could Islamic nance have fullled Nicks need for a home?
Based on a Diminishing Musharakah.
Musharakah refers to partnership. In a Diminishing Musharakah,
the banks equity keeps decreasing throughout the tenure of the
nancing, while the clients ownership keeps increasing through a
series of equity purchases. Eventually, the client becomes the
sole owner.
At no time does the homebuyer pay any interest and at no time
does any payment compound. The homebuyer just pays for two
things: the house, in small payments, little by little. And the rent,
for the portion of the house he doesnt yet own.

Faisal the Student Example
Faisal took a student loan. His university cost him $120,000 for
four years. He began borrowing $30,000 at the beginning of each
year. Three years after graduation he began paying off his student
loans at the rate of $20,000 a year.
It took him 25 years to pay off his loan and he ended up paying
over $400,000.
How would an Islamic bank fulll Faisals need?
An Islamic bank could structure a service-based Ijarah to lease
out the universitys credit hours. Faisal ends up paying about
20% or 30% more; but with the interest-based loan, he pays
about 400% more.
Islamic nance never can, and never will be able to grow Faisals
debt once its xed.

Islamic Finance Essentials
All banking products can largely be divided into the following 4
categories:
1. Equity
2. Trading
3. Leasing
4. Debt
Some important Islamic nance transactions:
Equity based - Mudarabah, Musharakah, and Sukuk
Trade based - Murabaha, Salam, and Istisna
Lease based - Ijarahs

12
Islamic banking transaction must:
1. Be Interest free
2. Have risk sharing and asset and service backing: Based on
the Islamic concept of no return without risk. An Islamic
bank takes a direct equity position, or buys a particular asset
and charges a premium through a trade or a lease. It uses risk
mitigants, but not without rst taking ownership risk.
3. Have contractually certainty: Contracts play a central role in
Islam and the uncertainty of whether a contractual condition
will be fullled or not is unacceptable in the Shariah.
4. Be ethical: There is no buying, selling, or trading in anything
that is, in and of itself, impermissible according to the Shariah
for instance dealing in conventional banking and insurance,
alcohol, and tobacco.
13
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CIFE02, 03, 04
Understanding Musharakah
Islamic Business Partnerships
You've heard of joint-stock companies. Now learn about the
Islamic variation. We look at Musharakah, the Islamic
business partnership where partners pool together capital,
expertise or goodwill to conduct business or trade. We look at
the basic features of a Musharakah and its types, their mode
of operation, duration and the various forms of capital
contribution. We discuss the management of the Musharakah
business and take you through some practical applications of
how Islamic banks use Musharakah. We also look at prot
and loss sharing ahead of the subsequent module's prot
calculation exercises. We complete our discussion on general
aspects of Musharakah, including how banks handle
negligence, termination, and constructive liquidation. We
round our discussion with some practical examples of
Musharakah calculation, a quick review of nancial
statements and how exactly prot gets calculated.
A Musharakah is a partnership that is set up between two or more parties usually
to conduct business or trade. It is created by investing capital or pooling together
expertise or goodwill.
Partners share prot based on ownership ratios and to the extent of their
participation in the business and share loss in proportion to the capital they invest.
Prot cannot not be xed in absolute terms such as a number or percentage of
invested capital or revenue.

Types of Musharakah:
Shirkah tul Aqd
Shirkah tul Milk

Shirkah tul Aqd is a partnership to enter into a joint business venture and trade.
Partners enter into a contract to engage in a dened prot seeking business
activity.
Shirkah tul Milk is a partnership in the ownership of property or assets for personal
use.
Every Shirkah tul Aqd has a Shirkah tul Milk imbedded in it, namely joint ownership
of assets and property.
Denition
Types of Musharakah
Musharakah duration
Musharakah capital
Musharakah management
Musharakah prot and loss
Negligence in Musharakah
Musharakah termination
CIFE02, 03, 04: Understanding Musharakah
17
Differences between Shirkah tul Aqd and Shirkah tul Milk
1. Shirkah tul Aqd is a direct contract of partnership in a
business or income generating activity whereas Shirkah tul
Milk comes indirectly through contracts or arrangements
unrelated to production or income generation.
2. Shirkah tul Milk is a partnership of joint ownership as opposed
to a commercial venture (Shirkah tul Aqd). It may serve as
source of income for one party but not for both.
3. In a Shirkah tul Milk ownership proportions cannot be
specied however a Shirkah tul Aqd cannot be formed unless
the respective capital contribution shares of the parties are
specied.

Types of Shirkah tul Aqd:
Shirkah tul Wujooh: Partnership where subject matter is
bought on credit from the market based on a relationship of
goodwill with the supplier.
Shirkah tul Aamal: Partnership in the business of providing
services. There is no capital investment, instead partners
enter into a joint venture to render services for a fee.
Shirkah tul Amwaal/Shirkah tul Inaan: Partnership
between two or parties to earn prot by investing in a joint
business venture.

Musharakah Duration
Ongoing Musharakah: Most common form also referred to as
open-ended or permanent. Partnership where there is no
intention of terminating or concluding the business venture at any
point for instance equity participation.
Partners may exit the business at any point they want. This is
usually done by the remaining partner(s) purchasing the share of
the individual exiting the Musharakah.
Temporary Musharakah: Partnership created with the intention of
terminating it at a given time in the future at which point
Musharakah assets are sold and distributed along with any
remaining prot on a pro-rata basis.
It is used to meet working capital needs of businesses, other
examples being private equity followed by planned exit.

Musharakah Capital
All Shariahcompliant items of material value may be used as
capital in a Musharakah.
It may be in the form of cash or it may be in kind, for instance
contributing assets to the business in which case it is necessary
to ensure the assets are valued at the time of Musharakah
execution.
Partners capital investment ratio must be determined at
Musharakah inception or before the business generates prot.
In case of a Musharakah investment in different currencies,
partners must agree upon the numeraire, i.e. one particular
currency to serve as the standard of value in the business which
is usually the currency of the country where the business is
located.
Debt may not constitute Musharakah capital.
18
Musharakah Management
All partners possess the right to be involved in the administration
of the business.
Partners who opt for limited partnership are silent partners. Since
they do not participate in the business unlike the working
partners, according to Shariah, they cannot be allocated a prot
share greater than their capital contribution ratio.
The working partner is responsible for running the Musharakah
but cannot receive separate remuneration for his services
although he may receive an increased prot share as a reward for
his management role.
Unlike for the silent partner, the working partners prot share may
exceed his capital contribution ratio.
In case an individual who is not a business partner serves as
business manager, he is paid a xed wage for his services but
does not share business prot or loss.
The business manager is liable for loss in case of his proven
negligence.
If the business manager invests in the Musharakah business by
means of a separate contract, his capacities of manager and
partner are independent of one another. He earns remuneration
for his managerial role and shares prot and loss based on his
business partnership.

Musharakah Prot and Loss
It is important to remember that prots are not xed in absolute
terms, such as a number, or as a percentage of the invested
capital or the revenue.
For instance, $1000 of prot cannot be stipulated as a xed
number at the time of the contracts execution because the prot
itself is not yet known.
Or, for instance, if a person invests $100,000 and their prot is
guaranteed to be 10% of their investment amount. This would
result in an absolute positive number, or $10,000, regardless of
whether the business gains or loses money.
Similarly, prot rates cannot be set as a percentage of the
revenue either as if theres no revenue; how can there be any
prot? And what if the revenue is unexpectedly high; why should
investors be denied higher prots.
In a Musharakah:
Prot may not be guaranteed or xed in absolute terms for
any of the Musharakah partners.
Prot may not be set as a percentage of capital.
Each partner whether minority or majority shareholder must
be allocated a prot share.
One partner cannot guarantee any part of the prot or capital
of another partner.
Silent partners prot ratio may not exceed his investment
ratio.
During the Musharakah, a partner may surrender all or part of
his prot share to another provided doing so is not agreed at
the time of Musharakah execution.
Prot sharing mechanism and prot ratios must be clearly
determined at Musharakah inception.
19
Musharakah may only announce an expected return for the
business, actual returns are declared only after they are
known.

Prot Calculation
Prot is calculated by subtracting costs and expenses from
revenue.
Loss can only be shared by capital contribution ratios.

In Practice
Many Islamic banks base prot and loss sharing investment or
savings accounts on Musharakah. The bank is the working
partner and the account holders are silent partners.
Modern ijtihad has enabled a prot calculation system based on a
combination of tiers of investment amounts, investment duration,
minimum and average balance.
Many businesses need running nance, but are unwilling to opt
for nance on interest. In a conventional running nance facility
the bank offers credit to a client over a certain period and charges
interest. To address this, the bank and its client enter into a
temporary Musharakah.

In a Shariah-compliant running Musharakah facility:
1. The bank and the client agree to a nancing limit.
2. The bank opens a current account to hold the clients sale
proceeds and also to allow him to utilize the nance facility.
3. The clients contribution to the Musharakah is the business he
owns, while the banks contribution to the Musharakah are the
running facility funds.
4. After a certain period, the client and the bank share the
businesss operating prot based on a predetermined ratio.
5. Eventually, one partner, the bank, sells shares to the remaining
partner, the client, and exits the Musharakah.
Unlike interest-based nancing, where the bank is only interested
in the repayment of a debt, in a running Musharakah, the bank
has actual equity ownership in the clients business.

Negligence in Musharakah
Negligence refers to loss resulting from the violation of contract
conditions, willful or intentional damage to the Musharakah.

Musharakah Termination
If partners have not agreed on a Musharakah term, one of them
may terminate his partnership unilaterally at any time.
Alternatively a condition may be stipulated at contract execution
that no partner can terminate the contract without the consent of
the other partners.
In case of Musharakah termination, if assets are realized as cash,
they are distributed based on partnership ratios. In case a prot
has been earned, it is distributed based on predetermined prot
ratios.
Tangible assets may be liquidated by granting them to existing
partners in exchange for the prot they have earned or they may
be sold in the market and the income from them distributed.
20
CIFE05, 06, 07
Understanding Mudarabah
Islamic Investment Partnerships
Where Islamic banks meet conventional private equity type
investing. Here you learn Mudarabahs, the Islamic business
partnership where one partner supplies capital for the
business and the other provides management expertise. We
explain the Mudarabah structure and contrast it with
Musharakah and Wakalah, explaining how they differ in
banking practice. How is an investment partnership different
from an agency contract? We discuss the relative merits of
the Mudarabah and the Wakalah structure in different
situations. We also describe the Mudarib's role, the duration
of Mudarabahs and the forms of capital contribution by the
investor and in some cases even the Mudarib. We discuss
the Mudarabah's management and the rules for sharing
prot and loss. We also look at some practical examples
showing how Islamic banks use Mudarabahs.
A Mudarabah is a partnership between two or more parties usually to conduct
business or trade. Typically, one of the parties supplies the capital for the business
and the other provides the investment management expertise.
The nancier or the Rabb al Maal provides all the investment capital for the
business.
The investment manager or the Mudarib is entrusted with the Rabb al Maals
capital, invests it in a Shariah-compliant project and takes full management
responsibility.
The Rabb al Maal and Mudarib share prot based on pre-agreed ratios.

Types of Mudarabah
With respect to scope of business activity, Mudarabahs may be unrestricted or
restricted.
Unrestricted Mudarabah
The Mudarib is free to invest capital in any Shariah-compliant project of his choice.
Restricted Mudarabah
The Mudaribs investment of capital is restricted to specic sectors and activities
and/or geographical regions only. Here too all investments must be Shariah-
compliant.
Denition
Types of Mudarabah
Investment of Mudarabah capital
Differences and similarities
Mudarabah and Musharakah
Mudarabah and Wakalah
Mudarabah duration
Mudarabah capital
Mudarabah management
Mudarabah prot sharing
Loss in a Mudarabah
Mudarabah termination
Mudarabah - At the bank
CIFE05, 06, 07: Understanding Mudarabah
24
Investment of Mudarabah Capital
1. More than one Rabb al Maal
2. Mudarib also contributes capital
3. Mudarib invests business capital in different project

More than one Rabb al Maal
Multiple capital providers pool in their contributions to the same
project and hire an investment manager as Mudarib.
Mudarib also Contributes Capital
The Mudarib is permitted to contribute capital to the Mudarabah
provided that the Rabb al Maal/Arbaab al Maal approve.
Mudarib invests business capital in different project
The Mudarib as business manager is responsible for investing
and managing the Rabb al Maals funds however the Shariah
permits him to use the capital for parallel investment, i.e. receive
capital for Mudarabah and invest in a different venture.

Differences Between Mudarabah and Musharakah
1. In a Mudarabah, the Mudarib is solely responsible for
managing the business whereas in a Musharakah all partners
have the right to participate in the business.
2. The Rabb al Maal provides the business capital and only on
the condition that the Rabb al Maal agrees can the Mudarib
contribute capital to the Mudarabah whereas in a Musharakah
all partners must contribute capital.
3. Rabb al Maal bears any loss to the business provided it is not
due to the Mudaribs negligence however in a Musharakah all
partners bear loss pro-rata to their capital contributions.
4. Mudarabah costs that relate to tasks that pertain to the
Mudaribs domain are not billed to the Mudarabah business,
only running costs are whereas in a Musharakah, partners
bear all costs as they are subtracted from revenue prior to
prot distribution.
5. The Mudarib may only receive amount of capital that he
requires to invest in the business whereas in a Musharakah,
when the business project concludes the partners retain the
right to receive Musharakah capital according to capital
contribution ratios.

Similarity between Mudarabah and Musharakah
1. The Mudarib is permitted to surrender all or part of his prot
to the Rabb al Maal provided it is not pre-agreed. Similarly in
a Musharakah, a partner may give up his prot in favour of
another on the strict condition that it is not predetermined.

Differences between Mudarabah and Wakalah
1. The Mudarib in a Mudarabah receives a share in prot
whereas the Wakeel or agent in a Wakalah receives a xed fee
for services.
2. The Mudarib gets paid his prot share only if there is prot
whereas the Wakeel receives a fee in any case.
25
Similarity between Mudarabah and Wakalah
1. Both Mudarabah and Wakalah are principal-agent contracts
and prot is not guaranteed in either case.

Mudarabah Duration
Ongoing: Partnerships where there is no intention of concluding
the business venture at any known point however partners have
the option of exit provided they give prior notice to the other
partners.
Temporary: Partnerships created with the specic intention of
terminating them at a given future point in time. When the time is
over, the Mudarabah assets are sold and distributed with any
remaining prot on a pro-rata basis.

Mudarabah Capital
All Shariah-compliant items of material value may serve as
Mudarabah capital. The capital may be cash or in kind. In case it
is kind it is important to ensure that the assets are valued at the
time of Mudarabah execution.
Partners capital investment must be established at Mudarabah
execution or at the latest before the business generates any
prot. If partners are investing in different currencies it is
important to agree upon one particular currency or numeraire to
serve as a standard value for the business.
Debt cannot serve as Mudarabah capital.
Partners may agree on individual prot shares.
For the Arbaab al Maal, the ratios of capital contribution may help
them in developing their prot sharing ratios but in practice these
prot sharing ratios differ from capital contributions ratios.
Example:
A furniture business is set up between one Mudarib and one
Rabb al Maal.
The Rabb al Maal contributes $5,000 cash. There are no other
assets at this point.
The annual prot sharing ratios are agreed at 60% for the Rabb al
Maal and 40% for the Mudarib.
The prot in the rst year is $10,000 which is distributed as
$6,000 for the Rabb al Maal and $4,000 for the Mudarib.

Mudarabah Management
Only the Mudarib possesses the right to manage the business.
The Rabb al Maal/Arbaab al Maal serve in the capacity of silent
partners.
While restricted Mudarabahs are permitted, no conditions that
may restrict or impede the Mudaribs management of business
are allowed.
As business manager, the Mudarib receives a prot share for his
effort however he is not entitled to a xed remuneration for his
services.
If the manager wants to receive a xed wage he must be
employed under a Wakalah contract as Wakeel, in which case he
does not receive a prot share.
If the Mudarib is permitted by the Rabb al Maal/ Arbaab a Maal to
invest in the business, then by means of a separate contract he
26
may make an investment contribution and become a Rabb al
Maal. It is important to remember that his roles as Mudarib and
Rabb al Maal are independent of one another.

Mudarabah Prot Sharing
The prot sharing mechanism and mutually agreed prot ratios
must be clearly dened for all the partners at the Mudarabahs
inception or before prot or loss is generated.
Prot amount cannot be guaranteed or xed in absolute terms for
any of the Mudarabah partners and neither can it be a percentage
of capital.
A partner may voluntarily surrender all or part of his prot share to
another partner provided it is not pre-agreed at contract
execution.

Loss in a Mudarabah
The Rabb al Maal/Arbaab al Maal bear(s) the entire loss based on
capital contribution ratios.
Mudarib does not bear any loss except that caused by his proven
negligence.

Mudarabah Termination
A Mudarabah may be terminated by any party at any time
provided the terminating party gives prior notice however a lock-
in clause may be established for a certain period that the
Mudarabah must remain in operation unless unexpected
circumstances such as death or injury materialize.
At termination, business assets in the form of cash are distributed
based on capital contribution for cash and prot sharing ratio for
prot. If the business capital is in illiquid form, it is realized in
cash. Next after calculating accrued prot, the cash and prot are
distributed as per capital contribution and prot sharing ratios.

Mudarabah Practical Applications at the Islamic Bank
Islamic banks collect money from their depositors on a
Mudarabah (or Musharakah) basis and then form a Mudarabah (or
Musharakah) pool.
The bank serves as Mudarib to manage the pool.
Based on its contractual agreement with its account holding
customers, the bank retains the right to invest in the Mudarabah
(or Musharakah) pool if it wants to.
The bank uses the capital to make a range of Shariah-compliant
investments.
Operationally there is one difference, where normally prot in
partnership based ventures like Mudarabah are shared after costs
have been deducted from the revenue, since it is difcult for
Islamic banks to identify and allocate costs to different pools and
projects, they absorb the costs and instead share gross prot.
Mudarabah accounts are usually offered through savings or term
deposit accounts where normally a longer duration of deposit
corresponds to a higher expected prot rate.
Such accounts have expected prot rates attached with them.
These are the rates the account holders can expect to receive.
It is important to remember that the bank cannot guarantee its
rates of return.
27
CIFE08, 09
Understanding Ijarah
Islamic Leasing
What's an Islamic lease? This modules helps you nd out.
We introduce Ijarah, the Islamic lease, and look at pre-
requisites for their execution, legal title, possession,
maintenance, earnest money, default, and insurance. We
begin answering the question "How does an Ijarah work?"
with step-by-step practical explanations. You learn the rights
and obligations of the lessor and the lessee and focus on
defective assets, sub-leases, extensions and renewals,
transfer of ownership, and termination.
Ijarah is the lease of a specic asset or service to a client for an agreed period of
time in exchange for rent which at the end of the lease period may result in
transferring the subject matters ownership to the lessee.

Types of Ijarah
Ijarah tul Aamaal
Ijarah tul Manafaay

Ijarah tul Aamaal:
A lease contract providing services in exchange for agreed rent.
For instance the services of a lawyer purchased by a client in return for a fee.

Ijarah tul Manafaay:
A lease contract executed to transfer the benets of an asset in exchange for an
agreed price.
For instance an apartment leased for a year in exchange for a monthly rent. A part
of the years rent may be paid in advance and the remainder be paid as monthly
installments, mutually agreed upon between the lessor and lessee.

Denition
Types of Ijarah
Ijarah classication
Prerequisites
Subject matter
Rent and remuneration
Default
Rights and obligations of Lessor and
Lessee
Renewal
Transfer of asset ownership
Negligence
Termination
CIFE08, 09: Understanding Ijarah
31
Usufruct lease categorized as:
Specic Asset Lease: A particular asset. For instance a car
identied by the lessee, a red fully loaded, automatic sedan.
Lease of asset based on specications: An asset not
specically identied by the lessee but one required to meet
certain conditions. For instance any sedan.

Ijarah classication based on transfer of ownership to lessee
Standard Ijarah
A lease contract where the lessee benets from the asset for a
specic time period but it does not result in the eventual transfer
of ownership of the asset to the lessee.
Ijarah wa Iqtina
A lease contract conducted solely to transfer ownership of the
leased asset to the lessee at the end of the lease period.

Ijarah prerequisites
The client and lessor enter into a promise to execute an Ijarah for
the usufruct of a particular asset or service. The institution
undertakes to provide the asset or service and the client
undertakes to enter into a lease contract for it.
The asset or service must be owned by the lessor and made
available to the lessee before the Ijarah commences. The lease
period commences once the subject matter of the lease is made
available to the lessee.
Ijarah - Key Elements
Subject Matter
All Shariah-compliant assets or services may be used as Ijarah
subject matter.
Legal Title
Generally the lessor owns the leased asset and it should be in his
name however for regulatory reasons the asset may be registered
in the lessees name.
Possession
Ijarah may only be executed for subject matter the lessor owns
and possesses.
Maintenance
Periodic Maintenance: The lessee is responsible for regular
maintenance of the leased asset.
Major Maintenance: The lessor is responsible to meet all
requirements to ensure the leased asset continues to provide
intended use.
Earnest Money
A sum of money the lessee deposits with the lessor. The lessor
maintains it as compensation for actual loss in case the client
goes back on his word about executing an Ijarah.
If the client fullls his undertaking to lease and enters into an
Ijarah contract, the lessor returns him the earnest money.
Insurance
The Ijarah asset can be insured by means of Shariah-compliant
Takaful insurance.
32
Ijarah Rent and Remuneration
Rent
1. Rent must be clearly dened, it may in the form of cash or
kind or an assets usufruct.
2. Different rentals may be established for different periods.
3. Rent for the initial Ijarah period must be established and
received in advance from the lessee and rent for the remaining
period may be linked to a well known benchmark.
4. Rent begins to accrue as soon as the subject matter of the
lease is made available to the lessee.
Remuneration
Remuneration for a service is established in relation to time.

Default in Ijarah
Default in an Ijarah is a failure on the lessees part to make a
rental payment.
If the lessee defaults on lease payments, the lessor may reclaim
the asset or grant him respite until his nancial condition
improves.

Lessors Rights and Obligations
Lessors Obligations
1. Lessor bears all the risks associated with the leased asset
during the lease term.
2. Lessor takes care of major maintenance expenses and
insurance costs. The lessor may include insurance costs at
the time rentals are determined however once rentals are
established, they may not be adjusted to accommodate a
change in expenses. Lessor may appoint client as agent to
deal with the insurance company.
3. Lessor is obliged to deliver the asset and all associated
leased items necessary to transfer usufruct to the lessee. The
lessor must rectify any problem that prevents the lessee from
utilizing the usufruct.

Lessors Rights
1. In case the lessee defaults on lease payments, the lessor is
within his rights to reclaim the leased asset or grant respite for
a time. He may also charge late payment fee which includes
administrative charges that belong t the lessor and late
payment penalty that is given to a designated charity.
2. In case of excessive damage to leased asset, the lessor may
rescind the Ijarah.
3. Lessor may contract an Ijarah with more than one lessee for
the same asset for different time periods.
4. Lessor may rescind contract if he becomes aware of the
lessees intent to use Ijarah asset for unlawful purposes.

Lessees Rights and Obligations
Lessees Obligations
1. Lessee must utilize the Ijarah asset according to customary
practice by which similar assets are used. He must take
necessary measures to preserve it from damage or defect and
33
benet from the usufruct as provided in the contract and not
in any way beyond its scope.
2. The lessee is obliged to pay rentals once the Ijarahs subject
matter is made accessible to him. If the Ijarah asset is
available to the lessee only for a part of the contracts
duration, the lessee in not obliged to pay rentals for the period
the usufruct is not at his disposal

Lessees Rights
1. The lessee is within his rights to rescind the Ijarah contract if
the lessor refuses to repair the Ijarah assets defects that
occur after the contract date or exist on the contract date
unbeknownst to the lessee.

Sublease
The lessee may sublease the Ijarah asset to third party with the
lessors consent.

Ijarah Renewal
The Ijarah may be extended when it reaches maturity and the
lessee still wants to continue benetting from it. A new Ijarah is
not required.

Transfer of Ijarah Asset Ownership
In order to transfer the Ijarah assets ownership to the lessee at
the end of the lease term, a separate document independent of
the original Ijarah contract is prepared.
In this document the lessee undertakes to purchase the Ijarah
asset at the end of the Ijarah period for a mutually agreed amount
at the time of Ijarah contract execution.
The price may be the actual cost of the leased asset or any other
nominal value. Alternatively the lessor may gift the leased asset to
the lessee at the end of the Ijarah period.
In some cases, with the lessors consent, the lessee may even
purchase the asset during the lease period by making complete
payment of rentals due or paying for the market value of the asset
at the time.
The asset is sold to the client at the end of the lease period based
on a separate sale contract that represents the transfer of
ownership.

Negligence in Ijarah
Negligence is the loss that results from the violation of contract
conditions.
If the Ijarah asset is damaged as a result of the lessees
negligence, he must bear repair expenses. However the lessee is
not liable for rent for the period the asset remains out of use.

Ijarah Termination
The Ijarah is terminated:
Based on contractual terms
One of the partys rescission
Due to the theft or destruction of the Ijarah assets usufruct.
34
As a general rule, contracts cannot be terminated unilaterally but
only by mutual consent, however there are some conditions as a
result of which contracts are automatically terminated:
1. If the lessee fails to meet lease terms
2. If the lessee loses his sanity during the lease period
3. If case of the lessees death

Lessee can terminate Ijarah:
If the Ijarah asset contains or develops defects. He may return
asset to the lessor and demand compensation for the period of
defect.
The lessee may not rescind the contract if the defect does not
hinder usufruct utilization or the lessor ensures its immediate
replacement.
Remember that the lessee can exercise rights of rescission in an
Ijarah of a specic asset only.
35
CIFE10, 11, 12
Understanding Murabaha
Cost Plus Financing
Learn about the most widely used Islamic nance product:
buy an asset for the customer; sell the asset at a premium in
installments to the customer. That's a Murabaha. In these
modules we introduce Murabahas and walk you through the
rst 5 of the 7 important steps necessary for a Murabaha's
valid execution. Wrap up the 7 steps to executing a
Murabaha: we cover steps 6 and 7 and go on to discuss
common mistakes bankers make when executing
Murabahas and how to avoid them. We also look at risk
management, default, early repayment, and prot calculation
in Murabahas. So how does it work in the real world? We
look at 6 practical examples of Murabahas based on
installment repayments, bullet repayments, advance
payments, and credit and import Murabaha.
A Murabaha is a sale in which the sellers cost of acquiring the asset and the prot
earned from it are disclosed to the client or buyer.
Islamic banks offer the Murabaha to fulll asset purchase requirements and not as
a liquidity nancing facility.

Murabaha Prerequisites
Subject Matter
1. Murabaha subject matter or the Murabaha asset must exist at the time of
contract execution. For instance a Murabaha can be executed for a car that
exists not for one that is to be manufactured.
2. The bank must own the asset and have either physical or constructive
possession.
3. The subject matter must be an item of value and Shariah-compliant.
4. The subject matter must be a tangible good, clearly identied and quantied.

For instance if the buyer wants to purchase rice, its exact quality and quantity in
terms of weight must be clearly specied in the Murabaha contract to avoid gharar
or uncertainty that leads to dispute between contracting parties.

Price
1. Murabaha asset cost must be declared to the client.
2. The cost refers to all expenses involved in the assets acquisition.
Denition
Murabaha prerequisites
Subject matter
Price
Steps of Murabaha execution
Mitigating Murabaha risks
Default in a Murabaha
Prohibitions in a Murabaha
Calculating prot in a Murabaha
CIFE10, 11, 12: Understanding Murabaha
39
3. The assets price includes all direct expenses where the bank
pays for all indirect expenses.
4. Parties to the contract establish a prot rate by mutual
consent or in relation to a specic and known benchmark.
5. The Murabaha price may be charged at spot or be deferred
and paid as a lump sum at the end of the contract or in
installments on xed dates during the term.
6. The Murabaha prot must be disclosed as a specic amount.

It is important to remember that Murabaha execution must adhere
to a certain sequence of procedures in order to ensure Shariah-
compliance.

Steps of Murabaha Execution
1. The clients submission of a purchase requisition for
Murabaha goods
Based on the requisition the bank approves the credit facility
before entering into an actual agreement.
2. The master Murabaha facility agreement between the nancial
institution and the client
It includes:
i. An approval of the clients credit facility
ii. The terms and conditions of the Murabaha contract
iii. Murabaha asset specication
iv. Clients undertaking to purchase the Murabaha asset
once the bank acquires it (if not included in the MMFA, it
constitutes step 3)
3. The clients unilateral promise to purchase the Murabaha
goods and the nancial institutions acceptance of collateral
At this stage the bank in order to safeguard its rights in case
the client backs out from entering into a Murabaha, requests
the client to furnish a security or earnest money called
Haamish Jiddiah.
In case the client backs out from entering into a Murabaha,
the bank makes up for the actual loss from it and returns the
remainder to the client.
4. The agency agreement between the nancial institution and
the client or a third party
Since banks do not possess the expertise or manpower to
purchase the asset, they appoint the client as the agent to
procure the asset from the supplier on their behalf.
Agency agreements are of two types:
Specic Agency Agreement: Agent is restricted to
purchase a specic asset from a specic supplier
Global Agency Agreement: Agent may purchase the asset
from any source of his choice. Such an agreement also lists
a number of assets which the agent may procure on the
banks behalf without executing a new agency agreement
each time.

Key point to remember about the agency
During the agency stage, the banks exposure to asset risk is
highest and it is in the banks interest to shorten this period as
much as possible.
Bank may also minimize risk by ensuring the supplier receives
payment for the Murabaha asset.
40
Bank must also ensure that the Murabaha asset to be
purchased is not already in the clients possession. To
maintain correct sequence, the bank must disburse the
money to the agent before the agent purchases the goods.
The agency agreement is not a prerequisite but motivated by
logistical ease.
Banks can procure Murabaha goods directly or establish a
third party agency.
5. The possession of the Murabaha goods by the agent on
behalf of the nancial institution
After the agency agreement the client completes the
purchase order form. The bank disburses the money to the
client, who as agent pays it to the supplier and receives
possession of Murabaha goods.
6. The exchange of an offer and acceptance between the client
and the nancial institution to implement the Murabaha sale
Either party can make the offer; the client may offer to buy
the Murabaha goods or the bank may offer to sell them. The
Murabaha sale is completed at the time of offer and
acceptance.
7. The transfer of possession of Murabaha goods from the
nancial institution to the client
The client is the owner of goods and all the associated risk
and rewards however his obligation does not conclude until
he makes complete payment of Murabaha price.

Mitigating Murabaha Risks
Shariah validity of a Murabaha is strongly sensitive to
following the designated steps in the correct sequence.
A deferred Murabaha may not be executed for mediums of
exchange, i.e. commodities such as gold, silver and
currencies, only a spot Murabaha may be executed for them.
The bank must seek Shariah-compliant Takaful insurance for
Murabaha goods to cover transit period risk, i.e. the risk
posed to the bank once it purchases the goods from the
supplier and has their possession and before it sells them to
the client.
Default in a Murabaha
There is no concept of a late payment penalty in a Murabaha
contract however a charity clause is established at contract
execution to serve as a deterrent to default.
In case of a default in payment, based on the charity clause, the
client is obliged to pay a predetermined amount to a designated
charity.

Murabaha Prohibitions
A roll-over is the provision of an extension in return for an
increase in the original payable amount and is impermissible in a
Murabaha.
It constitutes repricing and rescheduling:
Repricing is prohibited because the Shariah does not permit an
increase in debt once it is xed.
Rescheduling is only permissible when the creditor provides an
extension to ease the burden of a debtor, so a roll-over where the
bank increases the debt in return for an extension is
41
impermissible as the resulting amount of debt is analogous to riba
or interest which is prohibited in Islam.

Calculating Murabaha Prot
From an accounting perspective, there are two stages in a
Murabaha:
1st stage: The investment stage: Begins after the bank and client
sign the agency agreement. It is the time period where the bank
has disbursed money for the purchase of the asset from the
supplier but has not yet acquired possession in order to sell it.
2nd stage: The nancing stage: This stage begins when the bank
receives the good and goes ahead with the exchange of offer and
acceptance with the client. It ends once the bank receives the
Murabaha payment from the client. It is during this time that the
bank has the right to accrue prot.

Example
A bank extends an advance for Murabaha to the client on the 1st
of March, knowing that he will not purchase the asset until the 1st
of June.
The client purchases the asset on the 1st of June and the
Murabaha sale takes place between him and the bank on the
same day.
If the tenure of the Murabaha is 4 months, it will commence on
the 1st of June and last until the 1st of October.
The bank will begin calculating prot on the 1st of June and not
the 1st of March so that no income accrues to the bank between
1st of March and 1st of June.
In case the client as agent is unable to purchase the asset on the
1st of June due to some unavoidable circumstances such as a
supply shortage and the Murabaha is terminated, the bank is
entitled to receive only the capital back and nothing more.
This is the key difference between a loan on interest and a
Murabaha.
42
CIFE13, 14, 15
Understanding Salam and Istisna
Forward Sale and Manufacturing
Contracts
What makes a forward contract Islamic? Learn here. In this
module on Salam, the Islamic forward sale, and Istisna, the
Islamic manufacturing contract, we begin with Salam. We
look at the goods for which a Salam may be executed, the
pre-requisites, and the use of a Parallel Salam. We discuss
security, replacement, and default before explaining how its
pricing is calculated. We then look at Istisna and discuss the
major differences between it and the Salam. We also discuss
delivery, default, and termination an Istisna. We conclude the
3 module series with a practical product structuring exercise
where you get to choose the appropriate nancing tools in a
given scenario.
Salam is a sale where the price of the subject matter is paid in full at the time of
the contracts execution while the delivery of the subject matter is deferred to a
future date.
It is not necessary that the subject matter exist, and be owned and possessed by
the seller at the time of the Salams execution as is the customary requirement of a
standard sale, provided it meets the other criteria specic to it.
Salam is a mode of nance that helps the seller generate and utilize liquidity and at
the same time allows the buyer to purchase commodities for a price lower than the
spot market price.
A Salam may be executed for homogeneous commodities but not for specic
commodities and mediums of exchange.
Homogeneous commodities, also termed fungible, are similar to one another and
are sold as units. The difference between them is negligible. Since they are
homogeneous, in case of loss, one unit may be replaced by another.

Salam Prerequisites
1. The quantity and quality of Salam goods must be specied in order to avoid
any ambiguity that may lead to dispute between contracting parties.
Salam goods must be readily available in the market so that at the time of
delivery if they do not meet specications the seller can procure them easily
and supply them to the buyer.
Salam denition
Salam prerequisites and essentials
Salam term and termination
Security in a Salam
Replacement of subject matter
Delay in delivery and default in a Salam
Istisna denition
Istisna essentials
Istisna term
Parallel Istisna
Delay in delivery and default in an Istisna
Rebate, Prohibition of buy-back
Istisna termination
CIFE13, 14, 15: Understanding Salam and Istisna
46
2. Salam price must be paid at spot. The price is xed and
cannot be increased due to an increase in the price of Salam
goods in the market during the contracts term.
The seller must deliver the goods without demanding any
excess money as the Salam goods become the property of
the purchaser once the contract is signed.
3. The place of delivery of Salam goods must be specied and
they must be delivered in their entirety on a xed future date
or in installments on predetermined dates.
4. Salam goods cannot be sold to a third party before receiving
possession however a parallel Salam may be executed for
them.

Parallel Salam
A transaction executed simultaneously with the original Salam.
The buyer of goods in the rst Salam is the seller of goods in the
second or parallel Salam.
For instance, a buyer makes a payment for the subject matter to
be delivered at a date, three months in the future.
At the same time, as a seller, he executes another Salam for a
higher price with a third party for the same goods to be received
by him in the future. This way the money disbursed to purchase
goods in the rst Salam is retrieved as price payment and prot
from the parallel Salam. Once the goods of the original
transaction are delivered they are transferred to the buyer in the
parallel Salam.
A parallel Salam is permitted with a third party only.
Salam Essentials
Price
Most things established as the price for an ordinary sale may also
be established as Salam price, i.e. cash, goods and usufruct.
It is important to remember that goods may serve as the Salam
price provided they do not fall into the Amwaal e Ribawiya
category.
Usufruct refers to the benets received from a particular asset.
The buyer in a Salam may offer the seller an assets usufruct for a
specic time period as the Salam price.
The Salam price is determined based on the number of days the
banks funds remain invested in the Salam transaction.

Subject Matter
1. Salam subject matter must fall into the category of
homogeneous goods and be easily available in the market
throughout the contracts term or at the time of delivery.
2. The Salam subject matter must be clearly specied in terms of
quantity and quality.
3. The subject matter must not be a commodity for which value
cannot be established. For instance precious stones.
4. The Khayar al Aib (option of defect) may be exercised for
Salam subject matter however not the Khayar al Rooyat
(option of refusal).
47
The Khayaar al Aib is an option that a buyer may exercise to
return goods to the seller if they are found to be defective
according to the specications at the time of delivery.

The Khayaar al Rooyat is an option of refusal based on which the
buyer may decline from accepting the goods as a result of non-
conformity to specications.
Delivery of Salam goods
1. Date of delivery of subject matter must be clearly established
at the time of contract execution.
2. Place of delivery of Salam goods must also be clearly
specied.
3. Delivery of subject matter implies the complete transfer of its
ownership.

Salam Termination
Once executed, a Salam may not be revoked unilaterally by either
party. It is a sale contract binding on both parties and may be
terminated completely or partially by mutual consent by returning
the actual or proportionate amount of the price paid.

Salam Term
A Salam may be executed for any length of time mutually agreed
upon between the buyer and the seller.
Security in a Salam
Since Salam is based on advance payment, the buyer is within
his rights to obtain a form of security from the seller. In case of
default, the buyer liquidates the security and makes up for the
actual price paid for the subject matter.
Alternatively at the time of contract execution, the buyer may
establish that in case of default, he will sell the security in the
market and purchase the goods that the seller was supposed to
provide at their going rate. The seller will then make up for the
price difference if any.

Replacement of Salam Subject Matter
Salam subject matter cannot be replaced before the delivery date
however it may substituted for another commodity based on
mutual consent and the observance of some conditions.

Delay in delivery of Salam Subject Matter
In case the seller is unable to deliver the subject matter on time,
the buyer may not charge a penalty however a charity clause
established at the time of contract execution serves as a
deterrent against a delay in delivery.

48
Default in Salam
Default in a Salam may be intentional or unintentional.
Unintentional
If the seller is unable to meet delivery due to unavailability of
goods or a price rise:
The buyer may wait for the commodity to return to the market
or
Both parties can mutually agree to terminate the contract and
the buyer may be reimbursed the entire payment or
Both parties may mutually agree to replace the original
subject matter with another commodity
Intentional Default
In the case where the seller deliberately does not purchase the
commodity from the market to avoid a personal loss, he must be
compelled to follow through with the original commitment or else
the buyer may liquidate the security to make up for loss.

Salam: Practical Application
The price of goods in a Salam may be xed at a lower rate than
the price of goods delivered at spot. The difference between the
two prices earns the nancial institution a legitimate prot.
The Islamic bank after purchasing the commodity may sell it
through a parallel Salam contract for the same delivery date.
If a parallel Salam is not feasible, the Islamic bank may obtain a
promise to purchase from a third party.
Istisna
An Istisna is a transaction used to acquire an asset manufactured
on order. It may be executed directly with the supplier or any
other party that undertakes to have the asset manufactured.
There are usually two parties involved in an Istisna contract; the
Istisna requestor, or orderer, and the manufacturer.
An Istisna takes place when one party agrees to manufacture a
product for another party at a specic price. This agreement
involves an exchange of an offer and an acceptance which
completes the contract.

Subject Matter in an Istisna
1. The subject matter of an Istisna need not exist, be owned or
possessed by the manufacturer at the time of contract
execution.
2. It must be an item that is manufactured as customary market
practice and undergoes processing to convert from one form
to another.
3. The manufacturer cannot execute a pre-agreed Istisna for
goods that he already possesses.
4. The Istisna subject matter must be clearly specied.
5. The manufacturer and not the Istisna requestor must procure
the subject matter.
6. Unless the requestor stipulates otherwise, the manufacturer
may also have the goods produced from another source.
7. The quantity or quality of Istisna subject matter can be
changed by mutual consent of the contracting parties.
49
8. The Istisna requestor reserves the right to exercise the Khayar
al Aib after receiving the delivery of Istisna goods within a
certain time limit the manufacturer species.

Istisna Essentials
1. Cash, goods and usufruct may serve as the Istisna price.
Goods may be established as the Istisna price provided they
do not fall into the category of Amwaal al Ribawiya.
2. Istisna price may be paid at the time of contract execution, in
xed installments over the contracts term or as a lump sum at
the end of the contracts term.
3. The Istisna price is mutually agreed upon between the Istisna
requestor and manufacturer at the time of contract execution.
4. The Istisna price may not be established on a cost plus prot
basis like a Murabaha but as a lump sum.
The manufacturer need not pass on the benet of a lower
manufacturing cost to the requestor and conversely if the
manufacturing cost turns out to be greater than the
estimate, he must bear it.

Istisna Term
An Istisna may be executed for a time period mutually agreed
between the Istisna requestor and Istisna manufacturer. In case a
time period is not agreed upon, the goods may be manufactured
and delivered within a reasonable period of time as is the market
norm for those goods.
Parallel Istisna
A parallel Istisna is a second Istisna contract executed alongside
the rst Istisna. The manufacturer in the original contract serves
as the Istisna requestor in the parallel contract and prots from a
difference in price. The parallel Istisna is completely separate and
independent of the original Istisna contract.
For instance a client places an order for the manufacture of
goods with an Islamic bank, the bank enters into an Istisna with
the manufacturer.
Once the bank receives the goods, it transfers them to the client.
As the client is the ultimate buyer, the bank may appoint him as
an agent to supervise the production of the Istisna goods.
It is important to remember that the bank may not enter into an
existing Istisna contract between two parties.

Default in Istisna
The Islamic bank may demand security in its capacity as
requestor or manufacturer. Such a security is called Arbun. Arbun
is a non-refundable down payment that the seller/manufacturer
receives from the buyer/requestor, in order to secure the
purchase of goods.

50
Delivery of Istisna Goods
1. The buyer may not consume Istisna goods before they are
delivered. The buyer must rst assume physical or
constructive possession of the goods.
2. If Istisna goods do not meet specications and are of an
inferior quality, the buyer can reject them however if they are
of superior quality he must accept them unless he requires
them as raw material.
3. The buyer may accept Istisna goods of an inferior quality if the
manufacturer agrees to reduce their price.
4. In case of early delivery, the buyer may accept it provided it
does not adversely affect his prior arrangements.
5. If the buyer delays accepting goods delivered on time, the
manufacturer may charge him for the expense for holding
them on his behalf.
6. If the buyer refuses to accept goods, the manufacturer may
sell the goods as agent on the buyers behalf. Any amount
above the original price is returned to the buyer and if goods
sell for a lower price, the buyer is expected to pay the
difference.

Shart al Jazai
A penalty established at the time of contract execution that allows
for a reduction in the price of manufactured goods in case of a
delay in their delivery. Such a penalty is only permitted in
manufacturing contracts as the buyer requires the goods at a
xed time and in the absence of a deterrent a delay in delivery
could have serious consequences with respect to follow-on
commitments.
Rebate in an Istisna
The manufacturer is permitted to grant the Istisna requestor a
rebate in the price at his own discretion. A rebate may not be
stipulated at contract execution.
Prohibition of Buy-Back
The Istisna must not involve a buy-back at any stage. Before the
Istisna is executed it is important to ensure that the contracting
parties are separate and independent legal entities.

Istisna Termination
Either of the two contracting parties may terminate the Istisna
unilaterally provided the manufacturing process has not
commenced. If manufacturing has begun then the contract is
binding on both parties and can only be terminated by mutual
consent.

Istisna: Practical Applications
An Istisna can be used to nance construction, export and
infrastructure development.
51
CIFE16
Understanding Islamic Insurance
You learn the difference between Islamic and conventional
insurance and the essentials that make Islamic insurance
unique.
Islamic Insurance is based on mutual assistance and co-operation through
voluntary contributions to a common fund that provides its members mutual
indemnity in the event of loss.
Prohibition of Conventional Insurance
Conventional insurance is prohibited as it possesses the following elements:
Gharar: Contractual uncertainty that leads to dispute.
- Gharar exists in conventional insurance as one party in the contract, the
insurer, has a right to prot from the investment of insurance premiums and
the other party, the insured, does not have access to its funds.
Maisir: The element of speculation in a contract.
- In conventional insurance, the insured pays a premium expecting a much
greater amount in case of loss, but loses the entire premium when an
uncertain event does not occur.
Riba: Any amount that is charged in excess which is not in exchange for a due
consideration.

Conventional insurance possesses the element of riba in two ways:
It involves direct riba in terms of the excess that is involved in an exchange
between the insureds premium and the insurers payment against a claim.
It involves indirect riba based on the interest earned on interest based
investments made by the insurance company with the insureds premium.
Denition
Prohibition of conventional insurance
Gharar
Maisir
Riba
Differences between conventional and
Islamic cooperative insurance
Speculative risk
Pure risk
Islamic insurance essentials
Types of Islamic insurance
Duration
Re-Insurance
CIFE16: Understanding Islamic Insurance
55
Differences between conventional insurance and cooperative
Islamic insurance

Speculative Risk
Speculative risk is the risk that involves the possibility of loss, no
loss or gain. For instance, the risk involved in a new business
venture.
It is prohibited to insure speculative risk as it entails gharar with
respect to the probability of gain as well as that of loss.

Pure Risk
Pure risk involves the possibility of loss. For instance damage to
property due to a re. Such risk can be insured Islamically as it
does not involve uncertainty with regard to the probability of gain
as well as loss.

Islamic Insurance Essentials
1. Islamic insurance offers risk protection based on Shariah
principles of mutual co-operation.
2. It is offered on the principles of good faith where both
contracting parties make full disclosure of all relevant material
facts without intending to manipulate, cheat or disadvantage
each other.
3. Based on three main relationships, the Musharakah between
participants of the joint fund, the Wakalah between the Islamic
insurance company and the insurance policy holders and a
Mudarabah between the insurance policy holders and the
fund itself.
4. The insurer in his capacity as the agent cannot guarantee
premiums and can only be liable in case of his proven
negligence.
56
Conventional Insurance Islamic Insurance
The conventional insurance contract is a
purely financial contract involving uncertainty.
The Islamic insurance contract is based
on co-operation and seeks mutual benefit
through contributions to a common fund.
The insurance company executes the contract
in its own name.
The insurer serves as the insureds agent
to manage operations and invest
premiums based on Mudarabah. The
insured has equity in the pooled funds.
The insurer owns the premiums in return for
being obliged to pay insurance claims
The co-operative insurance account is the
owner of funds.
All the premiums after deduction of insurance
expenses are considered the insurers
revenue.
Any surplus after deduction of expenses
from the premiums is distributed among
the members of the insurance fund
based on their contribution ratios or any
other method agreed upon in the
insurance policy.
All returns from investment transfer to the
insurer.
The Mudarabah based return from
investment of premiums, after deduction
of the Mudaribs share, belong to the
fund members.
The insured and the insurer are two separate
entities; the seeker of insurance and its
provider.
The insurer and the insured are the
same; members of a mutual fund seeking
to indemnify each other against loss. The
participants pool together their risk and
their premiums to share them.
Provides protection against speculative risk in
addition to pure risk.
Only provides protection against pure
loss exposures.
The amount left over in the insurance
account at the time of liquidation is kept by
the insurance company.
The amount left over in the insurance
account is disbursed to charity.
5. The insurer and the insured must fulll their responsibilities in
the contract. This may include conditions that do not affect
the co-operative nature of the agreement.
6. The insurance company may charge a fee for its services as
agent of insurance operations. However, the returns from the
investment of premiums in Shariah-compliant endeavours
based on the Mudarabah must be distributed between the
insurer and the insured according to their investment ratios.
7. In case of loss to members, the Islamic Insurance company
may demand indemnity from the party responsible for
damage. Additionally, it may take all necessary action to
receive the insurance amount on behalf of its participants.
Alternatively, the participants of the Islamic Insurance
company and the party causing the damage may even
reconcile with one another according to Shariah principles.
8. A Shariah advisory board must be established to supervise
insurance operations and ensure Shariah-compliance

Types of Islamic Insurance
There are two types of Islamic Insurance:
Property insurance; or insurance against injuries or mishaps
such as res, earthquakes, car accidents and so on.
Personal insurance; which refers to indemnity against the risk
of disability or death, also known as Takaful.
Islamic Insurance - Duration
Islamic Insurance requires both the insurer and the insured to
adhere to certain time limits.
The insured must make timely payment of premiums, if he
doesnt, the insurer is within his rights to withhold indemnity,
cancel the contract or alternatively take legal action and
pursue due payment from him.
The insured must provide evidence for a claim within a
stipulated period of time. On the other hand, the insurer must
follow through with providing timely and agreed upon
indemnity for loss to him.
The insurance contract runs its course for a specied term
before it expires. It is also terminated upon damage to insured
property or death of the insured, as in such cases the object
of commitment ceases to exist.

Islamic Insurance Overview
Islamic Insurance funds are invested in a joint pool created to
share risk and provide its members mutual guarantee and
protection against it.
The fund is managed by one of its members in exchange for a
payment of a xed fee or alternatively a manager is hired for the
job.
The operator manages the funds in the pool, maintains a part of
the funds to pay for claims and invests the rest in Shariah-
compliant business ventures.
In case a loss is experienced by any member of the pool it is
distributed equally amongst all its participants and is made up for
from the funds within the pool.
57
In the event of a prot from business investments, it is distributed
among the investors according to their investment ratios.
After the fulllment of claims, if any, the operator is remunerated
for his services from the amount in the pool and the remaining
balance is distributed among its members.

Re-insurance
A new insurance arrangement consistent with Islamic Insurance
principles and guidelines provided by the Shariah board. It is
enacted in the event that the amount in the original fund is
insufcient to meet the needs of its members.
58
CIFE17, 18
Understanding Sukuk
Islamic Securitization
You've read about them. Now learn about them. Sukuks are
Islamic shares and we show you the main features walking
you through the 8 step structuring process concluding with a
study of Ijarah Sukuk. We continue our discussion on Sukuk
with a look at Musharakah and Mudarabah, Sukuk and the
limitations of issuing using Murabaha, Salam and Istisna. We
close with a case study of the IDB Sukuk.
Who Uses Ethica?
Sukuk is the Arabic plural of the word Sakk which means certicate. Sukuk are
certicates of equal value representing undivided shares in ownership of tangible
assets, usufruct and services.
For instance, six partners invest in a business venture worth $60,000 by making an
investment of $10,000 each.
In order to represent their shareholding they create certicates to divide the
business into 60,000 units.
Each partner is allotted 10,000 shares.
Securitization is the process of issuing certicates of ownership against an asset
or business. Securitization turns an ordinary asset into a tradable security.
If the securities represent a proportionate share of ownership in tradable assets,
the trade of such securities is permissible.
Important to remember:
The asset portfolio comprises 25% tangible assets because if the majority of
assets are liquid and sold for any amount other than their face value, the
transaction is analogous to riba.
The core contract used in the process of securitization to create Sukuk is the
Mudarabah, based on a predetermined prot sharing ratio, where one party serves
as an agent on behalf of the principal who is the capital owner.
The Mudarabah contract creates the Sukuk with the establishment of an
independent legal entity known as a Special Purpose Vehicle or SPV.
Denition
8 Steps of Sukuk execution
Ijarah Sukuk
Prerequisites
Advantages
Equity-based Sukuk
Musharakah
Mudarabah
Sale-based Sukuk
Murabaha
Salam and Istisna
CIFE17, 18: Understanding Sukuk
62
In the case of Sukuk, the SPV acquires Shariah-compliant assets
and issues ownership certicates against them.

8 Steps of Sukuk Issuance
1. The identication of assets to be securitized;
2. The creation of the SPV;
3. The transfer of the assets to the SPV;
4. The issuance of participation certicates against the identied
assets;
5. The lease of the assets back to the seller;
6. The provision of a guarantee by an investment bank for future
payments or to replace assets if and when required;
7. Periodic payments to investors where there is income from
the securitized assets;
8. The termination of the SPV at maturity by the sale of the
assets to the original seller at a pre-determined price and after
paying any dues owed to the certicate holders or investors
Ijarah Sukuk
A Sukuk al Ijarah may be issued for 3 purposes:
1. To securitize ownership of a leased asset
2. To securitize ownership of the usufruct of an asset
3. To securitize ownership of the right to receive benets from
services
Ijarah Sukuk issuance prerequisites
1. Ijarah Sukuk must represent the holder's proportionate
ownership of the leased asset.
2. The Sukuk-holder must assume the rights and obligations
proper to a lessor to the extent of his ownership.
3. As the owner, the Sukuk-holder has the right to receive rent
proportionate to his ownership in the asset.
4. It is essential that the Ijarah Sukuk is designed to represent
real ownership of leased assets, and not only a right to receive
rent.

Ijarah Sukuk Advantages

Pricing
Rentals amounts that are eventually transferred to Sukuk-holders
may be xed or benchmarked against a known standard.

Reassignment
Ijarah Sukuk may be reassigned or sold to those seeking
ownership in the secondary market provided the underlying
assets represent a considerable portion of tangible assets.

Maturity
The Ijarah may be executed for any length of time mutually
decided between the lessor and the lessee provided the subject
matter of the Ijarah continues to exist.
63
Timing
The asset represented by the Ijarah Sukuk need not exist at the
time of contract execution.

Equity Based Sukuk

Musharakah Sukuk
Used to create new projects, develop existing projects and
nance business activity on the basis of a partnership
contract.

Mudarabah Sukuk
Based on the Mudarabah contract for which capital is
received from investors to nance a project.
Sukuk are issued to investors to represent their proportion of
ownership in the investment activity.
The investors earn prot from the business venture and may
even sell their ownership share in the secondary market.

Both Musharakah and Mudarabah Sukuk are bought and sold in
the market where Sukuk-holders share prots by an agreed ratio
and losses in proportion to investment ratios. In a Mudarabah the
principal bears all loss.
To allow tradability, the asset portfolio of Musharakah and
Mudarabah Sukuk should include 25% tangible assets. Sukuk
issuer cannot guarantee prots.
Sale Based Sukuk

Murabaha Sukuk
Sukuk investors provide issuer with funding to purchase
assets
Asset is purchased from supplier
Asset is sold to the issuer for a deferred price
Prot earned is distributed proportionately among the
investors

Important to remember:
These Sukuk represent the investors shares in receivables from
the purchaser. And since these receivables are a debt, they
cannot be traded in the secondary market.

Salam Sukuk and Istisna Sukuk
Salam and Istisna Sukuk are a useful investment tool for a variety
of short, medium and long-term nancings
For the issuance of Salam or Istisna Sukuk:
An SPV is created, which buys a commodity such as crude oil
in a Salam, or constructs infrastructure such as a highway in
an Istisna.
The SPV pays the price of the crude oil, or cost of
construction of the highway at the time of the contracts
execution with the income generated from the sale of
certicates to investors.
64
After executing the Salam or Istisna, a promise is obtained
from the ultimate beneciary of the deliverable to buy it from
the SPV on the date that it is due.
Since Salam Sukuk represent a debt in the form of Salam
goods to be delivered at a specied date in the future, they
may not be sold in the secondary market. Istisnas, on the
other hand, gradually transform from a pure debt to a
manufactured item, so once the item is substantially created,
where the timing depends on the asset and the opinion of the
Shariah board, the certicates are tradable.
65
CIFE19, 20
Liquidity Management In
Islamic Finance
What do Islamic banks do with excess capital in the short-
term? How do they access capital for the long-term? You
learn the answers to these and other questions in this
module. We discuss how Islamic banks manage liquidity and
begin by explaining an inter-bank Mudarabah, walking you
through how a weightage table works; useful information for
other Islamic banking products. We close the module with a
look at the application of Sukuk in liquidity management. You
look at lters for stocks, shares, Musharakah investment
pools, and the use of agency contracts to manage liquidity.
We also look at local and the foreign currency Commodity
Murabahas.
Liquidity management refers to the nancial management of an excess or shortage
of funds. In order to maximize returns and to ensure that funds are used efciently,
banks place their excess liquidity somewhere for the time they do not require the
funds, (sometimes even for a night) and when they have a shortage of liquidity,
they tap markets and other nancial institutions for access to funds.

Liquidity Management Tools

Mudarabah
A Mudarabah is a business partnership between two or more parties, where one
party supplies capital and the other provides management expertise.
The objective of the Mudarabah deal is to provide a Shariah-compliant structure to
conduct permissible transactions in order to meet business needs and reserve
requirements.
The basic structure for inter-bank dealings for managing liquidity is the
implementation of the master Mudarabah agreement conducted for a maximum
period of 180 days, which discloses the prot and loss sharing ratios between the
partners as well.
Denition
Liquidity Management Tools
Mudarabah
Sukuk
Shariah-compliant Equities
Musharakah Investment Pools
Agency or Wakalah
Foreign Currency Commodity Murabaha
Local Currency Commodity Murabaha
CIFE19, 20: Liquidity Management In Islamic Finance
69
In this way the master Mudarabah agreement serves as the basis
for money market transactions provided:
The investor and working partner mutually agree on a prot
sharing ratio at the time of contract execution
The investor is held liable for loss to the business venture
when not caused by the working partners negligence

It is a Shariah requirement to establish prot and loss sharing
ratios at the time of Mudarabah execution.
For the appropriate allocation of prot, weightages are assigned
to each investment category, whereas loss is shared in proportion
to investment amounts.
Weightages are prot ratios. The longer the term of the deposit, or
the higher the balance, the greater the weightage allocated to it.

Steps of an interbank Mudarabah transaction
Step 1: After the Mudarabah deal between the bank and
investor the transaction is reported to the nancial institutions
treasury operations department.
Step 2: The treasury department veries the deal between
both parties, conrms the weightages, their conversion to
expected prot rate and contract maturity date.
Step 3: Based on the Mudarabah contract, the Islamic bank
as working partner pays regular prot to investors during the
contracts term.
At maturity the Mudarabah closes out the balance of prots and
losses.
Sukuk
Sukuk are certicates of equal value representing undivided
shares in the ownership of tangible assets, usufruct and services.
They are equity stakes in assets and companies, so unlike
conventional bonds, which are debt instruments, they are directly
affected by prots and losses.
The process of issuing tradable certicates of ownership against
assets, investment goods and businesses is referred to as
securitization.
The underlying instrument used in Sukuk ranges from commonly
used Ijarah and Musharakah to Mudarabah and hybrids that
include Murabaha, Salam, and Istisna.
These Sukuk are oated on the capital markets and are available
to institutions seeking a relatively liquid means to park their
capital while also receiving attractive returns.
Alternatively, in case of a shortage of funds, nancial institutions
sell Sukuk to generate the liquidity necessary to meet
requirements.

Shariah-compliant Equities
Like investment in Sukuk, Islamic nancial institutions also make
investments in Shariah-compliant equities in general provided
they meet the Shariah-compliance criteria for stocks.
70
Musharakah Investment Pools
In order to handle a shortage of funds, Islamic banks create
investment pools consisting of nancing assets based on
Murabahas, Ijarahs and Diminishing Musharakahs.
When necessary, these assets are transferred from the general
pool to the specic investment pool to fulll short-term liquidity
requirements.

Musharakah pool creation checklist
1. In order to ensure Shariah compliance, the pool must consist
of at least 33% tangible assets.
2. The Islamic bank accepts funds in the capacity of working
partner and investors serve as silent partners.
3. The tenure of the pool must be less than or equal to the
tenure of the nancing assets it comprises.
4. The pool must consist of those assets expected to earn a
prot greater than the prot required by the nancial
institutions making the investment.
5. The prot and loss sharing ratio established between the
nancial institution and the Islamic bank must be the same
that could be availed for an investment of an equivalent
amount of capital in another nancial concern.
6. At maturity, the pool must be dissolved and the assets
transferred back to the general pool.
When disbursed from the general pool, the assets must be
appropriately assigned to a specic investment pool.
The proper allocation of nancing assets ensures that the prot
earned from them is properly attributed to the specic pool.

Agency or Wakalah
In a Wakalah, the bank possessing excess liquidity as principal,
appoints another bank as its agent to invest its money in various
protable, Shariah-compliant ventures.
The invested funds become a part of the treasury pool of the
bank receiving the investment.
Before investing the funds in a business venture, the agent
presents the principal with an offer for a probable investment
opportunity where it discloses the amount to be invested, and the
tenure and prot to be expected from the investment.
If the principal accepts the agents offer, the deal is executed.
An agency fee is xed for each deal between the agent and the
principal and when the realized prot is greater than the amount
expected, the agent is entitled to retain the amount that is in
excess in addition to the pre-agreed agency fee.
If the business venture suffers a loss as a result of the agents
negligence, the principal is entitled to the prot and any
compensation for actual costs, expenses and the original
investment.
71
Foreign Currency Commodity Murabaha
The foreign currency commodity Murabaha is commonly used for
investing excess funds and is available for maturities ranging from
overnight to a period of a year.
In a commodity Murabaha, the Islamic bank purchases a
commodity on spot and sells it based on a deferred payment
ensuring that the transaction is used only to manage liquidity.
The Islamic bank with the surplus funds through a broker
procures a metal listed on a metal exchange in order to sell it
to the Islamic bank short of funds.
After purchasing the metal from the broker the Islamic bank
maintains the amount payable to him as foreign currency in a
separate account.
The metal is now sold to the bank in need of funds in
exchange for a deferred payment through a Murabaha sale.
Having purchased the commodity, the bank in need of funds
pays the Murabaha price in foreign currency within 90 days.
The selling Islamic bank discloses its cost for purchasing the
foreign currency, the cost of the metal from the broker, and
the prot earned over the 90 days. The prot is linked with a
money market benchmark such as LIBOR.
The bank short of funds sells the metal to a different broker
than the one used earlier and receives payment in foreign
currency.
This broker then sells the metal to the rst broker.
The Islamic bank makes the payment of metals price owed to
the rst broker in foreign currency and this broker pays the
second broker.
The bank short of funds receives the price of the metal in
foreign currency from the second broker and, after 90 days,
the selling Islamic bank recovers the foreign currency principal
amount in addition to a prot linked to LIBOR.

Local Currency Commodity Murabaha
The process involved here is different from a foreign currency
commodity Murabaha because an organized asset exchange
market is not used.
Commodities like sugar, cotton and fertilizer are physically
identied before a sale takes place.
The Islamic bank appoints an agent who takes possession of
the commodities on the banks behalf. Whenever instructed,
the agent sells out or issues a delivery order for the
commodities in favour of another person or party.
The bank purchases a commodity from a broker at a spot
cash price.
Another commodity broker representing a nancial institution
requiring liquidity, issues a delivery order to the Islamic banks
agent. The agent checks the availability of the commodity
required by the delivery order and informs the Islamic bank.
After taking delivery of the commodity from the agent, the
Islamic bank sells it to the nancial institution on deferred
payment. The price of the commodity is xed based on a
benchmark for a matching tenure.
The commodity is received by the nancial institution and the
buyer, now having taken constructive possession of the
commodity sells it.
72
CIFE21, 22
Risk Management In
Islamic Finance
Some have said "Banking is risk management." If you don't
know anything about risk management this is the module for
you. You learn the basics about risk management in Islamic
nance and discuss the most common risks facing Islamic
banks and the mitigation techniques used to address them.
Now you learn about how risk relates to each specic Islamic
nance product. We go through each major Islamic banking
product, namely Murabaha, Salam, Istisna, Ijarah,
Musharakah and Mudarabah, and explain the specic risks
associated with each.
Access Ethicas Webinars at
Risk is dened as exposure to the likelihood of loss, where this loss takes on many
forms depending on the kind of risk involved.
It is the possibility that the outcome of an action or event could bring an adverse
impact to the bank.
Some of the many threats to a nancial institution are low protability, bankruptcy,
fraud, false nancial reporting and mismanagement.
For a transaction to be Shariah-compliant, the main principle with regard to risk is
that in order to benet, liability must be assumed.
Risk management is the process of evaluating and responding to the exposure
facing an organization or an individual. It is a structured and disciplined approach
employing people, processes and technology for managing the many uncertainties
faced by an organization.

Forms of Risk
Credit risk: Refers to the possibility of a counter party failing to meets its
nancial obligations according to agreed terms. It represents 80% of the risk
linked to a banks asset portfolio.
Equity investment risk: Arises from entering into a partnership to nance a
specic business activity. Mudarabah, Musharakah and most Sukuk are
susceptible to equity investment risk.
Market risk: Represents the markets volatility and its effects on an
investments value
Denition
Forms of risk
Risk mitigating tools
Risks in Murabaha
Risks in Salam
Risks in Istisna
Risks in Ijarah
Risks in Musharakah and Mudarabah
CIFE21, 22: Risk Management In Islamic Finance
76
Liquidity risk: Refers to the potential risk of loss to nancial
institutions arising from the inability to meet nancial
obligations.
Rate of return risk: Financial institutions are exposed to rate
return risk in the context of their overall balance sheet
exposures. Increased benchmark rates may result in
investment account holders having increased expectations of
higher rates of return.
Operational risk: Refers to the risk of direct or indirect loss
resulting from inadequate or failed internal processes, people
and systems.
Legal or Shariah non-compliance risk: Relates to
operational risk given the Shariah sensitivity to mistakes in
operations

Risk Mitigating Tools

Personal guarantees
Guarantees of different types, such as a guarantee for timely
payment, a guarantee for supplying goods at a specic time etc.

Pledges
A form of security, an asset or cash, taken from the client and
maintained by the nancial institution.

Earnest Money
Security the client deposits with the bank as security to serve as
compensation in case he backs out from entering into a contract.

Promises
The client undertakes to purchase goods from the nancial
institution in order execute a contract.

Agency Agreements
In order to ensure goods are procured according to specications
the nancial institution may appoint the client or a third party as
agent for the job.
Specic agency agreement
Global agency agreement

Advance Payment
An amount paid at the time of contract execution and considered
a part of the assets price if client makes all payments within the
agreed time period.

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Options
Several options can be granted or possessed in order to mitigate
risk in contracts.
For instance:
Khayar al Shart Optional Condition
Khayar al Rooyat Option of Inspection
Khayar al Aib Option of Defect
Khayar al Wasf Option of Quality
Khayar al Ghaban - Option of Price

Takaful
An Islamic alternative to conventional insurance. Based on the
concept of mutual indemnity in case of loss

Shart al Jazai
A penalty that allows for a reduction in price of manufactured
goods in case of a delay in their delivery. Such a penalty is
permitted in manufacturing contracts.

Charity Clause
The charity clause serves as a deterrent to default, based on it
the client undertakes to give a certain amount to charity in case of
default in payment.
Risks in Murabaha
Credit risk
- Client backs out from purchasing the goods
Market risk
- Exposure to uctuating market price of goods
Supplier risk
- Supplier is unknown to the bank which may cause a delay
in delivery time of goods and non-conformity to
specications
Operational/Ownership Risk
- Client as agent gains possession of goods from the
supplier without informing the bank
Transit period Risk
- The risk associated with goods after the bank purchases
from the supplier and before the client purchases them
from the bank
Documentation Risk
- The risk that the counter party does not provide sufcient
documentation.
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Risks in Salam
Holding risk
- The risk of holding goods until the time of delivery
Shariah non-compliance Risk
- Arises if goods are sold before receiving their physical or
constructive possession
Settlement and Delivery Risk
- Arises in the event goods are not delivered on time and do
not conform to specications
Risk of Early Termination
- Arises in the event the client terminates the contract before
delivering the goods
Rate of Return and Price Risk
- The risk that a decrease in the commoditys price after
contract maturity will result in a lower rate of return
Risks in Istisna
Risk of hidden defects
- Risk of defects inherent in the manufactured products
- Arises as a result of not specifying the characteristics of
goods, the time or place of delivery or lack of information
about the supplier
Settlement and Credit Risk
- Arises when the customer in unable to honour deferred
payments
Price Risk
- Banks exposure to the risk of selling goods to a third party
for a lesser price as a result of contract cancellation
Delivery Risk
- The risk of not being able to make a scheduled delivery of
manufactured goods for a parallel Istisna
Legal Risk
- Litigation costs for claims against Istisna requestor that
terminates the contract
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Risks in Ijarah
Risk associated with security that sells for a lower price in the
market as a result of which the bank cannot cover its loss
Asset Risk
- Asset is stolen, damaged
Price Risk
- Banks exposure to changes in costs during the Ijarahs
term. The longer the term the greater the banks exposure
to price uctuations
Risk that the customer will back out from his promise to lease,
the bank may have to sell the asset at a price lower than its
market price
Legal Risk
- Litigation costs against the client who refuses to
compensate the bank for losses resulting from unfullled
promises.

Risks in Musharakah and Mudarabah
- Debt cannot be used as a substitute for equity
- One partner cannot guarantee other partners principal or
prot
- Risk of the funds being from a prohibited source
Credit Risk
- Managing partner manipulates reports to show lower
returns
- Silent partner opts out of partnership while still owing
money
- Working partner takes a percentage of vendors payment in
return for awarding the vendor a mandate.
- Prohibition of any collateral to secure banks investment
poses additional risk.
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Glossary
Commonly Used Industry Terminology
AAOIFI: Accounting and Auditing
Organization for Islamic Financial
Institutions.
Advance against Murabaha: The
amount disbursed by the nancial
institution for the purchase of goods
from the supplier.
Amwaal e Ribawiya: Goods which,
when exchanged with one another, result
in the accrual of interest by either of the
contracting parties. Six items have been
classied as such by a Hadith of the
Prophet Muhammad (God bless him and
give him peace): gold, silver, wheat,
barley, salt and dates. These items may
only be exchanged for each other in
equal measure and at spot.
Adadiya: Countables - items which are
measured as units and not by weight,
length or volume, i.e. eggs sold as units
(dozen or half a dozen)
Adl: Justice, impartiality, fairness.
Adil: Trustee; an honest and trust worthy
individual
Afw: Surplus wealth.
Agency Agreement: An agreement by
means of which a third party whether an
individual or a nancial institution is
established as an agent to carry out an
activity such as make an investment, on
behalf of the principal.
Ahadith: (pl.hadith) Reports of the
attributes, words and deeds of the
Prophet Muhammad (PBUH)
Ajr: Remuneration or compensation. In a
service Ijarah, the ajr is the price paid to
the employee by the employer in
exchange for services rendered.
Ajeer: Employee
Ajeer e Aam: An employee who is not
restricted to the employment of a single
employer but in fact is free to work for
another person or persons as long as he
fullls his duties responsibly towards
each of them.
Ajeer e Khas: An employee for a
specied term, who only serves one
beneciary.
Akl al-Suht: Illegal acquisition of wealth
Al-ajir al-mushtarak: A worker who may
concurrently serve or be contracted by a
number of clients, for instance a lawyer.
Al-ajr al-mithl: The prevalent price; the
standard rate for a particular service.
Al-akl bi-al-batil: Wrongful acquisition of
wealth.
Al-amin al-amm: Trustee for property
other than that granted for safe-keeping
such as the lessee in an Ijarah or the
mudarib in a Mudarabah.
Al-amin al-khas: Trustee for property
granted for safe-keeping as in the
wadiah (safe-keeping) contract.
Al-ghunm bi-al-ghurm: An Arab proverb
according to which prot may lawfully be
earned provided risk is shared for an
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economic activity that ultimately
contributes to the economy.
Al-hisab al-jari: Current account
Al-sanadiq: Marketing investment funds
Al Shaì: Muhammad b. Idris, late 2nd/
8th century eminent faqih after whom the
Shaì madhhab is named.
Amanah: Property in the safe-keeping of
another (the ameen) that must be
preserved and protected; deposits
maintained as trusts on a contractual
basis
Ameen: Trustee
Amil: A worker entitled to remuneration,
i.e. the mudarib in a Mudarabah contract
or a zakat collector.
Amoor e Mubaha: Commodities that are
naturally available and may be beneted
from by all. For instance, water from a
river or the wood from the trees of a
forest.
Amwal: (pl. maal); goods
Aqar: Real estate; immovable property,
i.e. land, buildings etc.
Aqd: Contract
Aqd al-bay: A sale contract
Arbaab al Maal: Partners who contribute
capital to the business, plural for rabb ul
maal.
Arbun: A non-refundable down payment
received from the buyer or the Istisna
requestor securing the purchase of
manufactured goods.
Ard: Land
Ariya: A contract in which one party
loans another the use of an item for an
indenite period of time.
Arif: An expert who is consulted in
matters requiring an informed and just
decision.
Arkan: (lit. pillars) Fundamentals of a
contract
Asil: Assets
Average Balance: A formula for
determining the eligibility of prot a
partner or Musharakah account holder
can receive on his invested amount.
Essentially, it is the minimum amount
that must remain invested at all times in
an account over a period of time, for the
account holder to be eligible to receive
prot.
Ayah: Sign; a verse from the Holy
Qur'an.
Ayn: Currency or ready money, i.e. gold,
silver, coins, notes or any other form of
ready cash.
Bai/Bay: Contract of sale
Bai al Dayn biaddayn: An exchange of
debt, i.e. sale of securities or debt
certicates.
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Bai Muajjal: A deferred sale, where one
of the considerations of the contract
such as its price or the delivery of its
subject matter is delayed to a future
date.
Bai ul muzayadah: The sale of an asset
to the highest bidder in the market.
Bai al-salam: A sale where the price of
the subject matter is paid in full at the
time of the contracts execution while the
delivery of the subject matter is deferred
to a future date.
Batil: Void, invalid; refers to a
transaction, a contract governing a
transaction or an element in a contract,
which is invalid.
Bai al-wafa: A sale where the seller is
allowed to repurchase property through a
purchase price refund. It is a transaction
prohibited by a majority of scholars.
Bai bi-thaman ajil: (syn. bai muajjal) A
deferred payment sale, where requested
goods are purchased by the bank and
sold to the client for a prot. The buyer is
usually permitted to complete payments
in installments.
Bai` àjal bi al-àjil: (syn. bai al salam) A
type of sale in which the price is paid
upon signing the contract and the
delivery of goods is delayed to a future
date.
Baiatan bai: Two sales in one also
referred to as "safaqatan safaqah."
Bai al Inah: A buy-back transaction that
is prohibited in Islam.
Bai al istijrar: A contract where the
supplier agrees to provide a particular
product to the client on an ongoing basis
for an agreed price based on an agreed
mode of payment.
Bai` al-kali' bi al-kali': (kali. syn. debt)
Sale of debt for debt, specically
prohibited by the Prophet. In such a
transaction, the creditor grants an
extension in the repayment period in
exchange for an increase on the
principal.
Bay al-Muajjal: A credit sale where
payment is delayed and delivery of the
contracted goods is immediate
Baytul Mal: The Muslim communitys
treasury. It was established as an
institution by the early caliphs, the funds
contained in which were used to fulll the
peoples needs.
Benchmark: A known and
acknowledged standard that may already
exist or alternatively be identied by
means of expert appraisal.
Benchmarking: A method by which the
rent for the remaining period of an Ijarah
is based upon a known and
acknowledged standard that may already
exist or alternatively be identied by
means of expert appraisal.
Bond: A certicate of debt based on
which the issuer agrees to pay interest if
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any in addition to the principal, to the
bondholder on specied dates.
B.O.T or Build, Operate and Transfer:
A contract by which the government
hires a contracting company to assist it
in the development of infra-structure.
Usufructs for a xed period of time are
established as the price of the contract
after which ownership is transferred to
the government free of cost.
Bringing forward future installments:
By the establishment of this option, in
the event that the client defaults on his
payment, all the installments for the
entire term of the contract fall due
immediately.
Buy-back: The same as bai inah, a
prohibited type of sale in which one sells
an item on credit then buys it back for a
lesser price.
Business partnership: A joint venture or
project between two or more parties,
entered into with the aim of making a
prot.
Capital Recovery Risk: The risk of the
inability to regain capital from the
security maintained by the nancial
institution in case of a loss.
Catastrophic Risk: The risk arising from
the possibility of the occurrence of a
natural disaster causing loss of or
damage to goods.
Charity Clause: A stipulation made at
the time of the execution of the contract
which establishes a certain amount of
payment to a designated charity in the
event of a default.
Commodity Murabaha: A transaction
where the Islamic bank purchases a
commodity on spot and sells it for a
deferred payment for the purpose of
managing liquidity.
Compound Interest: The accrual of
additional interest on existing interest
payments due on the principal.
Commercial Interest: The excess paid
in exchange for a loan taken for the
establishment of a commercial
enterprise.
Commutative contract: A contract
involving an exchange
Conditional agency agreement: An
agency agreement where the agent is
limited by certain conditions and
restrictions with respect to the execution
of a required task such as the purchase
of an asset.
Constructive liquidation: Evaluating the
capital value of a business, without
actually liquidating or selling it off.
Constructive possession: Any form of
documentary evidence that proves
rightful ownership of an asset thereby
sanctioning the seeking of gain from it;
where the one possessing the asset is in
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a position to use the item for which it is
intended.
Contract: A commitment to something
enjoined by the association of an
acceptance with an offer.
Conventional insurance: The
conventional form of providing indemnity
against loss.
Credit risk: The possibility of a counter
party failing to meet its nancial
obligations in accordance to the terms
agreed upon in the contract.
Credit stage: This stage begins once the
goods for a Murabaha are received by
the nancial institution and the
documents of offer and acceptance are
signed and ends once the Murabaha
payment is recovered from the client. It is
during this period that the bank has the
right to accrue prot. It is also referred to
as the nancing stage.
Daftur al-tawr: Savings account
Dayn: A debt which comes into
existence as a result of a contractual
obligation or credit transaction.
Dhaman: A contract of guarantee
whereby a guarantor underwrites any
claim or obligation to be fullled by the
owner of the asset.
Deal Ticket: A form of documentation
evidencing the acceptance of funds by
one bank from another based on a
contract of Musharakah.
Default: A contracting partys failure to
make a due payment.
Dhimmah: Liability
Dhulm: A comprehensive term used to
refer to all forms of injustice, exploitation,
or inequity through which a person
deprives others of their rights or does not
fulll his obligations towards them.
Diminishing Musharakah: A temporary
partnership where an asset or property is
jointly purchased by two partners and
one partner eventually acquires
ownership of it through a series of
property share purchases.
Dinar: A gold coin used by Muslims
throughout Islamic history. Its standard
mass was app. 4.25 grams.
Displaced Commercial Risk: Islamic
nancial institutions manage the funds of
investment account holders on a prot-
and-loss-sharing basis. However, in
order to maintain competitiveness with
conventional banks which offer xed
returns, IFIs typically surrender part (or
all) of their prot share in order to allow
their depositors to receive their expected
prot allocation. This effectively means
that the risk attached to depositors
funds is partially or wholly transferred to
the IFIs capital, which increases the
overall risk for IFIs and is referred to as
DCR.
Diyah: The compensation paid by one
who commits manslaughter to the
relatives of the deceased.
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Earnest Money: A sum received from
the client as security that serves as
compensation in the event the lessee
backs out from entering into or
continuing an Ijarah. The lessor makes
up for the actual loss from it and returns
the remainder to the client.
Equity: The ownership share in a
business.
Equity Investment Risk: The risk arising
from entering into a partnership in order
to nance a particular or general
business activity, where the manager of
nance also shares the business risk.
Equity Market: The equity market is the
place where company shares are traded
thereby providing viable investment
opportunities to individuals, other
companies and nancial institutions
seeking to avail them.
Falah: To be happy and successful;
refers to success both in this world and
in the hereafter based on the belief in
one God, belief in the Prophethood of
Muhammad (PBUH) and the Akhirah as
well as conformity to Shariah
requirements.
Faqih: Muslim jurist
Faqir: A poor person.
Fasid: Voidable, usually said of a
contract or an element within a contract
Faskh: Cancellation of a contract,
usually based on one of the contracting
parties exercising an option, i.e. the
option of return in case of a defective
asset or the option of refusal to purchase
an asset
Fatwa: An authoritative legal judgment
based on the Shariah
FI pool: A Musharakah based nancial
investment pool created by the Islamic
nancial institution for the purpose of
liquidity management.
Financing stage: This stage begins once
the goods are received by the nancial
institution and the documents of offer
and acceptance are signed and ends
once the Murabaha payment is
recovered from the client. It is during this
period that the bank has the right to
accrue prot.
Fiqh: Practical Islamic jurisprudence.
Fiqh al Muamalat: The Islamic discipline
governing the jurisprudence of nancial
transactions
Foreign Currency Commodity
Murabaha: A transaction commonly
used for investing excess funds which is
available for maturities ranging from
overnight to a period of one year. The
commodity used in the transaction exists
with a foreign asset exchange company.
Fuduli transaction: A transaction with
another's property without the
permission of the Shariah. For instance,
selling property before contracting an
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agency agreement with its owner is a
fuduli transaction.
Fungible Goods: Goods that are similar
to one another and are sold as units, any
difference between them is considered
negligible.
Gharar: Contractual uncertainty that may
lead to major dispute between
contracting parties which is otherwise
preventable or avoidable
Gharim: A debtor who does not possess
the funds to repay his debts. The gharim
falls into the classication of one of the
eight groups mentioned in the Quran as
legitimate recipients of zakat. According
to the Maliki and Shai jurists there are
two types of gharim: 1) one whose debt
was incurred in his own benet and 2)
one whose debt was incurred beneting
others.
Ghasb: The misappropriation of property
Global agency agreement: An
agreement where the agent may
purchase the required asset from any
source of his choice. Such an agreement
also lists a number of assets which the
agent may procure on the banks behalf
without having to execute a new agency
agreement each time.
Guarantee: A risk mitigating technique
that serves as a form of security in
contracts and is provided by a third
party. For instance, a guarantee for the
supply of specic goods at a specic
time or a guarantee for a timely payment.
Haba al-habala: A sale practiced by the
Arabs in the pre-Islamic era which was
prohibited by the prophet owed to the
gharar (contractual uncertainty leading to
dispute) involved. The sale depended on
a she-camel giving birth to a female calf
who would subsequently mature and
become pregnant itself.
Hadith: A report of the attributes, words
and deeds of the Prophet Muhammad
(PBUH).
Hajj: (The fth pillar of Islam) Pilgrimage
to the House of Allah, which is obligatory
upon every able Muslim at least once in
his lifetime.
Halal: Anything permitted by the Shariah,
one of the ve major Shariah
categorizations of human acts
Haamish Jiddiah: The Islamic nancial
term for a sum of earnest money
received from the client as security that
serves as compensation in the event the
lessee backs out from entering into or
continuing an Ijarah. The lessor makes
up for the actual loss from it and returns
the remainder to the client.
Hand-to-hand sale (Muata): A sale
where the seller hands the asset over to
the buyer in exchange for a price without
any verbal expression of offer or
acceptance
Hanite laws: Laws formulated by one
of the four Islamic schools of
jurisprudence founded by Iman Abu
Hanifa.
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Haq: Right
Haq dayn: Debt rights
Haq maliy: Rights over nancial assets
Haq tamalluk: Ownership rights
Haram: Anything prohibited by the
Shariah, one of the ve major Shariah
categorizations of human acts.
Hawala: A contract that allows a debtor
to transfer his debt obligation to a third
party.
Hawl: The amount of time that must
elapse before a Muslim in possession of
funds equaling or exceeding the
exemption limit (nisab) is required to pay
zakat. Typically, one Islamic year i.e. a
lunar year of approx. 354 days.
Hiba: Gift
Hijrah Year: The year of the emigration
of Prophet Muhammad (PBUH) and his
followers to Medina.
Holding Risk: The risk that accompanies
the possession of assets by the nancial
institution before they are delivered to
the buyer.
Homogeneous Commodities:
Commodities that are similar to one
another and are sold as units. The
difference between them is negligible
Hukm: Shariah ruling
Huquq: (Pl. haq) Rights
Husah: (lit. pebbles) A sale practiced by
the Arabs in the pre-Islamic era, which
was prohibited by the Prophet (PBUH)
based on the involvement of gharar
(contractual uncertainty leading to
dispute). The sale was determined by the
casting of pebbles in three ways: 1)
where once the seller threw the pebbles,
the deal would be binding 2) where the
seller would sell the buyer the
commodity that the pebbles thrown by
the buyer would hit, 3) where the seller
would sell the buyer an amount of land
determined by the extent to which the
buyer could throw the pebbles.
Hybrid Sukuk: Certicates of ownership
representing trust assets for more
contracts than one.
Ibaha: Forgoing a right, i.e. forgoing a
claim to a debt
ICD: Islamic Corporation for the
Development of the Private Sector
IDB: Islamic Development Bank
IFI: Islamic nancial institution; i.e. bank
or nancial organization operating
commercially within the limits prescribed
by Shariah.
IFSB: International Financial Standards
Board
Ihtikar: Hoarding; the prohibited practice
of purchasing essential commodities,
such as food and storing them in
anticipation of an increase in price.
Ijab: Offer, in a contract
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Ijarah: A form of lease which seeks to
provide the benets of an asset or a
service to the lessee in return for a
payment of an agreed upon price or rent.
Ijarah tul Amaal: A contract of lease
providing services for an agreed upon
rental.
Ijarah tul Ashkhaas: A contract of lease
providing services for an agreed upon
rental.
Ijarah tul Manaafay: A contract of lease
executed for the transfer of the benets
of an asset in exchange for an agreed
upon price.
Ijarah mawsoofah dhimma: A lease
agreed upon and based on a deposit, for
the future use or delivery of an asset.
Ijarah muntahiya bi-tamlik: An Ijarah
based on the lessors undertaking to
transfer the ownership of the leased
property to the lessee at the end of the
lease or by stages during the term of the
contract.
Ijarah Sukuk: Certicates representing
the ownership of leased assets, the
ownership of the usufruct of leased
assets or the ownership of the rights to
receive benets from services.
Ijarah wa Iqtina: An Ijarah conducted
solely for the purpose of transferring the
ownership of the leased asset to the
lessee at the end of the period of lease.
Ijma: Juristic consensus on a specic
issue. It is recognized as one of the four
sources of Shariah.
Ijtihad: Juristic reasoning based on the
Quran and the Sunnah.
Iktinaz: Hoarding wealth by not paying
zakat.
Illah: The attribute of an event requiring a
specic ruling in all cases possessing
that attribute; analogies are drawn based
on it to determine the permissibility or
prohibition of an act or transaction.
Iman: Belief, faith; the acceptance and
afrmation of Allah, His Books, His
Messengers, His Angels, the Hereafter
and Divine Will.
Inaan: (A type of Shrikah) A form of
partnership in which each partner
contributes capital and has a right to
work for the business.
Infaq: Spending in Allahs way, i.e.
spending on one's family, in preparation
for jihad, in caring for orphans and the
destitute.
Insakh: Cancellation of a contract
without the will of the contracting parties,
i.e. based on the destruction of the sale
asset or the death of a party to the
contract.
Informational Asymmetry: A situation
where important relevant information is
known by some parties, but not by all.
In-kind: Where instead of cash, payment
or capital contribution is made in the
form of tangible assets, goods or
services.
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Interest: Any addition or increment
involved in an exchange between
contracting parties.
Investment stage: This is the stage that
begins after the execution of the agency
agreement. It is the time period during
which the bank has disbursed the money
for the purchase of the asset from the
supplier but has not yet acquired
possession of it in order to sell it.
Iqtisad: (Lit. moderation) Generally, a
term used to refer to the eld of
Economics.
Ishara: A gesture made by a persons
head or hand taking the place of speech
in expressing the will of two contracting
parties.
Israf: Immoderateness and wastefulness
Istighlal: Investment
Istihlak: Consumption
Istihsan: Judicial preference for one
legal analogy over another with a view to
public welfare.
Istijrar: A contract where the supplier
agrees to provide a particular product to
the client on an ongoing basis for an
agreed price based on an agreed mode
of payment.
Istisna: A transaction used for the
purpose of acquiring an asset
manufactured on order. It may be
executed directly with the supplier or any
other party that undertakes to have the
asset manufactured.
Istisna Requestor: The party placing the
manufacturing order.
Istisna Sukuk: Certicates representing
proportionate ownership of
manufactured goods.
Ittifaq dhimni: A sale and re-purchase of
the underlying asset for which the price
is agreed between parties prior to
contract completion; it is a pre-requisite
to the bai muzayadah.
Joaala: A contract involving a reward for
a specic service or achievement.
Jadwala: Rescheduling
Jahiliyyah: Days of ignorance; particular
reference to the pre-Islamic era.
Jihalah: Ignorance; inconclusiveness in a
contract leading to gharar.
Kafalah: Taking responsibility for debt
repayment; a standard Islamic nancial
transaction where one undertakes
responsibility for the debts of another.
Similar to, but not identical to hawalah.
Kal: The party assuming responsibility
for repayment of anothers debt in a
kafalah contract.
Kali bil Kali: The exchange of debt for
debt
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Kharaj: The share of the produce from
agricultural lands collected by the
caliphate and added to the bayt al-mal.
Khayaar: Option or power to annul or
cancel a contract.
Khayaar e Aib: The option of return in
case of a defective asset.
Khayar e Majlis: The option to annul a
contract possessed by both contracting
parties.
Khayaar e Rooyat: The option of refusal
based on which the buyer may decline
from accepting the goods of a sale as a
result of non-conformity to
specications.
Khayaar e Shart: An option in a sales
contract concluded at the time of signing
the agreement giving one of the two
parties to the contract a right to cancel
the sale within a stipulated time.
Khayaar e Taaeen: The purchasers
option to return an asset to the seller in
case it does not meet specications as
established at the time of the execution
of the contract.
Khilabah: Fraud in word or deed by a
party to the contract with the intention of
inducing the counter party into entering
into a contract.
Khiraj bi ad daman: Gain accompanies
liability for loss; a basic principle and
legal maxim (see Al- Ghunm bil
Ghurm).
Khiyanah: Deception by withholding
information, or breach of an agreement.
KYC: (Abb.) Know-Your-Client; the due
diligence checks carried out on
customers to determine their credit
worthiness.
Legal Risk: The risk of having to resort
to litigation for redemption of claims
arising from a contract.
LIBOR: London Inter-Bank Offered Rate
Lien: A charge, claim, hypothecation or
mortgage, pledging an asset to a
creditor.
Liquidity Management: The
management of an excess or shortage of
funds by nancial institutions through
inter-bank treasury transactions to meet
day to day business needs and liquidity
reserve requirements.
Local Currency Commodity Murabaha:
In the absence of an organized asset
exchange market, the LCC Murabaha is
conducted for the management of funds
at nancial institutions with the help of
local commodities exempt from value
added tax.
Luqta: An item misplaced by its owner
and found by someone else.
Madd: A dry measure equal to 1/4 sa`
used in Madinah during the time of the
Prophet, a part of the traditional Islamic
measurement system.
93
Madhab: (lit. way of going) (pl.
madhahib) A school of jurisprudence
characterized by differences in the
methods by which Shariah sources are
understood forming the basis for
differences in the Shariah rulings inferred
from them. The four well-known
madhahib among Sunni Muslims are
named after their founders, Hana,
Maliki, Shaì and Hanbali.
Mahr: The obligatory gift given by the
groom to the bride, forming an essential
component of the marriage contract.
Maisir: 1)The act of gambling or playing
games of chance with the intention of
making an easy prot; 2)the element of
speculation in a contract; 3)chance or
uncertainty with respect to an outcome.
Major maintenance: The fulllment of all
the requirements that ensure that the
leased asset provides intended use.
Makruh: (lit. detested); said of an act
which one is rewarded for avoiding, but
not punished for committing.
Mal: Wealth; anything of value that may
be possessed.
Mal-e-Mutaqawam: Items that are
lawful to use or consume by Shariah; or
wealth considered commercially valuable
by Shariah.
Manfaah: Usufruct or benet derived
from an asset.
Maqasid al-Shariah: The establishment
of goals and objectives by Muslim jurists
in a way that assists the investigation of
new cases and the organization of prior
rulings.
Market risk: The current and future
volatility of the market value of specic
assets to be purchased and delivered
over a specic period of time such as the
commodity price of a Salam asset, the
market value of a Sukuk, the market
value of a Murabaha asset and the
uctuating rates of foreign exchange.
Minimum balance: A formula for
determining the eligibility of prot a
partner or Musharakah account holder
can receive on his invested amount.
Essentially, it is the minimum amount
that must remain invested at all times in
an account over a period of time, for the
account holder to be eligible to receive
prot.
Miskin: A poor, indigent person. One of
the recipients of zakah.
Mithli: (Fungible goods) Goods that can
be returned in kind, i.e. gold for gold,
silver for silver, wheat for wheat and the
like.
Moral Hazard: Risk of a party acting
either in bad faith, or underperforming
due to negligence and indifference,
brought on by insulation from risk
Muamalah: A nancial transaction
Muata: See hand-to-hand sale
94
Mubah: Object that is lawful; an item
permissible to use or trade.
Mudarabah: A Mudarabah is a business
partnership between two or more parties,
where, typically, one of the parties
supplies the capital for the business, and
the other provides the investment
management expertise. Also known as
Muqaradah or Qirad.
Mudarib: Partner responsible for
management in a Mudarabah, also
dened as an investment manager.
Mudarabah Sukuk: Certicates
representing the proportionate ownership
of capital for specic projects
undertaken by an entrepreneur.
Mufti: A highly qualied jurisconsult who
issues fatawa or legal verdicts, in
response to issues posed to him.
Mugharasa: An agricultural contract
similar to muzaraàh in which a land
owner agrees to grant the farmer a share
of the harvest from the fruit orchard he
tends.
Mughba: Favoritism
Muwaada/ Muahida: A bilateral
promise
Mujtahid: A highly qualied qh
specialist who engages in independent
juristic reasoning.
Mukhabarah: An agreement between a
landowner and a farmer, similar to a
muzaraah the only difference being that
in a muzaraàh the seeds are provided by
the landowner whereas in a mukhabarah
they are supplied by the farmer.
Mumtaza: Excellent
Muqassa: Setting off two debts at an
agreed exchange rate
Murabaha: A contract in which the cost
of acquiring the asset and the prot to be
earned from it are disclosed to the client
or the buyer.
Murabaha facility agreement: An
agreement including the approval of the
credit facility extended to the client, the
terms and the conditions of the contract,
the specication of the Murabaha asset
and the clients promise to purchase.
Musawamah: A general sale in which
the price of the commodity to be traded
is bargained between the buyer and the
seller and where no reference is made to
the cost of acquisition of the sale asset
or the prot to be earned from it.
Musaqah/Musaqat: A type of
partnership in which the owner of an
orchard agrees to share a portion of the
produce with a farmer, in exchange for
the farmers irrigation of the land.
Musharakah: A business partnership set
up to make prot, where all partners
contribute capital and effort to help the
business run.
Musharik: A partner in a Musharakah
95
Mutual Insurance: A form of insurance
where a group of people exposed to a
similar risk, by mutual consent make
voluntary contributions to a pool of funds
to share that risk and provide one
another with indemnity against loss.
Muwakkil: The principal in an agency
agreement.
Muzabana: Presently the term is used to
refer to a sale where the volume or
weight of the sale commodity is
unspecied. In the earlier Muslim era it
was a transaction where the owner of
fruit trees agreed to sell his fruit for an
estimated equivalent amount of dried
fruit, i.e. grapes for raisins. Muzabana
was common practice amongst the
people of Madinah and was prohibited
by the Prophet owed to the element of
gharar involved. (contractual uncertainty
leading to dispute)
Muzaraah: Share-cropping; an
agreement where one party agrees to
allow a portion of his land to be farmed
by another in exchange for a part of its
produce.
Najash: The practice of deceiving a
potential buyer during pre-sale dialogue,
through insincere bidding by a third party
(a party expressing insincere desire to
purchase the commodity at a higher
price) or false claims on the sellers part.
Nasia: Delay.
Negligence: Loss resulting from the
violation of the conditions of a contract.
Nisab: The exemption limit for the
payment of zakat. A Muslim who
possesses wealth below the nisab is
exempted from paying zakat, whereas a
Muslim who possesses wealth at or
above the nisab is obligated to pay
zakat.
Numeraire: A basic standard by which
comparative values are measured, or a
unit of account.
Offer and acceptance: The actual
execution of a sale, where one of the
contracting parties makes an offer to sell
or purchase an asset and the other
accepts it.
Operational Risk: The risk of direct or
indirect loss resulting from inadequate or
failed internal processes, people and
systems or from external events as well
as non-compliance to Shariah
regulations or a neglect of duciary
responsibilities.
Parallel Istisna: Another contract of
Istisna executed alongside the original
Istisna. The manufacturer in the original
contract serves as the Istisna requestor
in the parallel contract and prots from a
difference in price.
Periodic maintenance: Regular
maintenance of the leased asset.
96
Permanent Musharakah: Also referred
to as an on-going Musharakah, a
partnership where there is no intention of
terminating or concluding the business
venture at any point
Physical Possession: The actual or
corporal possession of an asset and the
ability to benet from it.
Pledge: A form of security that is taken
from the client and maintained by the
nancial institution. It may be in the form
of an asset or cash.
PLS: Prot and Loss Sharing; a term
used to describe any one of several
nancial schemes based on the principle
of interest-free lending, characterized by
the use of Musharakah and Mudarabah
as nancing instruments.
Possession: The ownership of all the
risks and rewards associated with an
asset.
Premium: The amount of contribution
made by the insured to the pool of funds
established for the purpose of providing
indemnity against loss.
Price risk: The risk arising from the
uctuating price of goods in the market,
thereby affecting the value of the goods
of the contract.
Private equity: Shares in a business that
are not for sale to the general public but
are sold exclusively through invitation to
certain parties.
Project nance: The nancing of large
infrastructure and industrial projects
based on a comprehensive nancial
structure for operation.
Promise: An undertaking by the client to
enter into a contract with the nancial
institution for the sale or lease of an
asset in the future.
Provisional prot: The prot earned by
the investor for the period of time his
funds remained invested.
Pure Risk: The risk that involves the
possibility of loss or no loss. For instance
damage to property due to a re that
may or may not occur.
Qabda: (lit. to seize) Take possession of
the exchange commodity in an exchange
transaction.
Qardh: Loan
Qardh e Hasana: A good-will loan
against which interest is not charged.
The debtor is required to return the
principal amount in the future without
any increase.
Qimar: An agreement where the
acquisition of an asset is contingent
upon the occurrence of an uncertain
event in the future.
Qirad: Alternative name for Mudarabah
or Muqaradah
Qiyas: Drawing a comparison; the
derivation of law through analogy from
an existing law if the basis (illah) for both
is the same; also one of the sources
Shariah.
97
Qubul: Acceptance, in a contract.
Quran: The Holy Book of the Muslims.
Ras al-mal: Capital; the money or
capital which an investor (rabb al-mal)
invests in a prot-seeking venture
Rabb al Maal: The investor or the owner
of capital in a Mudarabah contract
Rahn: Collateral; a pledge or the
transaction which governs such a
pledge.
Rate of return risk: The risk that a
nancial institution is exposed to as a
result of an undetermined or variable
amount of return on an investment.
Receiveable: An asset or cash that a
business is due to receive as a result of a
prior transaction.
Restricted Mudarabah: A Mudarabah in
which the mudarib has to observe
certain restrictions regarding how the
business may be run. Typically, these
restrictions may relate to sector, activity,
and/or region in which the business may
be operated (various other restrictions
also may be inserted).
Re-Takaful: The re-Takaful is a new
Takaful arrangement consistent with
Takaful principles and guidelines
provided by the Shariah board. It is
enacted in the event that the funds in the
original Takaful are not sufcient to meet
the needs of its members.
Riba: Any amount that is charged in
excess which is not in exchange for a
due consideration. Conventionally it is
referred to as interest and is prohibited in
Islam.
Riba al-buyu: The riba of exchange
surplus. Any barter transaction where like
commodities are exchanged in unequal
measure, or the delivery of one
commodity is postponed, is
characteristic of rib al-buyu.
Riba al-Fadl: The same as riba al buyu
Riba an nassiya: The predetermined
excess repayable on the principal
extended as a loan
Riba al Quran: The same as riba an
nassiya
Ribawi: Goods subject to Shariah rulings
with respect to riba in the event of their
sale
Risk: An exposure to the likelihood of
loss, where this loss takes many forms
depending on the kind of risk involved. It
is the possibility that the outcome of an
action or event could bring an adverse
impact resulting in a direct loss of
earning and capital or the imposition of
constraints in the banks abilities to meet
its business objectives.
Risk management: The process of
evaluating and responding to the
exposure facing an organization or an
98
individual. It is a structured and
disciplined approach employing people,
processes, and technology for managing
uncertainties faced by an organization.
Rishwa: Bribery
Roll-over: A roll-over is the provision of
an extension in return for an increase in
the original payable amount.
Rukn: (lit. pillar) Fundamental of a
contract.
Sa: A dry measure in use in Madinah
during the time of the Prophet used to
weigh dates, barley and other similar
items.
Sadaqah: Voluntary charitable donations
Sahih: (lit. sound, correct) 1) In reference
to a valid contract, 2) A hadith of the
highest level of authentication.
Sak: (pl. Sukuk) Certicate of equal value
representing an undivided share in the
ownership of a tangible asset, usufruct
or service.
Salaf: A loan that draws no prot for the
creditor. Salaf is also referred to as
Salam where the price of the subject
matter is paid in full at the time of the
contracts execution while the delivery of
the subject matter is deferred to a future
date.
Salam: A sale where the price of the
subject matter is paid in full at the time of
the contracts execution while the
delivery of the subject matter is deferred
to a future date.
Sale contract: The commitment to trade
a commodity in a specic manner for a
consideration in cash or kind, evidenced
by the exchange of an offer and
acceptance.
Salam Sukuk: Certicates representing
nancial claims arising from the
purchase of commodities to be delivered
in the future based on an advance
payment of price.
Sarf: Currency exchange
Securitization: The process of issuing
certicates of ownership against an
asset, an investment good or a business.
Shahadah: (lit. witnessing); to testify that
there is no god but Allah and Prophet
Muhammad is the Messenger of Allah by
declaring, "Ashhadu an la ilaha illallah wa
ashhadu anna Muhammadan abduhu wa
rasuluhu" (i.e. "I testify that there is no
god but Allah and that Muhammad is the
Messenger of Allah).
Share: A form of equity ownership
representing claims on earnings and
assets.
Shart: (pl. shurut) A necessary condition
or stipulation, that must exist to ensure
the validity of a transaction.
Shart e Jazai: The Shart e Jazai is a
penalty established at the time of the
execution of the Istisna contract which
99
allows for a reduction in the price of the
manufactured goods in the event of a
delay in their delivery.
Shariah: Islamic law
Shariah Advisory Board: A panel of
Shariah scholars appointed by Islamic
nancial institutions that supervises all
transactions and ensures their Shariah
compliance. Its role also includes
conducting regular and annual audits at
IFIs.
Shariah-compliant: Permitted by the
Shariah
Shariah non-compliance risk: The risk
arising from non-compliance to the
standards of Islamic law.
Sharik: Partner
Sharikah: The same as Shirkah
Shirkah: (lit. sharing); refers to different
kinds of business partnerships based on
sharing, of which Musharakah is one.
Shirkah tul Aamaal: A partnership
based on the pooled provision of
services.
Sharikah al-Wujooh: A partnership of
goodwill where the subject matter is
bought on credit from the market on the
basis of a relationship of goodwill with
the supplier, with the aim of reselling at a
prot to be shared.
Shirkat al-Aqd: A business partnership
established through a deliberate
contract.
Shirkat al-Amwaal: The commonest
type of Shirkah tul Aqd which refers to a
partnership between two or more parties
for the purpose of earning prot by
means of investment in a joint business
venture. Also known as Shirkah tul
Inaan.
Shirkat al Inaan: It is the commonest
type of Shirkah tul Aqd and refers to a
partnership between two or more parties
for the purpose of earning prot by
means of investment in a joint business
venture.
Shirkat tul-Milk: Primarily a partnership
of joint ownership which may come
about deliberately or involuntarily.
Shufah: The right of pre-emption in a
sale transaction, for example, a real
estate sale where one party possesses
the right to compel the other party to sell
him all or part of the real estate.
Shurut: see shart
Sigha: Formulation of the contract, often
referred to as offer and acceptance
Silent partner: A partner in the business
who only contributes capital but takes no
part in management of the business; also
referred to as the sleeping partner.
Simple Interest: The excess or
increment that is charged over and
above the initial investment.
Sleeping partner: A partner in the
business who only contributes capital
100
but takes no part in management of the
business; also called silent partner.
Sole proprietorship: A business fully
owned and managed by one person
Specic agency agreement: An
agreement based on which the agent is
under restriction to purchase a specied
asset from a specied supplier only.
Speculative Risk: The risk representing
potential gain or prot, i.e. the risk
involved in a new business venture.
SPV: (Abb. Special Purpose Vehicle); an
independent entity created based on the
Mudarabah contract for the purpose of
generating funds by acquiring assets
from a company and issuing certicates
of proportionate ownership against them.
Specic commodities: These types of
commodities possess specic attributes
that make them different from each other.
One may not be replaced by the other for
instance livestock, precious stones.
Standard Ijarah: A contract of lease
executed for the provision of usufruct for
a xed term at the end of which the
ownership of the leased asset is not
transferred to the lessee.
Statement: A phrase that indicates the
intention of the parties to effectuate the
contract
Stock Company: A company in which
the capital is partitioned into equal units
of tradable shares and each
shareholders liability is limited to his
share in the capital; it also represents a
form of partnership.
Sublease: The lease of an already leased
asset to a third party with the primary
lessors consent.
Suftaja: A debt transfer transaction,
practiced in Muslim societies in the
Abbasid period where a creditor X
authorized his agent or his debtor, to pay
a given amount to Z whom X owed a
debt. Suftajah is a special case of the
Islamic debt assignment transaction
referred to as hawalah.
Sukuk: Certicates of equal value
representing undivided shares in
ownership of tangible assets, usufruct
and services.
Sukuk al Ijarah: Certicates
representing the ownership of leased
assets, the ownership of the usufruct of
leased assets or the ownership of the
rights to receive benets from services.
Sukuk al Mudarabah: Certicates
representing the proportionate ownership
of capital for specic projects
undertaken by an entrepreneur.
Sukuk al Murabaha: Certicates
representing the investors shares in
receivables from the purchaser of assets
based on a deferred sale.
Sukuk al Musharakah: Certicates
representing proportionate ownership of
a Musharakah asset, be it a partnership
101
for new projects or a partnership for the
expansion of existing projects.
Sukuk al-Salam: Certicates
representing nancial claims arising from
the purchase of commodities to be
delivered in the future based on an
advance payment of price.
Sunnah: The personal example
comprising words and deeds of the
Prophet Muhammad (PBUH)
Taawun: Co-operation
Tabburro: Gift or contribution
Tabzir: Immoderate/ wasteful spending
on items prohibited by the Shariah. See
also Israf.
Tadlis al-ayb: Refers to the activity of a
seller concealing the defects of goods.
Takaful: A Shariah-compliant system of
insurance based on the principle of
mutual co-operation. The companys role
is limited to managing operations and
investing contributions.
Takaful Operator: The manager of
Takaful funds
Tawarruq: A mode of nancing, similar
to a Murabaha transaction, where the
commodity sold is not required by the
client but is bought on a deferred
payment basis and sold to a third party
for a lesser price, thereby becoming a
means of liquidity generation.
Tawidh: Penalty agreed upon by
contracting parties as compensation to
be claimed by the creditor in case of
default on the debtors part
Thaman: Price
Thaman al-bai: Sale price
Tijarah: Trade
Time-sharing leasing contract: The
lease of a single asset to multiple lessees
by means of different leasing contracts
for different time periods, with none of
them overlapping with one another.
Trade nance: The nancing of
international trade transactions, which
involves satisfying the needs of
importers and/or exporters.
Transit period risk: The risk that is
posed to the bank for the time period
that ensues after having assumed
possession of Murabaha goods from the
supplier and before they are sold to the
client.
Treasury Operations Department: The
section of the nancial institution that
deals with the maintenance of funds and
capital reserves and their movement in
and out of the bank.
Two-tier business model: Where one
set of capital investments enables a
stream of follow-on investments in
multiple Shariah compliant ventures.
102
Ujrah: Financial payment for the
utilization of services
Ulema: Muslim scholars.
Ummah: The Muslim community.
Unconditional agency agreement: An
agency agreement where the principal
does not stipulate any conditions or
restrictions upon the agents
performance of duties. The agent is
allowed to exercise his own discretion
with reference to the assigned task
taking into consideration the market
norm.
Unrestricted Mudarabah: A Mudarabah
in which the mudarib has a free hand
regarding where and how to invest the
capital of the business.
Uqud almuwadat: Exchange contracts
Uqud al-ishtirak: Partnership contracts
Uqud al-tabbaruat: Charitable
contracts.
Urf: Market norm
Ushr: Islamic tax on agricultural produce
Usufruct: The benet received from an
asset in a contract of lease.
Usul al-Fiqh: Sources of law.
Usury: An exorbitant amount of interest
or any rate of interest or the excess paid
in exchange for a loan granted for
personal use.
Voluntary contract: A contract based on
the mutual co-operation of contracting
parties for which remuneration is neither
granted nor received.
Wada: Promise; an undertaking
regarding future actions.
Wadià: Safe-keeping deposit.
Wadia yad dhaman: Guaranteeing
goods or deposits granted for
safekeeping. As wadia is a trust, the
depository becomes the guarantor for
repayment on demand, of all the
deposits or any part that remains
outstanding in the accounts of
depositors. The depositors are not
entitled to any of the prots but the
depository may grant them a portion of
the returns at their own discretion.
Wakalah: An agency contract which
usually includes in its terms a fee for the
agent.
Wakalah tul Istismaar: An investment
management contract
Wakalah Muqayyada: The same as the
conditional agency agreement
Wakalah Mutluqqa: The same as the
un-conditional agency agreement
Wakalah tul Ujrah: Agency executed for
fee
Wakeel: Agent
Wakeel bil Bai: The agent assigned to
sell
103
Wakeel bil Khasooma: The agent
assigned to deal with common disputes
Wakeel bil Qabz: The agent assigned to
take possession of debt
Wakeel bi Shara: The agent assigned to
purchase
Wakeel bi Taqazidain: The agent
assigned to retrieve debt
Waqf: A legal entity that has the potential
to own, purchase and sell in addition to
grant and receive gifts.
Wasiyah: Will, bequest. A Muslims
testimony in which he details the manner
in which his wealth is to be disposed of
after his death.
Weightages: Ratios calculated for the
appropriate allocation of prot and
assigned to investment categories at
nancial institutions. They are subject to
change with changes in market trend;
the longer the term of deposit, the
greater the weightage assigned to it.
Working Partner: A partner who is
responsible for the running of the
business
Wujuh: (Lit.face) Interpreted in nancial
transactions as goodwill or credit for
partnership
Zakat: A tax prescribed by Islam on all
persons having wealth above an
exemption limit at a rate xed by the
Shariah. Its objective is to collect a
portion of wealth of the afuent members
of society and distribute it amongst the
underprivileged. It may be collected by
the state or distributed by the individual
himself.
Zakat al-Fitr: A small obligatory tax
imposed on every Muslim who has the
means for himself and his dependants. It
is paid once annually at the end of
Ramadan before Eid al-Fitr.
Zakat Al-Maal: The Muslims wealth tax;
a Muslim must pay 2.5% of his yearly
savings above a certain amount to the
less fortunate members of the
community. Zakat is obligatory for all
Muslims who have saved the equivalent
of 85g of gold at the time when the
annual Zakat payment is due.
Zakat ul Maadan: Zakat on minerals
Zakat ul Hubub: Zakat on grain / corn
Zakat ul Tijarah: Zakat on prots from
trade
Zakatur Rikaz: Zakah on treasure/
precious stones.
Zar: seed; crop to be sown
104
Contact Us
Ethica Institute of Islamic Finance
Level 14, Boulevard Plaza - Tower One
Emaar Boulevard, Downtown Dubai
PO Box 127150, Dubai, UAE

Emails are responded to within the same working day, usually in a few hours.
New inquiries about Ethica's training and certication:
info@ethicainstitute.com
Technical help:
support@ethicainstitute.com
Subject matter related questions:
questions@ethicainstitute.com
For everything else:
contact@ethicainstitute.com
We take calls Sunday to Thursday from 9am to 5pm Dubai time:
+9714 455 8690

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