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Glossary of Financial Terms - I
 
This glossary is not limited to Islamic terms and
contains Arabic and English terms that are also referred to
in the study of Islamic economics, banking and insurance.
 
 
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Ibadat
Worship or Ritual act.
Ibaha
Lit: permissibility. Ibaha refers to the rule that every economic transaction is mubah (permissible) unless expressly and specifically forbidden by the Shari’ah.
Ibnu Sabil
"Lit.: ibnu sabil is an expression for musafir. Musafir are people who are travelling. Although an ibnu sabil has living means, the person can receive zakat in case of problems in accessing provisions during travelling."
IFI
Islamic Financial Institution, may be a bank or any financial instiution conducting business according to the Shari'ah principles.
Ihsan
Carrying out noble deeds without expecting any worldly rewards but doing it for the pleasure of Almighty God. The doing of good and showing it in both deed and action, a sense of social responsibility borne from religious convictions. Ihsan constitutes the highest form of worship (Ibadah); it is excellence in work and in social interactions. Lexically, meaning help, aid, and support. Also Al-Ihsan.
Ihtikar
Hoarding: the prohibited practice of purchasing essential commodities, such as food and storing them in anticipation of increase in prices.
Ijab
Offer (in contract). Opp. Qabul.
Ijarah (1)

Lit: letting on lease. Technically, sale of a definite usufruct in exchange for a definite reward. Commonly used for wages, it also refers to a contract of land lease at a fixed rent payable in cash. It is contrary to "Muzarah" when rent is fixed as a certain percentage of the produce of land banks. It is an arrangement under which an Islamic bank leases equipment, a building or other facility to a client against an agreed rental. The rental is so fixed that the bank gets back its original investment plus a profit on it.

Lit: letting on lease or simply, leasing. Technically, sale of a definite usufruct in exchange for a definite reward. Used for hire of services for wages and also refers to a lease of an asset at a fixed rent payable. As in a normal lease transaction, a lessor who owns the leased asset will lease it to another party (the lessee) in exchange for payment of rental. The lessee will get the full benefit of using the lease asset within the specified period for as long as he adheres to the lease terms and conditions. At the end of the lease period, the leased asset will be returned to the lessor.There are some other variants of leasing which incorporate the transfer or option to transfer ownership of the leased asset from the lessor to the lessee at the end of the lease period; these are referred to as;

Ijarah Thumma Bai - Lease Agreement Incorporating sale of leased asset at the end of the lease period.

Ijarah Muntahiya Bil Tamleek - Lease Agreement with option to own the leased asset at the end of the lease period.

Ijarah Wa Iqtina - Lease Agreement with option to acquire the leased asset at the end of the lease period. Often used in the context of home purchasing

Ijarah wa Iqtina extends the concept of Ijarah to a hire and purchase agreement. It is a contract under which the Islamic bank finances equipment and machinery, building or other facilities for the customer against an agreed rental together with a unilateral undertaking by the bank or the customer that at the end of the lease period, the bank's ownership in the leased asset would be transferred to the customer. The rental is so fixed that the bank recovers its investment plus a profit. Ijarah wa Iqtina extends the concept of Ijarah to a hire and purchase agreement. It is a contract under which the Islamic bank finances equipment and machinery, building or other facilities for the customer against an agreed rental together with a unilateral undertaking by the bank or the customer that at the end of the lease period, the bank's ownership in the leased asset would be transferred to the customer. The rental is so fixed that the bank recovers its investment plus a profit. Ijarah wa Iqtina extends the concept of Ijarah to a hire and purchase agreement. It is a contract under which the Islamic bank finances equipment and machinery, building or other facilities for the customer against an agreed rental together with a unilateral undertaking by the bank or the customer that at the end of the lease period, the bank's ownership in the leased asset would be transferred to the customer. The rental is so fixed that the bank recovers its investment plus a profit. Ijarah wa Iqtina extends the concept of Ijarah to a hire and purchase agreement. It is a contract under which the Islamic bank finances equipment and machinery, building or other facilities for the customer against an agreed rental together with a unilateral undertaking by the bank or the customer that at the end of the lease period, the bank's ownership in the leased asset would be transferred to the customer. The rental is so fixed that the bank recovers its investment plus a profit.

Ijarah (2)
A form of leasing contract in which there is a transfer of ownership of service (for use of an asset) for a specified period for an agreed upon lawful consideration. Instead of lending money on interest, Ijarah allows a financial institution to earn profits by charging rentals for the use of the asset. Often used by Islamic banks for financing. Under this scheme of financing an Islamic bank purchases an asset as per specification provided by the client. The period of lease and the lease rental fee are set in advance and may be determined by mutual agreement according to nature of the asset. During the period of the lease, the asset remains in ownership of the bank (as lessor), but the client (as lessee) has the right to use it.
Ijarah Sukuk
A Sukuk (Islamic bond) having Ijarah as an underlying structure. See Sukuk  and Ijarah.
Ijarah Muntahia-bi-tamleek
A lease ending in the transfer of the ownership to the lessee in such a way that the lease and sale are kept separate and independent transactions. Use of the this term for leasing is better known as  ljarah wa iqtina, as the latter tends to give the impression that the Ijarah and the sale are working side by side when actually they have to be two separate deals to fulfil the Shari'ah requirement. See ljarah wa iqtina.

Ijarah Mausufah bi Zimmah (a) An unidentified unit of asset is leased in the form of a forward lease. (b) A lease contract where the lessor undertakes to provide a well-defined service or benefit without identifying any particular of assets  rendering the related service. Of a unit of the asset is destroyed, the contract is not terminated and the lessor provides another such unit.
Ijarah Thuma Bai
Leasing to purchase. The principle governing an Ijarah contract that allows the lessee (the bank client) to purchase the leased asset for an agreed price though a separate purchase contract.
Ijarah wa-iktina
Lease purchase. Also known as Ijara wa iqtina.
ljarah wa iqtina
Lease and purchase transaction. Like Ijara, except that it is pre-agreed that at the end of the lease period the client will purchase the leased asset from the bank, after all rental fees are paid for the length of the lease period. The lease rentals include a part of the purchase price so that at the end of the lease period the bank gets back its principal sum along with some pre-determined profit. At the end of the lease period, the leased asset is often sold to the client for a nominal value.  As a mode of financing by way of hire-purchase, adopted by Islamic banks but different from conventional hire-purchase. Under the agreement an Islamic bank purchases an asset such as an equipment giving it on lease against payment of agreed rentals together with an undertaking or promise that the ownership will be transferred to the lessee; the undertaking or promise does not become part of the lease contract to make it conditional. Ownership is transferred through a separate contract of sale or gift. Also termed as Ijarah Muntahia-bi-tamleek.
Ijarah with Diminishing Musharakah
The principle is used for home purchased or Islamic mortgages.  Combining Ijarah with Diminishing Musharakah allows  the bank or lender and the client enter into an agreement to jointly purchase a house, the client pays rentals for the use of the bank's share along with an additional payment towards purchase of the bank's share. Over time, the bank's share is reduced and is gradually acquired by the client. When the bank's share is fully acquired, the bank transfer the ownership to the client. This principle may also be used to acquire any other asset.
Ijma
Consensus, usually on a given issue as represented by the agreement of the jurists. It is has traditionally been recognised by most Muslim jurists as an independent source of Islamic jurisprudence, along with the Qur'an, Sunnah and Qiyas (analogical deduction).
Ijtihad
Lit: effort, exertion, diligence. Independent or innovative legal reasoning or interpretation (by qualified Islamic legal scholars) to formulate a ruling on a given issue on the basis of evidence found in Islamic sources.
Ikhtiyar
Choice. Is to reach an opinion from choice among views already propounded by past scholars;
Illah
The attributer of an exchange or event that entails a particular Divine ruling cases possessing that attribute- cause of Prohibition of specific exchange contracts.Illah is the  basis  for applying analogy for determining permissibility or otherwise of any transaction.
Ilm (ilm)
Knowledge.
Imam
Lit. leader. Guide or ruler. Head of a religious community.
Iman
Personal faith, conviction or belief.
Inah
See Bai al-Inah.
Inan
A type of Shirkah: a form of partnership in which each partner contributes capital and has the right to work for the business but not necessarily equally.
Infaq
Spending. In the literature of Islamic economics , It usually refers to spending on poor, orphan, Traveler or the people who ar unable to return their debts.
Insurance
Pooling of risks and many individuals and business entities and transforming them to an insurer/insurance company or a large group in return for payment of a premium.
Interim Financing
Short-term loan to provide temporary financing until more permanent financing is available.
Iqtisad
Lit: moderation. It refers to Islamic approach to economic problems.
Islah
Reform.
Islam
Submission, which dictates that a believer submit to the will the one Almighty God (Allah), conforming inwardly and outwardly to His laws. The doctrine of One God is the most emphasised and repeated principle in The Qur'an. No sacraments or procedures are prescribed for a person to join the faith of Islam. The word islam is also derived from the word silm which means peace."
Islamic Banking
Financial services that comply with the requirements of the Shari'ah. While designed to meet the requirements of the Shari'ah, Islamic banking is not restricted to Muslims; both the financial services provider and the client can be non-Muslims so long as they agree to abide by the requirement of the Shari'ah. Synonym with Islamic finance or Islamic financial services.
 

The foundation of Islamic banking is based on the Islamic faith and therefore all actions and deeds of its practitioners as well as the business conduct of Islamic banks are bounds by the limits of the rulings by the Shari’ah. The Shari’ah allows business activities so long as they do not involve charging or receiving interest, known as Riba, speculation and contractual uncertainty that equates to gambling. An important underlying principle relating to financial transactions is “Deal not unjustly, and ye shall not be dealt with unjustly” (The Qur’an 2:279).  Another important principle is that there should be no profit without taking some risk, both in relation to labour and capital, meaning that no payment is allowed for labour unless it is applied to work and there is no profit on capital unless it exposed to business risk. There are also rules relating to economic activities and earnings that are Halal (permitted) and Haram (prohibited).   Yet another important principle is the emphasis placed on financing that should be backed by an underlying asset. Business activities are governed by contracts allowed by the Shari’ah, the common contacts are based on the concepts of joint venture partnerships (Musharakah and Mudarabah), Murabaha (cost plus profit mark-up), Ijarah (leasing), Istisna’a and Istisna’a (forward sales), Wadiah (safe-keeping), Amanah (trust), Kafalah (guarantee), Kafalah (agency) and Jua’lah (service fee). There should be a credible Shari’ah Supervisory Board comprising of Shari’ah scholars and advisors; they should be independent and qualified to give rulings that pass moral judgment on proposed contracts and transactions as well as to ensure that business conducted is according to the requirements of the Shari’ah.   

Islamic finance
See Islamic Banking and Takaful.
Islamic Financial Institution
A bank or any financial institution whose business is conducted according to the rules of the Shari'ah. Abbr. IFI
Islamic Financial Services
See Islamic Banking and Takaful.
Israf
Wasteful expenditure, unnecessary financial yoke.
Istihsan
Juristic preference. In Islamic jurisprudence, it refers to departure from the application of a ruling on an exceptional basis by taking a lenient view of an act that may otherwise cause unfairness or distress.
Istijar
Hiring, renting; another term less frequently used for Ijarah.
Istijrar
A recurring or repeat sale for continuous purchase. A master agreement between a buyer and supplier which facilitates purchasing of goods on ongoing basis (such as monthly) without explicit offer and acceptance each time; the price is fixed either upfront or concluded after a predetermined period which is subject to certain conditions.
Istislah

To deem proper, a method employed by Muslim jurists to solve problems that find no clear answer in sacred religious texts. It is related to the term Maslaha or "public interest" Istislah bears some similarities to the natural law tradition in the West, however, whereas natural law deems good that which is known self-evidently to be good, according as it tends towards the fulfillment of the person, Istislah calls good whatever is connected to any one of the five basic objectives of the Shari'ah: protection of faith, life, progeny, property and reason, some add also honour.

Istisna'a

A contract of sale of specified goods that have to be manufactured before delivery is possible. A forward sale; literal meaning, to manufacture or build. It is a contract of sale of a specified goods that can be sold before manufactured product comes into existence;  an order to manufacture (for purchase) allowing the buyer to pay the price progressively in accordance with the progress of a job or project or against delivery in stages; takes the form of (progressive financing. It is a condition in istisna'a that the seller provides either the raw material or the cost of manufacturing the goods. There is an obligation on the manufacturer to deliver the goods on completion according to the buyer's specifications.  Istisna’a may include any process of manufacturing including construction, assembling or packaging. Islamic banks commonly adopt istisna’a to provide financing for large projects such as to construct a building, a road or highway, develop an industrial project, build a ship or an aircraft or assemble a factory or machinery. The bank releases finance in phases commensurate with the progress in the manufacturing schedule. 

 

The bank first takes on the role of the seller under an Istisna’a contract with a customer with the obligation to manufacture goods required by the customer at a certain price; the bank then takes on the role of buyer and enters into a separate istisna’a contract with a supplier to have the goods manufactured at a lower price, the difference being the bank’s profit. Thus, the bank acts as a financial intermediary without being required to actually manufacture the goods required by the customer. Under the Shari'ah, a sale cannot normally be effected unless the goods are in existence at the time of the contract however, it is argued that it is justified in the case of istisna’a as the need for the goods are such that they cannot be sold until they are manufactured, however the order to manufacture is demonstration of the general need and the  availability of the manufactured goods is relatively certain.

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