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Glossary of Islamic finance terms

This short glossary gives my recommended spelling and a detailed explanation of the term.

Commenced 14 February 2016

There are many Islamic finance glossaries available on the internet. For example, those from The Institute of Islamic Banking and Insurance, Al Salam Bank Bahrain, The Chartered Institute of Management Accountants and Credit Agricole CIB to list just the top five in my Google search just now.

So why create another? I have some specific objectives:

  1. Use only terms which I consider have been absorbed into English, using what I regard as the best spelling, as explained in my piece "The language of international Islamic finance is English."
  2. Give more detailed explanations than the typical glossary. I will create a website page for each defined term.
  3. Avoid cluttering the glossary with words that are not really relevant in an attempt to be comprehensive.

The glossary below will grow slowly as I add words to it. If there is a word you would like me to include, please email me using my "Contact me" page.

The glossary

In general Islamic finance terms should not be capitalised, just as conventional finance terms ("derivative") are not capitalised except when starting a sentence. There are some exceptions for words having particular religious importance, such as "Shariah". Accordingly the use of lower case or upper case is intentional.

All transliteration characters, glottal stops, etc. are excluded since these words have been absorbed into English, and should be spelt as English words.

Word Explanation
diminishing musharaka

The word "musharaka" is broadly equivalent to a partnership.

Diminishing musharaka is a type of partnership agreement where one partner is expected (and in practice required) to buy out the other over time. Its most common use is to create the Islamic finance equivalent of a floating rate mortgage.

See "Property finance using a diminishing musharaka contract" on my page "A simple introduction to Islamic mortgages."

murabaha

A murabaha transaction occurs when the first party (usually a bank) buys an asset and immediately sells it to the second party (usually bank customer requiring finance to buy the asset) at a higher price, with the markup being fully disclosed.

The second party is not required to pay the price immediately. Instead, payment is only required at a specified future date or dates.

The goal is to for the first party to provide credit to the second party, and charge for it, while complying with the rules for Islamic finance specified by Shariah scholars. For more detail, see "A simple introduction to murabaha (purchase and resale) transactions."

sukuk

The word sukuk is uniplural, so "one sukuk", "two sukuk" etc.

Sukuk in their modern Islamic finance form were invented in Malaysia around the year 2000. They are designed to have economic implications for the issuer and the investor which are essentially similar to tradable bonds, but without having any interest paid or received. That means that there can be no legal debt involved.

The goal is to design an instrument which can be bought and sold between different holders, provides finance for a fixed period of time, typically three to five years although longer periods of time are used, and from the perspective of investors, provides a flow of regular payments which has priority over the payment of rewards to ordinary shareholders, without involving interest. See "A simple introduction to sukuk."

 

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