Glossary of Islamic Banking

Aqd (Contract)

It is a combination of offer and acceptance in a manner that results in the desired consequence in the subject matter.

Aqd ul-Bai (Sale Contract)

A contract between the buyer and seller stating amongst others, the terms and conditions under which an asset is sold.


Literally means: Uncertainty or ambiguity. Technically, it is ignorance in the elements (price, subject matter or time) of a contract or dependence of anything on an unknown or uncertain event.


Literally means: Transfer. Technically, Hawala is the transfer of liability from the transferor (Muheel) to the transferee (Muhal Alaihi). Traveler’s cheque and bill of exchange are examples of Hawala.

Ijara (Leasing)

Literally means: Letting on lease. Technically, leasing of a property pursuant to a contract under which a specified permissible benefit in the form of usufruct is obtained for a specified period in return for a specified permissible consideration. Following are the types of Ijara:

  1. jarat ul-Ashya
    It refers to hiring of things such as houses, shops, and lands etc.
  2. Ijarat ul-Ashkhas
    It refers to hiring of services, such as to hire a servant.
  3. Operating Ijara
    Any lease other than a financial lease is an operating lease.
  4. Financial Ijara (Ijara Muntahiya Bil-Tamleek)
    Financial lease is a lease that includes a promise from the lessor to transfer to the lessee the title of the leased asset at the end of the lease term or by stages during the term of the contract through gift or sale for an agreed price.
  5. Ijara Mausuf fil-Zimma
    It is to lease, a fully specified and described asset, which the lessor undertakes to produce and deliver to the lessee on future date.

Islamic Banking

A banking system where related transactions and activities are conducted in accordance with the tenets of Shari’a that allows asset-backed financing and prohibits interest-based dealings.


It is a sale contract whereby a manufacturer sells fully described goods to be manufactured and delivered at an agreed time and place to the buyer on an agreed consideration that may be paid upfront or at the time of delivery of the goods.

Kafala (Suretyship)

Literally, Kafala means responsibility, amenability or suretyship. Legally in Kafala a third, party becomes surety for an obligation. It is a pledge given to a creditor that the obligor will pay the liability.

  1. Kafala bil-Nafs

    This is a contract whereby the surety undertakes to produce the person. This is generally required when a person becomes surety to produce an accused person before the court of law.

  2. Kafala bil-Mal

    It is the suretyship for the satisfaction of claim whereby the surety may be called upon to perform the obligation of the principal debtor if he makes default in the payment of his debt.

Khiyarat (Options)

Khiyarat is the Arabic plural of the term Khiyar that refers to the option or right of the buyer and/or seller to rescind a contract of sale. Following are types of Khiyarat:

  1. Khiyar ul-Majlis

    Option of the contracting session; the power to annul a contract possessed by both contracting parties as long as they do not leave the session.

  2. Khiyar ul-Shart (Option of Condition)

    The option through which one party or both of them stipulate for themselves or for someone else the right to revoke the contract within a determined period. The purpose of the option is to give chance to a person who suffered some loss in transaction to revoke contract within stipulated time.

  3. Khiyar ul-Ta’een (Option of Determination)

    It is the right of buyer to choose, designate or determine within a pre-stated time one object out of two or more options, which are proposed to him. The basic rule is that the subject matter must be known, i.e. ascertained at the time of contract. For example, one buying a car out of three vehicles offered for fixed price gets opportunity through this option to have cars examined by a specialist and chooses one of them.

  4. Khiyar ul-A’ib (Option of Defect)

    It is a right to a purchaser in a sale to cancel the contract if he discovers that the object acquired has some defects, which reduces its value.

  5. Khiyar ul-Ruyah (Option of Seeing)

    Option of seeing is the right accorded to a person buying any thing not yet present at the moment of the signature of the contract. Eg. ‘A’ buys machinery from ‘B’ without seeing. However, ‘A’ has the option to accept the machinery or reject it after seeing.

  6. Khiyar ul-Wasf (Option of Quality)

    Right of return for the buyer if the goods are sold by specifying a certain quality by the Seller but which is absent in the goods. Eg. ‘A’ buys a car from ‘B’ by specification, however “A” has the right of return the car if he finds it contrary to the specifications agreed upon.

  7. Khiyar ul-Ghaban

    Right of return for the party who is deceived by the other party to the contract.

Maysir (Speculation)

Taking large risks, especially with respect to trying to predict the future.

Melk / Melkia (Ownership)

The legal title to property or thing vested in a person.


A form of partnership where one party provides the funds and the other provides the expertise and management. Any profits accruing are shared between the two parties on a pre-agreed ratio, while the capital loss is borne by the fund provider. If fund providers are more than one then loss is borne by them in proportion to their capital.

  • Rab ul-Maal (Capital Investor)

    In a Mudaraba contract, the person who invests the capital is called Rab ul-Maal.

  • Mudarib(Manager)

    The Mudarib is the entrepreneur or investment manager in a Mudaraba who invests the investor’s funds in a project or portfolio in exchange for a share of the profits.


It is a kind of sale where the seller discloses its cost and profit to the buyer.


Musawama is a general kind of sale in which price of the commodity to be traded is bargained between seller and purchaser without any reference to the price paid or cost incurred by the seller.

Musha’ (Undivided)

A share that is undivided and completely mixed up with the shares of the other partners, that is, it is to be found in each particle of the joint property.


Literally Musharaka means sharing. Technically, it is an investment contract whereby both parties contribute capital and/or entrepreneurship together and share profit on the agreed terms while loss is borne by the parties according to the proportion their invested capital.

There are two main kinds of Sharika:

  1. Shirkat ul-Melk (Co-ownership)

    It is defined as the existence of a thing in the exclusive co-ownership of two or more persons due to any reason of ownership. In this type of Sharika each and everyone has undivided ownership in every smallest part of the asset. It is of two kinds:

    1. Compulsory Co-ownership

      It is a partnership, which becomes effective without any action on the part of the partners, such as inheritance.

    2. Optional Co-ownership

      It is a co-ownership, which becomes effective through the act of parties e.g. joint purchase or joint acceptance of gift.

  2. Sharikat ul-Aqd (Contractual Partnership)

    Sharikat ul-Aqd means an agreement between two or more parties to combine their assets, labor and/or liabilities for making profits. Following are the kinds of Sharikat ul-Aqd:

    1. Shirkat ul-Wujooh

      Partnership between two or more parties whereby each partner contributes no capital but their creditworthiness in the society i.e. they obtain goods on credit, sell the goods and share the profit, if any.

    2. Shirkat ul-Abdan / Sharikat ul-Taqabul

      Partnership between two or more parties whereby each partner contributes the work and management (devoid of capital).

    3. Musharaka Mutanaqisa (Diminishing Musharaka)

      A diminishing partnership arrangement under which shares of some partners may be gradually bought out on agreed terms by the other partner.

    4. Sharikat ul-Mugharasa (Agricultural Partnership)

      It is a partnership in which one party presents a treeless piece of land to another to plant trees on it on the condition that they share the trees and fruits in accordance with a defined percentage.

    5. Sharikat ul Muzara`a (Sharecropping)

      Sharecropping is a partnership in which one party presents land to another for cultivation and maintenance in consideration for a common defined share in the crop.

Offer and Acceptance

Offer is a declaration that is made first with a view for creating an obligation, while acceptance is the second statement by which one accepts an offer and concludes a contract. Both are stated in past tense.

Parallel Istisna’

If the buyer in Istisna’a contract enters into another separate Istisna’a contract with a third party in the capacity of seller/manufacturer and the items whose specifications conform to the first contract, and there is no link between the two contracts, it is called a parallel Istisna.

Parallel Salam

If the seller in Salam contract enters into another separate Salam contract with a third party to acquire goods, the specification of which corresponds to that of the commodity specified in the first Salam contract, the second contract is called parallel Salam.

Possession (Qabd)

Literally, Qabd means taking or holding something in one’s hand. In its juristic sense, Qabd implies custody and possession of an asset.

  1. Constructive possession

    It is a legal fiction to describe a situation where an individual has control over a property or thing without actually having physical control of the same.

  2. Physical Possession

    It is a possession, which consists on both legal fiction and physical control over the asset/good. 

Riba (interest)

Literally means: addition, expansion, growth or increase. Technically, it refers to the premium that must be paid without any consideration. According to Jurists, this definition covers the two types of Riba namely Riba al Fadl and Ribal al Nasi’a.

  1. Riba al Fadhl

    It is a difference, which results from the contractual obligation of a party in the context of a direct exchange of items of the same general kind between two parties.

  2. Ribal al Nasi’ah

This refers to the ‘premium’ that must be paid by the borrower to the lender along with the principle amount as a condition for the loan or an extension in its maturity.


It is a type of sale in which the price, known as the “Salam Capital” is paid at the time of contracting while the delivery of the sold item known as “Al Muslam Fihi” –the subject matter of the contract – is deferred.


A set-off is the discharge of a receivable against a payable. It is divided into two main forms:

  1. Mandatory Set-off

    A mandatory set-off is a set-off that occurs without the need for bilateral agreement or consent of both parties.

  2. Contractual Set-off

    A contractual set-off is the discharge of two debts by the consent of the two parties to extinguish their obligations towards each other.


Sharia is an umbrella term which stands for the principles and rules related to practical aspects of life which cover acts of worship, financial transactions, family law and laws of inheritance, rules of war and peace etc. whether they are mentioned explicitly in the Holy Quran and Sunnah or derived from other Shari’a sources by Mujtahedeen through application of the rules of Ijatihad. 


Sukuk are certificates of equal value representing undivided shares in the underlying assets, usufruct or services. Or representing individual shares in the assets of particular projects or special investment activities in which case the Sukuk will represent undivided shares in the underlying assets after the proceeds are deployed.


A scheme of mutual support that provides insurance to individuals against hazards of falling into unexpected and dire need.


As used in personal financing, a customer with a genuine need buys something on credit from the bank on a deferred payment basis and then immediately resells it for cash to a third party.

Urboun (Pledge)

It means an amount of money that the customer pays to the institution after concluding a sale contract, with the provision that if the sale is completed during a prescribed period, the amount will be counted as part of the price. If the customer fails to complete the sale, then the institution may retain the whole amount.


Putting something in another person’s trust with the condition that the latter would tend to use it, if necessary, and draw benefits from the usufruct, if any.

Wakala (Agency)

It means to appoint someone to take charge of something, and also to leave an assignment in some other person’s care.

Wakala Istithmar

It is to appoint an expert fund manager for investment of one’s funds against a pre-determined fee for pre-decided services and duties. This fee may be given in lump sum or as a monthly or annual remuneration.

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