Sharia Banking Terms
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Ar-Rahnu
Ar-Rahnu is to pledge goods with the property value (economic value) as security for an indebtedness, this way the owner of the goods can incur debts. Ar-Rahnu also means pledge or pawn, which is a contract (akad) of guarantee and binding when the right of possession of goods as security is transferred. Under the contract, there is no transfer of ownership of the collateral. Or in other words, it is a contract for delivery of goods from a customer to a banks as security of an indebtedness, in whole or in part, held by a customer. Accordingly, the transfer of ownership of goods only occurs in the circumstances arising or resulting from the contract.
Hawalah
Hawalah is a contract of transfer of a debt from a customer to a bank to help the customer to acquire cash capital in order to continue his/her production and the bank will receive something of value in return for serving the transfer of a claim of a debt.
Ijarah
Ijarah is a lease agreement that allows a lessee to use the leased goods in return for rent as agreed upon, and upon expiration of the lease term, the goods are returned to the owner, but the lessee may also own the leased goods with option of transferring the ownership of the leased goods from the bank by another party (ijarah wa iqtina).
Istishna
Istishna’a is trade financing made between a bank and a customer where the seller (bank) manufactures the goods ordered by the customer. To meet the customer’s order, the bank can subcontract their work to other party.
Kafalah
Kafalah is a guarantee issued by the bank under a contract to the customer to guarantee projects and to fulfill a certain obligation by the guaranteed party.
Mudharabah
Mudharabah is a partnership between two parties in which the capital owner (shahibul maal) provides capital whereas the entrepreneur (mudarib) becomes the fund manager, and the parties share the profits and losses as agreed in advance.
Mudharabah al-Mutlaqah
Mudharabah al-Mutlaqah is a partnership between two parties in which the capital owner (shahibul maal) provides capital and fully authorizes the entrepreneur (mudarib) to determine the type and place of investment, and the parties share the profits and losses as agreed in advance.
Mudharabah Muqqayadah
Mudharabah Muqayyadah is a partnership between two parties in which the capital owner (shahibul maal) provides capital and authorizes the entrepreneur (mudarib) on a limited basis to determine the type and place of investment, and the parties share the profits and losses as agreed in advance.
Mudharib
Mudharib is a second party or other party other than a first party.
Murabahah
Murabahah is an agreement between a Sharia Bank and a customer under which the Bank provides financing for the purchase of raw materials or other working capital as needed by the customer who will repay at the bank’s selling price (bank’s purchase price + profit margin) at the specified time.
Musyarakah
Musyarakah is a financing agreement between a Sharia Bank and a customer who needs financing, under which the Bank and the customers jointly finance a business activity or projects which are also managed jointly within the principle of profit sharing according to the contribution, and both parties share the profits and losses as agreed in advance.
Nisbah
Nisbah (Ratio) is profit sharing of each party, whose amount is determined by agreement.
Salam
Salam is trade financing in which the buyer pays the money in advance for specific goods purchased and delivered at a specified time in the future.
Shahibul Maal
Shahibul Maal is a first party.
Wadiah
Wadiah (Safekeeping) is a deposit from one party to another both individuals and groups that must be kept in safe custody and returned at any time when the owner so requires.
Wadiah Yad adh-Dhamanah
Wadiah Yad adh-Dhamanah is wadiah (safekeeping) in which the depository may use the deposits with the permission of the owner, and guarantees to return the deposits in full at any time when the owner so requires.
Wadiah Yad al-Amanah
Wadiah Yad al-Amanah is wadiah (safekeeping) in which the depository is not responsible for any loss and damage to the deposits as long as they do not result from negligence or carelessness of the depository in maintaining the deposits.
Wakalah
Wakalah is an agency contract between two parties (a bank and a customer) under which the customer authorizes the bank to represent him-herself to perform a specific task or service.