Glossary of Islamic Banking Terms

MURABAHA

This is a sale contract in which an Islamic bank first purchases good from an independent supplier and acquires a valid title and possession thereof. Goods are then sold by the bank at an agreed deferred price which includes the banks profit.

MUSHARAKA (Partnership)

The bank enters into a partnership with the customer in an existing or new investment project or in the ownership of an asset, either on a permanent or diminishing basis. The Musharaka gets terminated upon the customer fully acquiring the title to the project /assets in a gradual manner. Musharaka profits are shared as per mutual agreement whereas losses are borne pro-rata.

MUDARABA (Fund Management)

This is an investment contract in which an investor provides the capital and the investment manager carries out the investment activities in a specific project or trade for a defined period. Profit is distributed as per the agreed ratio. However, genuine loss is fully absorbed by the investor. The investment manager is responsible to indemnify the investor in case of negligence.

ISTISNA (Forward Sale of An Asset)

A sale contract whereby the bank sells a non-existing asset to the customer, which is required to be built and delivered on a future date by the bank as per the customer's specifications. The sale price and terms are pre-agreed, which includes the bank's profit.

IJARA (Leasing )

The bank purchases an asset and leases the same to the customer at a pre-agreed lease rent on a financial lease basis whereby upon successful completion of the term, the asset title is transferred to the customer.

SALAM (Forward Sale of Goods)

The bank pays upfront a price for the purchase of goods from the customer with delivery to be made by the customer at a fixed future date.

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