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Islamic Finance forInvestment Managers
Five Steps to Creating a Shariah-Compliant Portfolio
With a Glossary of Islamic Finance Terms
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TABLE OF CONTENTS
[03] Introduction
[04] Step One: Finding Your Way AroundShariah PrinciplesAccounting and Audit Organisation for Islamic FinancialInstitutions (AAOIFI)
Islamic Financial Services Board (IFSB)
Islamic Fiqh Academy (IFA)
[05] Step Two: Choosing What to Offer:
Most Common Islamic Productsand TransactionsStandard Contracts
Shariah-Compliant Communal Investment Vehicles
Sukuk
Other Instruments
Some Primary Islamic Transaction Types
[09] Step Three: Choosing What to Offer:ShariahView on ConventionalInstruments
[10] Step Four: The Financial Screening ofConventional Stock: How to Pick Sharesfor a Shariah-Compliant Portfolio
[12] Step Five: Specific RecommendationsRegarding Conventional StockPurification of Income from Conventional Stock
Segregation of Funds/Islamic Windows
Workflow
The Term Interest
[13] Conclusion
[14] Glossary
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Step One: Finding Your Way AroundShariah Principles
Islamic finance is finance under Islamic law (or Shariah) principles. Thebasic sources ofShariah are the Quran and the Sunnah, which are
followed by the consensus of the jurists and interpreters of Islamic law.
The main principles of Islamic finance include:
The prohibition of taking or receiving interest (riba);
Capital must have a social and ethical purpose beyond pure,
unfettered return;
Investments in businesses dealing with alcohol, gambling, drugs or
anything else that Shariah considers unlawful are prohibited;
A prohibition on transactions involving maysir(speculation orgambling); and
A prohibition on gharar, or uncertainty about the subject-matter
and terms of contractsthis includes a prohibition on selling
something that one does not own.
Because of the restriction on interest-earning investments, Islamic
banks seek to obtain their earnings through profit-sharing investments
or fee-based returns. When financing is provided for business pur-
poses, the financier, if he wants to make a legitimate gain under the
Shariah, should take part in the risk. If a financier does not take part
in the risk, his receipt of any gain over the amount provided is classed
as interest.4
Although Islamic banking and finance authorities are attempting to
provide a uniform code of standards and practices, the specifics relat-
ing to Shariah-compliance can vary between regions and Islamic
schools of thought.
To ensure local adherence, each financial institution must therefore be
guided by its own internal board of Islamic scholars (often assisted by
national boards) that advise on the way in which all transactions are to
be processed. Moreover, a number of bodies aim to provide standards
and references.
Accounting and Audit Organisation for IslamicFinancial Institutions (AAOIFI)
The Accounting and Audit Organisation for Islamic Financial Institu-
tions (AAOIFI), established in 1990 in Bahrain, is an autonomous non-
for-profit body that prepares accounting, auditing, governance, ethics
and Shariah standards for Islamic financial institutions, with a view to
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Although Islamic banking
and finance authorities areattempting to provide a uniform
code of standards and practices,
the specifics relating to Shariah-
compliance can vary between
regions and Islamic schools of
thought.
4 Source: Freshfields Bruckhaus DeringerIslamic Finance: Basic Principles and
Structures
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having them globally adopted as international benchmarks for the
industry. They are intended to complement existing international
accounting standards (lAS), where there are no specific standards to
deal with Islamic banking transactions.Bahrain and Sudan now require Islamic banks to comply with AAOIFIs
standards, and in the Kingdom of Saudi Arabia and other Muslim major-
ity countries, AAOIFIs standards are being specified as guidelines.
Islamic Financial Services Board (IFSB)
The IFSB, based in Kuala Lumpur (Malaysia), is an organisation intended
to develop international regulatory standards to promote the sound-
ness and stability of the Islamic financial services industry. Its main
objectives are to promote the development of prudent and transparent
Islamic financial services and provide guidance on the effective supervi-
sion and regulation of institutions offering Islamic financial products.
In December 2005, the IFSB adopted two standardsthe Guiding
Principles of Risk Management and the Capital Adequacy Standard
which were intended to complement the Basel II accord with provisions
specifically designed for Islamic banks.
Islamic Fiqh Academy (IFA)
The Islamic Fiqh Academy (IFA) was established in 1982 in Jeddah by
the Organisation of the Islamic Conference. It meets annually to con-
sider topics relevant to modern-day Islamic life including Islamic
finance. One of the most important conclusions relating to Islamicbanking arose from the 1985 IFA meeting which definitively ruled on
what constituted riba, thus ending decades of uncertainty.
Step Two: Choosing What to Offer:Most Common Islamic Productsand TransactionsIt will be the decision of an individual firm to determine whether co-
mingling of compliant and non-compliant investments is permittedwithin a portfolio and even whether the institution is prepared to con-
duct business in (or hold) non-compliant investments at all.
A Shariah-compliant portfolio may be made up of:
Islamic-based permitted (halal) investments
Qualifying conventional securities and cash
The Islamic-based permitted investments are covered by a number of
standard contract types.
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Standard Contracts
Mutual Investment Contracts
The principal transactions within this group are the mudaraba and
musharaka.
In the mudaraba arrangement, the bank will provide funds to the entre-
preneur who will supply labour or expertise. The bank may invest its
own funds in which case it is the investor (Rab ul-Mal), or it may act as
agent (mudarib) on behalf of other bank clients who wish to invest
funds in which case the bank aggregates the investment funds and
places them with the entrepreneur. Profits will be shared according to a
pre-defined ratio while losses are borne purely by the investor(s).
The musharaka is a similar partnership arrangement, but the bank does
not act alone in investing in the project. In amusharaka
there are otherdirect investors, which may include the entrepreneurs themselves. Prof-
its are shared according to a pre-agreed ratio, but losses are shared on
the pro-rata of the capital investments.
This sharing of profits in an agreed ratio enables the bank to take a
higher proportion of profits in order that its investment may be returned
earlier, enabling the bank to exit the arrangement earlier than other
investors. This arrangement (called a diminishing musharaka) can be
used by a client to finance the start-up of a business or the purchase of
real estate where the banks share of the ownership gradually reduces.
Finance ContractsThis group of transactions are used by banks to provide assets, or the
use of assets, directly to their clients.
The most common types are the murabaha (cost plus sale), the ijara
(lease), and the salam and Istisnaa forward finance transactions.
The murabaha is the most common Islamic form of financing. In this
the bank acquires an asset on behalf of the client, and in turn the client
will buy the asset back from the bank over time. The client and bank
agree at the time of contract on the amount of profit that the bank will
make. This contract can be used at a retail level, say to buy a car, or at
a corporate level, for example to acquire real estate.
In its reverse form murabaha is used as a method of time deposit. In
this arrangement, it is the bank that does the buying and the investor
that sells. Most commonly the investor buys a stated commodity
which is then sold to the bank for selling price plus profit. The banks
payment will be deferred for an agreed time. In this way the investor
deposits money with the bank which is then repaid plus profit at a
given time in the future, avoiding interest.
The ijara lease is similar to a conventional lease in form but presents
some significant differences. The bank acquires the asset (plane, manu-
The murabaha is the most
common Islamic form of
financing. In this the bank
acquires an asset on behalf of the
client, and in turn the client will
buy the asset back from the bank
over time.
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facturing equipment, etc.) and gives the client the right to use the
asset (called usufruct) in return for agreed lease payments. Ownership
of the asset remains with the bank, which is also responsible for its
maintenance.In an ijara wa iktina, payments contain an element of capital repayment
so that at the end of the agreed lease period the capital amount is fully
repaid and ownership transfers to the client.
The salam and Istisnaa contracts are considered exceptions under
Shariah because they involve the purchase of something that at the
time of the contract does not exist. The existence and possession of
the item by the seller is normally a mandatory condition for a contract
of sale, but these two types of contracts are for the growth (salam) or
manufacture (Istisnaa) of the items. In both of these types of contract
the price paid may be less than the current market price. The descrip-tion, quantity, quality and time and place of delivery must be clearly
agreed in the contract.
Accessory Contracts
This group of contracts are those where the bank acts on a fee-earning
basis. Examples of accessory contracts are agency agreements
(wakalah) where the bank is appointed agent for the performance of
specific duties such as buying or selling shares, or trust agreements
(amanah) whereby the bank is appointed trustee and takes on a duty of
care, or where it provides a guarantee (kafalah), whereby a third party
becomes surety for the payment of debt if unpaid by the person origi-nally liable.
Shariah-Compliant Communal InvestmentVehicles
Additionally, there are many Islamic communal investment vehicles
such as unit trusts and other Shariah-compliant investment funds,
many of which specialise in property investment or other halalpur-
poses. Such funds are structured, priced and traded in generally similar
ways as their conventional counterparts.
Shariah Equity FundsShariah equity funds most commonly invest in the shares of listed
Islamic companies whose business purposes are of course halal. Con-
ventional listed companies may or may not be included, but if they are
they will need to comply with stipulations detailed in this paper.
Shariah Real Estate Funds
Shariah-compliant investment in real estate funds can often involve
investment in leased commercial properties, where the fund leases out
property and receives rentmost often through an ijara contract.
There are many Islamic
communal investment
vehicles such as unit trusts and
other Shariah-compliant invest-
ment funds, many of which
specialise in property investment
or other halal purposes.
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Step Three: Choosing What to Offer:ShariahView on ConventionalInstrumentsThe prevailing Shariah view is that certain type of stock market invest-
ments are acceptable.
Equity-Based SecuritiesMay be Acceptable
Equity-based securitiesshares in businessesdo not guarantee any
return and in fact, the investor has a real chance of loss, so this is in line
with Islamic principles. However, for a conventional equity investment
to be Shariah-compliant the business must not be one that is engaged
in forbidden activities, and the capital structure of the firm must con-
form to Islamic financial principles. These requirements are further dis-
cussed below.
Debt-Based SecuritiesUnacceptable
Much of the capital markets consist of debt-based securities. Because
these types of securities carry a fixed return until maturity, they are
inconsistent with Islamic financial principles. Essentially, all government
and corporate bonds are seen as interest-based instruments.
Instrument Classification Brief Description
Murabaha Asset or a Type of Financing Cost price (or deposit amount) plus a defined profit that may berepaid on a deferred basis. Can be used either as financing orcustomer time deposit.
Sukuk Communal Investment Vehicle On the buy-side have similar financial characteristics to conven-tional bonds. Often some variation of SPV owning (for the term) theasset that creates the profits. Certificates (sukuk) represent owner-ship in SPV.
Mudaraba Profit Sharing One partner invests funds, the other expertise. Profits are shared onan agreed basis, but not losses. Often used where an investordeposits funds with a manager (mudarib) who makes a profit from anacceptable form of investment.
Musharaka Profit Sharing Multiple partners invest funds, while a manager provides expertise.Normally, parties share profits on an agreed basis but losses areshared on a pro rata basis.
Ijara Islamic Leasing Islamic leasing arrangement. The bank acquires an asset and givesthe client the right to use it in return for agreed lease payments.
Salam Agricultural Finance Buyer agrees to the advance purchase of agricultural produce tofinance its planting, growing and harvesting.
Istisnaa Manufacturing Finance Buyer agrees to the advance purchase of specified goods to financemanufacture or construction.
Some Primary Islamic Transaction Types
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Preferred StocksUnacceptable
If the business goes bankrupt, preferred stockholders have priority in
getting their money back over ordinary shareholders, which is unac-
ceptable under Shariah. The provision for paying fixed dividends isalso unacceptable, so these investments cannot be considered.
DerivativesGenerally Unacceptable
The arguments regarding the compliance of derivatives are many and
complex. Financiers are attempting to create structures that may
deliver the characteristics of certain derivative types.
However, for the Shariah requirements of investing in real assets (not
just money), the price must be certain, delivery must occur and,
although there must be an element of risk and no fixed returns, there
should be no speculation in the transaction. These all conspire to gen-
erally prohibit derivative-type instruments, although in some markets
some emerging contract types may be deemed permissible.
Similarly for hedge funds, although financiers are trying to replicate the
characteristics of hedge funds, the Shariah requirements relating to
selling of assets that are not actually owned (short-selling), the require-
ment that income is obtained from the use of real assets and avoidance
of speculation (gharar) would all act as barriers to Shariah compliance.
Step Four: The Financial Screening of
Conventional Stock: How to Pick Sharesfor a Shariah-Compliant PortfolioAs seen above, some conventional equity investments can be owned
individually or through collective investment schemes after they have
been examined and declared as acceptable (halal). A screening
process is carried out to exclude stocks deemed unacceptable (haram).
Lists of acceptable stocks are supplied by various index providers,
although not all may be universally accepted by Shariah experts.
Obviously excluded are stocks in companies that deal with alcohol
(and often tobacco), gambling activities, pork and arms manufacturing.Some investors may prefer to avoid investing in airlines, hotels or
supermarket chains that serve or sell alcohol, even though this is a
minor part of their business. This would, however, result in a much
more restricted potential portfolio selection. Therefore, businesses are
usually defined by their primary activity. This principle may make a hotel
group acceptable, but a brewery unacceptable. There are parallels with
ethical investment funds that avoid investing in tobacco companies but
may invest in retailers selling cigarettes alongside other items.
The prevailing Shari'ah
view is that certain type
of stock market investments are
acceptable.
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While there is no universal consensus among Shariah scholars on the
prohibition of tobacco companies and the defence industry, most
boards advise against investment in these activities.
Investment in conventional interest-based financial institutions is alsonon-permissible. Insurance companies are excluded for this reason,
and also because the concept of conventional insurance itself is not
wholly accepted.
Generally, it would be desirable to avoid investing in companies that
have any involvement at all with interest (riba) or riba-based banks.
However, this would mean the exclusion of virtually all quoted compa-
nies, including those that have their stocks traded in the equity markets
of Muslim countries.
Additionally, most Islamic scholars accept that modern corporate capi-
tal structures of conventional corporations inevitably include somedebt on the balance sheet and fixed-income liabilities. As a result
of this pragmatic thinking, investments in companies that have low
interest income and below average debt-to-equity ratios have been
declared acceptable by various Shariah advisory boards, often with the
provision that profits must be purified (see below).
However, Islamic scholars differ in defining an acceptable debt-to-
capital ratio. In practice, investors seeking to comply with Shariah
principles adopt several criteria:
The extent to which a companys income is derived from interest,
generally any proportion in excess of 5% being unacceptable;
The extent of debt-to-equity finance, a proportion in excess of
one-third generally being unacceptable.
Positive criteria can also be used to pick acceptable stocks, such as
companies with pro-environmental policies or ones that support their
communities or provide humanitarian services.
A helpful tool is provided by index specialists through widespread
screening of conventional stocks listed on major exchanges. The
prominent index providers each offer their own Islamic indexes such as
the FTSE Shariah Global Equity Index Series, the Dow Jones IslamicMarket (DJIM) Indexes, S&P Islamic Indexes and the MSCI Islamic
Indexes.
Most Islamic scholars
accept that modern
corporate capital structures
of conventional corporations
inevitably include some debt
on the balance sheet and fixed-
income liabilities.
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Step Five: Specific RecommendationsRegarding Conventional Stock
When setting up portfolios and workflows, some additional items mustbe taken into account to preserve Shariah compliance.
Purification of Income fromConventional Stock
While Shariah scholars generally accept investing in conventional com-
panies that incur some income from interest but have acceptable debt-
to-equity ratios, many do not find it acceptable to profit directly from
those haram activities.
Instead they require that income from these companies be purified.
This purification requires managers to determine what percentage of acompanys profit is derived from interest-bearing accounts and other
haram activities. That ratio is used to purifyi.e. segregateany prof-
its the shareholder has gained from holding stock in that company
(such as dividends and possibly capital gains) and an equivalent
amount is then given to charitable organisations through a zakator
charity account.
The institutions Shariah Board should advise on the treatment of
purification. From a technical standpoint, there are systems that can
then automate the calculations.
Segregation of Funds/Islamic Windows
Not all Islamic institutions are solely Shariah-compliant. Some offer
mixed conventional and Shariah-compliant investments, where it is
important that workflows and the IT systems segregate funds and cash
flows so as not to co-mingle Shariah-compliant and non-compliant
monies. This requirement can create significant workflow and technol-
ogy challenges.
Workflow
Workflow is of particular importance because, as mentioned, the inter-
nal Shariah advisory board will consider each transaction type and howit is required to be processed. It is essential that any system can repli-
cate this transaction flow each time the transaction is processed.
The Term Interest
In a Shariah-compliant banking system the term interest should
never appear. In the case of an institution investing in both Islamic and
conventional products, however, there may be a need for a system
capable of dealing with the relevant vocabulary of both investment
types.
Not all Islamic institutions
are solely Shariah-
compliant. Some offer mixed
conventional and Shariah-
compliant investments.
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ConclusionFinancial institutions considering the creation of a Shariah compliant
offering must strive to understand and fully integrate the core princi-
ples of Islamic finance to their organisation, with the advice and assis-
tance of their Shariah advisory board, and to abide by the locally
accepted interpretations of these principles in the markets where they
want to sell. This will include choosing which types of products to offer,
both Islamic and acceptable conventional products, and ensuring the
right screening processes, workflows, purification methods and segre-
gations of monies are in place to ensure compliance of the Islamic
investments at all times.
Much of the Islamic banking requirements relate to prohibition of inter-
est, the methods of arranging customer lending or financing, the
degree of risk or lack of certainty of a transaction, the validity of thesale transaction, or how detailed transaction processing occurs (such as
how late or early payments are processed), but ultimately, Shariah
compliance is concerned about what an asset is, what it is used for, and
its financial constitution.
While achieving Shariah compliance involves significant effort and
expense, the dramatic growth in these vehicles may well justify such an
investment in future. With the continued development of many emerg-
ing markets with a dominant Muslim population, in addition to Islamic
products potential appeal for non-Muslim investors in search of ethical
products, this investment types 10% annual growth is indeed expectedto continue over the next several years. Moreover, international bodies
are continuously working towards greater harmonization of interna-
tional standards, with the increased participation of leading financial
services jurisdictions such as Luxembourg or Singapore. The more
standardization the industry can develop, the more exportable and
replicable the products will be, enabling Islamic financial institutions to
harness the benefits of their initial investments to achieve compliance.
Ultimately, Shariah com-
pliance is concerned about
what an asset is, what it is used
for, and its financial constitution.
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terms of the contract. Such ambiguity will render most contracts
invalid. The root Gharardenotes deception; an exchange in which
there is an element of deception either through ignorance of the
goods, the price, or through faulty description of the goods. Thus, oneor both parties stand to be deceived through ignorance of an essential
element of exchange. Gambling is a form ofghararbecause the gam-
bler is ignorant of the result of the gamble. Speculative risk-taking
in commerce, which involves the investment of assets, skills and labor,
is not considered similar to gambling. This is because the buyer is
engaged in a transaction aimed at making profit through trading and
not through dishonest appropriation of the property of others. The
prohibition on ghararis often used as the grounds for criticism of con-
ventional financial practices such as short selling, speculation and
derivatives.
Halal: That which is permissible by the Shariah, valid earnings. The
concept ofhalalhas spiritual overtones. Muslims believe that all things
have been provided by God, and the benefits derived from them, are
essentially for the use of mankind, and so are permissible except what
is expressly prohibited in the Quran or the Sunnah. It also refers to
activities, contracts and transactions as well as earnings. When guid-
ance is not clearly given in the Quran there are several other sources
of law, for example, guidance can be sought from Fiqh, which means
understanding and is the science of jurisprudence: the science of
human intelligence, debate and discussion. The concept ofhalalis
one of the distinctive features of Islamic economics vis-a-vis Westerneconomics where no such concept exists. In Western economics, all
activities are judged on the touchstone of economic utility. In Islamic
economics, other factors, mostly ethical and moral are also involved.
An activity may be economically sound but may not be allowed in the
Islamic society if it is not permitted by the Shariah.
Haram: Unlawful in Islam. Activities which are explicitly prohibited by
the Quran or the Sunnah. The prohibitions also includes professions,
contracts and transactions as well as earnings.
Ijara: Technically, sale of a definite usufruct in exchange for a definite
reward. Commonly used for wages, it also refers to a contract of landlease at a fixed rent payable in cash. More definitions are available at
http://www.islamic-banking.com/glossary_I.aspx
Ijara wa iktina: Lease agreement with option to acquire the leased
asset at the end of the lease period. Often used in the context of home
purchasing. It extends the concept ofIjarah to a hire and purchase
agreement.
Istisnaa: A contract of sale of specified goods that have to be manu-
factured before delivery is possible. A forward sale; literal meaning, to
manufacture or build. Under the Shariah, a sale cannot normally be
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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 istisnaa as the
need for the goods are such that they cannot be sold until they are
manufactured, however the order to manufacture is demonstrationof the general need and the availability of the manufactured goods is
relatively certain.
Kafalah: Surety, an obligation in addition to an existing obligation in
respect of a demand for something. Lit: responsibility or suretyship. It
is a covenant or pledge given. Legally, a third party becomes surety for
the payment of a debt of another. Suretyship in Shariah is the creation
of an additional liability with regard to a claim, not to the debt or the
assumption only of a liability and not of the debt. A person providing
surety or a guarantor is known as Kafil. Islamic banks use Kafalah to
issue guarantees for their business customers, for example, the bank
may guarantee the customers standing to facilitate any business
endeavours that may require such guarantees, or the bank may give a
surety to the owner of a ship or the shipping agent, to discharge goods
imported by a customer on arrival of the carrying ship, pending receipt
of the original shipping documents before the customer can take deliv-
ery of the imported goods. Also, known as Kifalah.
Maysir: Games of chance or gambling, trying to earn easy money with-
out having to provide equivalent consideration. A prohibited activity,
as it is a zero-sum game just transferring the wealth not creating new
wealth. One of three fundamental prohibitions in Islamic finance, the
other two being riba and gharar. The prohibition on Maysiris often
used as the grounds for criticism of conventional financial practices
such as speculation, conventional insurance and derivatives.
Mudaraba: 1. An investment partnership with profit-loss-sharing impli-
cations. 2. A form of business partnership contract in which one party
brings capital and the other personal effort to undertake a business
enterprise, as manager or entrepreneur.
Mudarib: The partner in Mudarabah providing entrepreneurship and
management to a partner providing the capital.
Murabaha: 1. A contract of sale between a seller and a buyer; theseller sells certain specific goods to the buyer at a cost plus an agreed
profit mark-up. The seller must disclose the cost of goods and the
profit mark-up. 2. Cost-plus financinga contract sale between the fin-
ancier or bank and its client for the sale of goods at a price which
includes a profit margin agreed by both parties.
Musharaka: The literal meaning ofMusharakah is sharing, an invest-
ment partnership with profit-loss-sharing implications. A musharakah
contract is similar to a mudarabah contract, the difference being that
in a musharakah all the partners contribute to the capital and share in
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both the profit and the loss. They also have the right, but not the
obligation to participate in the management. (more details at
http://www.islamic-banking.com/glossary_M.aspx)
Rab ul-Mal (also Rab-al-Maal / Rab al-Mal): Owner of capital. In amudarabah contract the person who invests the capital (the capital
owner or financier).
Riba: Technically it denotes any increase or addition to capital
obtained by the lender as a condition of the loan. In simple terms Riba
covers any return on money on money, whether the interest rate is
fixed, floating, simple or compounded and at whatever rate which is
guaranteed irrespective of the performance of the investment, is con-
sidered riba and is so prohibited. Riba, in all forms, is strictly prohibited
in Islamic tradition as it is considered an unjust return that leads to
unjust enrichment. Commonly understood as interest charged orreceived on lending though the legal definition goes beyond just inter-
est. It is one of the three fundamental prohibitions in Islamic finance,
the other two being ghararand maysir. (more details and specific
forms of riba are defined at http://www.islamic-banking.com/
glossary_R.aspx)
Salam: An advance purchase or a type of sale in which the full price of
the goods is paid in advance and the goods are delivered later at a
specified date in the future. It is similar to a modern forward sale con-
tract. Under Shariah, a sale cannot normally be effected unless the
goods are in existence at the time of the contract. However, this typeof sale is an exception provided the goods are defined and the time of
delivery is fixed. The exception was practiced in the early days of Islam
to meet the needs of the small farmers in Arabia who required money
to grow their crops and to feed their family until the time the crop
could be harvested and sold; owing to the prohibition ofriba they
could not borrow money on interest; they were allowed to sell the agri-
cultural produce in advance of cultivation for delivery later and take
payment in advance. The object of the sale must be tangible goods
that can be defined as to quantity, quality and workmanship. The mode
of financing is often applied in the agricultural sector, where Islamic
bank advances money without interest for various inputs and inexchange receives a share of the produce, which it then sells after
delivery. To hedge against fall in prices, the bank can also sell the
goods to a third party before delivery through a parallel contract of
Salam.
Shariah: Often referred to as Islamic law. Refers to the rulings con-
tained in and derived from the Quran and the Sunnah. These cover
every action performed by an individual or a society. It is primarily
concerned with a set of values that are essential to Islam and the best
manner of their protection. The essential values of the Shariah include
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those of faith, life, intellect, lineage, property, protection of honour,
fulfilment of contracts, preservation of ties of kinship, honouring the
rights of ones neighbour in so far as the affairs of this world are con-
cerned, and the love of God, sincerity, trustworthiness and moral purity,in relationship to the hereafter.
The method of finding solutions to new issues in the light of the goals
and principles of Islam are Ijtihad(independent reasoning), Ijma (con-
sensus) and Qiyas (analogy), these solutions are all upheld and sup-
ported by the Quran and the Sunnah.
Sukuk: A financial certificate. Similar characteristics to that of a conven-
tional bond with the key difference being that they are assets backed;
sukukrepresent proportionate beneficial ownership in the underlying
tangible asset(s) of particular projects or investment activity.
Wakalah (also wakala / al-wakala / wakalah bil ajr): Agency. A con-
tract of agency in which one party appoints another party to perform a
certain task on its behalf, usually for payment a fee or commission. An
agency arrangement without provision for payment of a fee cannot be
considered irrevocable, thus allowing an agent the right to terminate
the agency at any time.
Zakat (also zakah): Lit: blessing, purification, increase or cultivation of
good deeds. An obligatory contribution or tax prescribed by Islam on
all Muslim persons having wealth above an exemption limit at a rate
fixed by the Shariah. Zakatis the third pillar of Islam. According to the
Islamic beliefZakatpurifies wealth and souls. The objective is to take
away a part of the wealth of the well-to-do and pay it to the Islamic
state and/or distribute it among the poor and needy.
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