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| Financial Terminology |
| Monday, January 5, 2009 |
Bai' al-Inah (Saleand Buy Back Agreement)
The financier sells an asset to the customer on a deferred-payment basis, and then the asset is immediately repurchased by the financier for cash at a discount. The buying back agreement allows the bank to assume ownership over the asset in order to protect against default without explicitly charging interest in the event of late payments or insolvency.
Bai' Bithaman Ajil (Deferred Payment Sale )
This concept refers to the sale of goods on a deferred payment basis at a price, which includes a profit margin agreed to by both parties. This is similar to Murabahah, except that the debtor makes only a single installment on the maturity date of the loan. By the application of a discount rate, an Islamic bank can collect the market rate of interest.
Bai muajjal (Credit Sale)
Literally bai muajjal means a credit sale. Technically, it is a financing technique adopted by Islamic banks that takes the form of murabaha muajjal. It is a contract in which the bank earns a profit margin on the purchase price and allows the buyer to pay the price of the commodity at a future date in a lump sum or in installments. It has to expressly mention cost of the commodity and the margin of profit is mutually agreed. The price fixed for the commodity in such a transaction can be the same as the spot price or higher or lower than the spot price.
Mudarabah (Profit Sharing) Mudarabah is an arrangement or agreement between the bank, or a capital provider, and an entrepreneur, whereby the entrepreneur can mobilize the funds of the former for its business activity. The entrepreneur provides expertise, labor and management. Profits made are shared between the bank and the entrepreneur according to predetermined ratio. In case of loss, the bank loses the capital, while the entrepreneur loses his provision of labor. It is this financial risk, according to the Shariah, that justifies the bank's claim to part of the profitThe profit-sharing continues until the loan is repaid. The bank is compensated for the time value of its money in the form of a floating rate that is pegged to the debtor's profits
Murabahah (Cost Plus) This concept refers to the sale of goods at a price, which includes a profit margin agreed to by both parties. The purchase and selling price, other costs, and the profit margin must be clearly stated at the time of the sale agreement. The bank is compensated for the time value of its money in the form of the profit margin. This is a fixed-income loan for the purchase of a real asset (such as real estate or a vehicle), with a fixed rate of profit determined by the profit margin. The bank is not compensated for the time value of money outside of the contracted term (i.e., the bank cannot charge additional profit on late payments); however, the asset remains as a mortgage with the bank until the Murabaha is paid in full.
This type of transaction is similar to rent-to-own arrangements for furniture or appliances that are very common in North American stores.
Musawamah Musawamah is the negotiation of a selling price between two parties without reference by the seller to either costs or asking price. While the seller may or may not have full knowledge of the cost of the item being negotiated, they are under no obligation to reveal these costs as part of the negotiation process. This difference in obligation by the seller is the key distinction between Murabaha and Musawamah with all other rules as described in Murabaha remaining the same. Musawamah is the most common type of trading negotiation seen in Islamic commerce.
Bai salam Bai salam means a contract in which advance payment is made for goods to be delivered later on. The seller undertakes to supply some specific goods to the buyer at a future date in exchange of an advance price fully paid at the time of contract. It is necessary that the quality of the commodity intended to be purchased is fully specified leaving no ambiguity leading to dispute. The objects of this sale are goods and cannot be gold, silver, or currencies based on these metals. Barring this, Bai Salam covers almost everything that is capable of being definitely described as to quantity, quality, and workmanship.
Hibah (Gift) This is a token given voluntarily by a creditor to a debtor in return for a loan. Hibah usually arises in practice when Islamic banks involuntarily pay their customers interest on savings account balances.
Ijarah Ijarah means lease, rent or wage. Generally, Ijarah concept means selling benefit or use or service for a fixed price or wage. Under this concept, the Bank makes available to the customer the use of service of assets / equipments such as plant, office automation, motor vehicle for a fixed period and pric
Ijarah Thumma Al Bai' (Hire Purchase) Parties enter into contracts that come into effect serially, to form a complete lease/ buyback transaction. The first contract is an Ijarah that outlines the terms for leasing or renting over a fixed period, and the second contract is a Bai that triggers a sale or purchase once the term of the Ijarah is complete. For example, in a car financing facility, a customer enters into the first contract and leases the car from the owner (bank) at an agreed amount over a specific period. When the lease period expires, the second contract comes into effect, which enables the customer to purchase the car at an agreed to price.
Ijarah-Wal-Iqtina A contract under which an Islamic bank provides equipment, building, or other assets to the client against an agreed rental together with a unilateral undertaking by the bank or the client that at the end of the lease period, the ownership in the asset would be transferred to the lessee. The undertaking or the promise does not become an integral part of the lease contract to make it conditional. The rentals as well as the purchase price are fixed in such manner that the bank gets back its principal sum along with profit over the period of lease.
Joint Venture Musharakah is a relationship between two parties or more, of whom contribute capital to a business, and divide the net profit and loss pro rata. This is often used in investment projects, letters of credit, and the purchase or real estate or property. In the case of real estate or property, the bank assess an imputed rent and will share it as agreed in advance. All providers of capital are entitled to participate in management, but not necessarily required to do so. The profit is distributed among the partners in pre-agreed ratios, while the loss is borne by each partner strictly in proportion to respective capital contributions. This concept is distinct from fixed-income investing (i.e. issuance of loans).
Qard Hassan (Good Loan) This is a loan extended on a goodwill basis, and the debtor is only required to repay the amount borrowed. However, the debtor may, at his or her discretion, pay an extra amount beyond the principal amount of the loan (without promising it) as a token of appreciation to the creditor. In the case that the debtor does not pay an extra amount to the creditor, this transaction is a true interest-free loan. Some Muslims consider this to be the only type of loan that does not violate the prohibition on riba, since it is the one type of loan that truly does not compensate the creditor for the time value of money
Sukuk (Islamic Bonds) Sukuk is the Arabic name for a financial certificate but can be seen as an Islamic equivalent of bond. However, fixed-income, interest-bearing bonds are not permissible in Islam. Hence, Sukuk are securities that comply with the Islamic law and its investment principles, which prohibit the charging or paying of interest. Financial assets that comply with the Islamic law can be classified in accordance with their tradability and non-tradability in the secondary markets.
Takaful (Islamic Insurance) Takaful is an alternative form of cover that a Muslim can avail himself against the risk of loss due to misfortunes. Takaful is based on the idea that what is uncertain with respect to an individual may cease to be uncertain with respect to a very large number of similar individuals. Insurance by combining the risks of many people enables each individual to enjoy the advantage provided by the law of large numbers.
Wadiah (Safekeeping) In Wadiah, a bank is deemed as a keeper and trustee of funds. A person deposits funds in the bank and the bank guarantees refund of the entire amount of the deposit, or any part of the outstanding amount, when the depositor demands it. The depositor, at the bank's discretion, may be rewarded with a hibah (gift) as a form of appreciation for the use of funds by the bank. In this case, the bank compensates depositors for the time-value of their money (i.e. pays interest) but refers to it as a gift because it does not officially guarantee payment of the gift.
Wakalah (Agency) This occurs when a person appoints a representative to undertake transactions on his/her behalf, similar to a power of attorney.
gharar (risk) Hanafi Madhab : Defines gharar as "that whose consequences are hidden."
The Shafi madhhab : Defines gharar as "that whose nature and consequences are hidden" or "that which admits two possibilities, with the less desirable one being more likely."
gharhar transactions (e.g., selling the birds in the sky or the fish in the water, the catch of the diver, an unborn calf in its mother's womb etc.). Jurists have sought many complete definitions of the term. They also came up with the concept of yasir (minor risk); a financial transaction with a minor risk is deemed to be halal (permissible) while trading in non-minor risk (bayu al-ghasar) is deemed to be haram.
Source courtesy : Wikipedia
"Wadiah Yad Dhamanah" It means savings with guarantee. It refers to a contract between the owner of the funds (account holder) and the Bank for safe-keeping purposes. In this instance, the accountholder as depositor places his deposits on basis of trust. Maybank, as trustee, guarantees the repayment of the whole amount of deposits, or any part thereof, upon request.
"Mudharabah" This is an agreement made between 2 parties, 1 to provide the capital (financier) and the other (the Mudarib), using their business acumen, to provide the management. The profit-sharing ratio is agreed upon before hand. Capital losses are borne solely by the financier. In the case of our deposit products, it refers to a profit-sharing agreement between the Bank (Mudarib) and the depositors (financier) for the Bank to invest depositors' funds to generate profits.
"Bai-Bithaman Ajil (BBA)" It means deferred payment sales. It refers to the sale of goods on a deferred payment basis at a price which includes a profit margin agreed to by both the buyer and seller.
"Murabahah" This contract involves a request from a customer to the Bank to purchase and then on-sell to the customer certain goods. The sale by the Bank to the customer is at cost plus an agreed margin. Payment by the customer is in 1 or more pre-determined instalments at agreed points in time. Ownership of the goods passes to the customer upon delivery by the Bank. Such a sale contract is valid on condition that the price, other cost and the profit margin of the seller are stated at the time of the agreement of sale.
"Kafalah" It means guarantee. It refers to the guarantee or surety given by one party who agrees to discharge the liability of a third party, in case of default.
"Bai-al-Dayn" It means debt-trading. It refers to the sale of debt arising from a trade transaction in the form of a deferred payment sale.
"Qardhul Hassan" It refers to an interest-free loan or benevolent debt financing contract for which the borrower is not obliged but has the option to reward the lender for benevolent deed.
e.g: The Bank may use an appropriate proportion of the funds at its disposal for what may be considered as the discharge of its social responsibilities through loans to truly deserving customers for worthy economic projects with the underlying objective of support and assistance. The borrower is obliged under Syariah to repay only the principal amount of the loan according to its terms and conditions. The Bank cannot demand the borrower to pay anything over and above the principal amount of the loan, although in Syariah it is desirable that the borrower does so at his/her own discretion.
"Bai Salam" It refers to an agreement whereby payment is made immediately while the goods are delivered at an agreed later date. It is equivalent to an advance payment.
"Bai Al-Istina'" This contract involves the sale of manufactured assets where the Bank pays the manufacturer in advance and the assets are delivered subsequently upon completion. The specifications of the assets are pre-agreed. This contract enables suppliers to be paid a pre-delivery advance.
"Musyarakah" This Islamic financing technique refers to a partnership between 2 parties, where both provide capital towards the financing project. Both parties share profits on a pre-agreed ratio, but losses are shared on the basis of equity participation. In other words, it is a joint-venture profit-sharing contract between the Bank and the initiators of the relevant project. All parties including the Bank have the right to participate in the management of the project.
"Ijarah" Ijarah means leasing. Under this principle, the Bank may finance its customers to acquire the right to use the services of a given asset. The Bank will first purchase the asset required by the customer and subsequently leases the asset to the customer for a fixed period, lease rentals and other terms and conditions as agreed to by both parties.
"Ijarah Thuman Al-Bai" It means leasing and subsequent purchase. It refers to 2 contracts undertaken separately and consequentially, ie. Al-Ijarah contract (leasing) and Al-Bai contract (purchase). It is an extension of the principle of Al-Ijarah whereby both parties further agreed that at the end of the lease period, the customer will purchase from the Bank the asset concerned at an agreed price with all the lease rentals previously paid constituting part of the price. This concept is applicable for financing of consumer goods and durables.
"Ar-Rahn" It means collateralised borrowing. It refers to an arrangement whereby a valuable asset is placed as a collateral for a debt. The collateral may be disposed in the event of default. It is being applied for Islamic Pawning, currently offered by Bank Islam Malaysia Bhd and Bank Kerjasama Rakyat Malaysia Bhd.
"Al-Hiwalah" It means debt transfer. It refers to a transfer of funds (debt) from the depositor's (debtor's) account to the receiver's (creditor's) account where a commission may be charged for such a service. It is applicable to remittances.
"Al-Sarf" It refers to currency exchange, ie. buying and selling of foreign currencies.
"Al-Ujr" It refers to commissions or fees charged for services.
"Al-Hibah" It refers to gifts award voluntarily in return for loan given.
"Bai Ul-Inah" A buy and sell contract where by the provider of funds would sell its aset to the customer on defered payment basis. At the same time, the Bank would buy back the same asset from customer at a lower price but on cash basis.
Courtesy : Internet bank site.Labels: Banking, Finance, Islamic, Terminology |
posted by ismailraja @ 5:56 AM  |
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