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Saturday, April 5, 2008

Glossary of Islamic Capital Market Terms

Bai` Bithaman Ajil (BBA)
A contract which refers to the sale and purchase transaction for the financing of assets on a deferred and instalment basis with a pre-agreed payment period. The sale price will include a profit margin.

Bai` al-`Inah
A contract involving the sale and buy-back transaction of assets by a seller. A seller sells an asset to a buyer on a cash basis and later buys it back on a deferred payment basis where the price is higher than the cash price. It can also be applied when a seller sells an asset to a buyer on a deferred basis and later buys it back on a cash basis, at a price which is lower than the deferred price.

Bai` al-Istijrar
A contract whereby the supplier agrees to supply a particular product on an ongoing basis, e.g. monthly, at an agreed price and an agreed mode of payment.

Bai` al-Dayn
A transaction involving the sale and purchase of securities or debt certificates which conforms with the Shariah. Securities or debt certificates are issued by a debtor to a creditor as evidence of indebtedness.

Bai` al-Muzayadah
An action by a person to sell his asset in the open market, which is accompanied by the process of bidding among potential buyers. The asset for sale is awarded to the person who offers the highest price. It is a sale and purchase transaction based on tender.

Bai` al-Salam
A contract whereby payment is made in cash at point of contract but delivery of asset purchased is deferred to a pre-determined date.

Bai` al-Wafa'
A contract with a condition that when the seller pays back the price of the goods sold, the buyer returns the goods to the seller.

A contract of guarantee whereby a guarantor underwrites any claim and obligation that should be fulfilled by the owner of an asset. This concept is also applicable to a guarantee provided on a debt transaction in the event a debtor fails to fulfil his debt obligation.

Gharar is an element of deception either through ignorance of an essential element of the goods, the price, or through faulty description of the goods, in which one or both parties stand to be deceived. E.g. gambling is a form of gharar because the gambler is ignorant of the result of the gamble.

Gharar is divided into three types, namely gharar fahish (excessive), which vitiates the transaction, gharar yasir (minor) which is tolerated and gharar mutawassit (moderate) which falls between the other two categories. Any transaction can be classified as forbidden activity because of excessive gharar.

Haq Maliy
Haq maliy is a right on the financial assets, e.g. haq dayn (debt rights) and haq tamalluk (ownership rights).

A gift awarded to a person.

A contract which allows a debtor to transfer his debt obligation to a third party.

An act by a person to withdraw his rights to collect payment from a person who has the obligation to repay the amount borrowed from him.

A manfaah (usufruct) type of contract whereby a lessor (owner) leases out an asset or equipment to a client at an agreed rental fee and pre-determined lease period upon the `aqd (contract). The ownership of the leased equipment remains in the hands of a lessor.

Ijarah Thumma Bai`
A contract which begins with an ijarah contract for the purpose of leasing the lessor's asset to the lessee. Consequently, at the end of the lease period, the lessee will purchase the asset at an agreed price from the lessor by executing a purchase (bai`) contract.

A purchase order contract of assets whereby a buyer places an order to purchase an asset to be delivered in the future. The buyer requires the seller or a contractor to construct the asset and deliver in the future according to the specifications given in the sale and purchase contract. Both parties decide on the sale and purchase prices and the settlement can be delayed or arranged based on a schedule of work completed.

Ittifaq Dhimni
A sale and repurchase of an underlying asset whose prices are agreed by the parties prior to the completion of the contract. This is an agreement which must be reached before the contract can be concluded to allow for the bidding process (bai` al-muzayadah) to take place.

Contract of reward – a unilateral contract promising a reward for a specific act or accomplishment.

It has the same meaning as dhaman.

A form of fraud, either in word or deed by a party to the trading contracts with the intention of inducing the other party into making a contract. This is prohibited according to the Shariah.

Deception, by not disclosing the truth or breaching an agreement in a hidden way. This is prohibited according to the Shariah.

Something which has value and can be gainfully used according to the Shariah.

Any activity that involves betting whereby the winner takes the bet and the loser loses his bet. This is prohibited according to the Shariah.

A contract made between two parties to finance a business venture. The parties are a rabb al-mal or an investor who solely provides the capital and a mudarib or an entrepreneur who solely manages the project. If the venture is profitable, the profit will be distributed based on a pre-agreed ratio. If the business is a loss, it will be borne solely by the a provider of the capital.

A contract referring to a sale and purchase transaction for the financing of an asset whereby the cost and profit margin (mark-up) are made known and agreed to by all parties involved. The settlement for the purchase can be settled either on a deferred lump sum basis or on an instalment basis, and is specified in the agreement.

A partnership arrangement between two parties or more to finance a business venture whereby all parties contribute capital either in the form of cash or in kind. Any profit derived from the venture is distributed based on a pre-agreed profit sharing ratio and a loss is shared on the basis of capital contribution.

Debt settlement by a contra transaction.

Qabdh means possession, which refers to a contract of exchange. Generally, qabdh depends on the perception of `urf or the common practices of the local community in recognising that the possession of a good has taken place.

Qardh Hasan
A contract of loan between two parties on the basis of social welfare or to fulfil a short-term financial need of the borrower. The amount of repayment must be equivalent to the amount borrowed. It is, however legitimate for a borrower to pay more than the amount borrowed as long as it is not stated or agreed at the point of contract.

An act whereby a valuable asset is used as a collateral for a debt. The collateral will be used to settle the debt when a debtor is in default.

An increase, in a loan transaction or in exchange of a commodity, accrued to the owner (lender) without giving an equivalent counter value or recompensation in return to the other party. It covers interest both on commercial and consumer loans, and is prohibited according to the Shariah.

A buying and selling of currencies.

A credit instrument issued to enable a creditor to use or cash it at another pre-determined venue and at a future date.

A document or certificate, documenting the undivided pro-rated ownership of underlying assets. The sak (singular of sukuk) is freely traded at par, premium or discount.

Islamic law, originating from the Qur`an (the holy book of Islam), and its practices and explanations rendered by the prophet Muhammad (pbuh) and ijtihad of ulamak (personal effort by qualified Shariah scholars to determine the true ruling of the divine law on matters whose revelations are not explicit).

Tadlis al-`aib
Refers to the activity of a seller intentionally hiding the defects of goods. This activity is prohibited according to the Shariah.

A form of Islamic insurance based on the principle of ta`awun or mutual assistance. It provides mutual protection of assets and property and offers joint risk sharing in the event of loss incurred by one of its members. Takaful is similar to mutual insurance in that members are the insurers as well as the insured.

Refers to a conspiracy between a seller and a buyer wherein the buyer is willing to purchase the goods at a higher price. This is done so that others would rush to buy the goods at a higher price, resulting in the seller obtaining a huge profit. This transaction is not permissible in Islam.

Penalty agreed upon by contracting parties as compensation which can be rightfully claimed by the creditor when the debtor fails or is late in meeting his obligation to pay back the debt.

Financial payment for the utilisation of services or manfaat. In the context of today's economy, it can be in the form of salary, wage, allowance, commission, etc.

A deposit or earnest money forming part payment of the price of goods or services paid in advance, but is forfeited if the transaction is cancelled. The forfeited money is considered as hibah (gift).

'Uqud al-Mu'awadat
Contracts of exchange.

'Uqud al-Tabarruat
Charitable contracts.

'Uqud al-Ishtirak
Contracts of partnership.

A contract which gives a person the power to nominate someone to act on his behalf, as long as he is alive, based on the agreed terms and conditions.

Wadiah Yad Dhamanah
Goods or deposits kept for safekeeping with another person, who is not the owner. As wadiah is a trust, the depository becomes the guarantor and guarantees repayment of the whole amount of the deposits, or any part thereof outstanding in the accounts of the depositors, when demanded. The depositors are not entitled to any share of the profits but the depository may provide returns to the depositors as a token of appreciation.

A tax, which is prescribed by Islam on all persons having wealth above a certain amount at a rate fixed by the Shariah. According to the Islamic belief zakat purifies wealth and souls. The objective is to take away a part of the wealth of the well-to-do to distribute among eight categories of people stated in the Quran.
(Source: SC)

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