Showing posts with label Islamic Financing. Show all posts
Showing posts with label Islamic Financing. Show all posts

Friday, May 10, 2013

Islamic Banking and Finance Glossary

Term Meaning
Amanah Trustee
Bai Ad-Dayn  Sale of Debt
Bai Bithaman Ajil  Deferred Payment Sale, over a period of time
Bai Inah  2-party Sale (for Cash)
Bai Salam  Trust Sale
Fatwa  Edict, opinion or judgement based on religious sources scholarly discussion
Gharar  Uncertainty, unmitigated risk
Hadith  Sayings of the Prophet as recorded
Halal  Permissable, Clean & Pure
Haram  Prohibited
Hibah  Gift
Hilah  Trick (contractum trinius)
Hiwalah  Transfer of debt
Ibadah  Worship
Ibra’  Rebate
Ijab  Offer (tenets of a contract)
Ijarah  Rent
Ijarah Mausufah Fi Zimmah  Forward Lease
Ijarah Muntahiah Bi Tamlik  Rental with intention to own
Ijarah Thumma Al Bai  Rent with eventual sale (Hire-purchase)
Inah Deferred payment sale and subsequently followed by cash sale by the earlier buyer.
Isnad Change of reporting(hadith)
Istijrar  Staggered sale (time-to-time sale)
Istina’a  Order
Ijtimak Social Walfare
Jualah  Service Charge
Jizyah Tax imposed on non-Muslim in a muslim’s state.
Kafalah  Guarantee
Kiraa’ waqtinaa’ Rent followed by sale
Maisir  Unearned income, unfair income (part of gambling)
Muamalat  Man-to-Man transaction
Mudharabah  Profit Sharing. Commonly for investments.
Mudharib  Entrepreneur, in a Mudharabah transaction 
Murabahah  Cost-plus sale (financing) 
Musawamah  Simple Sale
Musyarakah  Partnership, Joint-venture
Musyarakah Mutanaqisah  Diminishing partnership
Musaqat Agriculture Partnership
Mukharabah Leasing of land for agriculture.
Muzara’ah Leasing of land for agriculture.
Muqassah Set-off
Nasi’ah  Delay (used in relationship in delay of payment of money)
Qabul  Acceptance (tenets of a contract)
Qardh  Loan
Qardhul Hassan  Benevolent Loan 
Qimar  Gambling
Rab Ul Maal  Capital providers, Fund owner
Rahnu  Collateralised debt (pawn broking)
Riba’  Usury (interest) 
Sarf  Exchange of foreign currency
Shariah  Law (Islamic) literal definition – way, path
Shirkah  Partner
Sukuk  Certificates (Securitised Assets)
Sunnah  Actions of the Prophet as recorded
Siasah Public
Takaful  Mutual assistance
Tawarruq Murabahah  Tripartite Cost-plus Sale
Tawliyah Novation
Tabarru’ Donation
Ujrah  Compensation / Service Charge
‘Uruf Custom of practice.
Yad Amanah  With Trust (used with Wadiah)
Yad Dhamanah  With guarantee (used with Wadiah)
Waad  Promise
Wakalah Agency
Wakf Endowment


Sunday, April 21, 2013

Rule of 78: What??? After one year payment why my loan principle not much different?

On first April last year you have bought a second hand car. You have make car loan for $50000 with 7 years financing period. Interest rate for that loan is 5%. Your monthly installment is $803.57.
On 1st April this year, suddenly you want to make full settlement because your company give you 24months salary bonus. You have checked with your car loan bank and find out you have pay $45, 327.73 for full settlement.

Instead of check with your car loan bank, you also can estimate it using online full settlement calculator available in internet, In this case I will use online full settlement calculator from

The typical bank loan or Islamic financing using "Rule of 78" to calculate prepayment schedule and early  settlement rebate. Why it calls "rule of 78", it is sum of month number of the year  ( 1+2+3...+11+12 ) is 78. The earliest official use of the Rule of 78s to calculate the unearned portion of a loan’s finance charge was in Indiana in 1935.

You will  paying more interest in early repayment. From calculator above total rebate is RM12529.41. In Islamic financing, we call this rebate as Ibra'. The rebate above actually balance interest you should paid from settlement date until end of tenure.

Total rebate based on Rule of 78 formula is =  f *( k(k+1) )/ n(n+1) ),
where  f = total agreed finance charges; k = number of months paying off early( remaining months to pay); n = total term of loan in months.

Early settlement amount,
= Initial loan amount - instalments already paid + total interest - interest rebate (rule of 78) + penalty (a percentage of the interest rebate).

From repayment schedule above which I generate from , we can straightway pick interest rebate from "Interest left to Pay" on month 13.

The magic number in the table calculate using formula
=  ( total term of loan in months/ 2 ) * ( total term of loan in months  + 1 )
=( 84/2) * (84+1)
= 3570

This number will use to calculate interest portion for every month by using following formula:
= total interest * ( ( total term of loan in months- total month instalments already paid ) /  magic number )

For first month the interest paid is,

= 17500 * ( ( 84-0 )/3570 )

 This is why when you do early settlement too early, the settlement amount not much different from your  total loan.

This is also why bank so happy when you refinance or overlapped the amount. When you this, the interest portion will back same as month one.

For more information you can refer following web sites:

Tuesday, April 16, 2013

Islamic Financing vs Conventional Loan

Situation: Ali want need money $5000 to buy motorcycle. He got two best friend, Ahmad and Jefry which offer to give him money with some condition.

Jefry said: I will give you $5000 and you need to pay back to me $6000 within two years.

Ahmad said: I will buy the motorcycle for you and will sell back to you with price $6000. You can pay it within two years.

In this situation Jefry is offering money. The $1000 extra is called interest. This is Conventional Loan.

Meanwhile, Ahmad is offering Motorcycle (asset) which he bought with price $5000 to Ali. After he sell back the motorcycle to Ali, he will get profit $1000. This is Islamic Financing.

 Islamic Financing transaction is based on asset and agreed profit.
Conventional Loan is based on money and agreed interest.

Both transaction have contract or agreement to secure the payments. In Islamic Finacing, the agreement or contract is called Akad.

This is just a very basic term of Islamic Financing. For more details you can learn from expert or more knowledgeable person.