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

Reference:

• http://bangladeshwatchdog.blogspot.com/2010/09/all-america-is-hallowed-ground-for.html
• http://aibim.com/content/view/150/77/
• http://usnazri.blogspot.com/2010/01/islamic-finance-glossary.html
• http://www.investopedia.com/terms/n/novation.asp
• http://arzim.blogspot.com/2010/02/how-muqassah-or-set-off-is-affected-in_1130.html
• http://www.qfinance.com/dictionary/wakalah
• http://nurjamilahrangkuti.blogspot.com/2010/12/banking.html
• http://global.britannica.com/EBchecked/topic/296158/isnad
• http://www.applied-islamicfinance.com/sp_capitalmarket_3.htm
• Book: The Principle and Practice of Islamic Banking and Finance by Mohd. Nasir Mohd. Yatim and Amirul Hafiz Mohd. Nasir PEARSON EDUCATION
  

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 http://loanstreet.com.my.

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 http://www.drcalculator.com/calc/rule78.cgi , 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 )
=411.76

 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:

• http://en.wikipedia.org/wiki/Rule_of_78s
• http://www.sgcarmart.com/news/writeup.php?AID=61

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.