Kinnaird College for Women

Course: islamic Finance

Instructor: Javeria Asim
Post mid Assignment

Define the following terms. Also quote example if necessary.

● Arbun
● Bai’ Muajjal
● Gharar
● Halal
● Haram
● Hawalah
● Ijarah
● Ijarah-wal-iqtina
● Istisna
● Mudaraba
● Musawamah
● Musharakah
● Qard
● Riba
● Riba Al-Fadl
● Riba AL-Nasiah
● Shariah
● Sunnah
● Wakalah
● Takaful
Arbun: Arbun refers to a down payment or earnest money in Islamic finance. It is a sum of money paid
by a buyer to a seller to reserve the right to purchase an asset at a later date. If the buyer decides to
proceed with the purchase, the arbun is considered part of the payment. If the buyer cancels the
transaction, the arbun may be forfeited or returned depending on the agreed-upon terms.

Example: Ali wants to buy a car from Hassan. They agree on a purchase price of $10,000 and Ali pays
$1,000 as arbun to secure the deal. Later, Ali decides to proceed with the purchase, and the arbun
amount is deducted from the total price.

Bai' Muajjal: Bai' Muajjal is a type of deferred payment sale in Islamic finance. It refers to a transaction
where the buyer acquires an asset on credit, agreeing to pay the seller in installments over a specified
period. The seller adds a profit margin to the cost of the asset, which is divided into equal installments.

Example: Aisha wants to buy a laptop from a computer store. They agree on a Bai' Muajjal arrangement
where Aisha can take the laptop immediately but will pay the store $500 per month for six months,
including a profit margin.

Gharar: Gharar refers to uncertainty, ambiguity, or risk in a contract. In Islamic finance, it is considered
undesirable and prohibited. Contracts with excessive gharar involve elements of speculation, deception,
or uncertainty about essential contract terms. Islamic finance encourages transparency and certainty in
contractual obligations.

Example: Sale of fish in a river where the buyer is unaware of the exact quantity or species of fish they
will receive. The transaction involves excessive gharar as the buyer is uncertain about the quality and
quantity of the fish being purchased.

Halal: Halal means permissible or lawful in Islamic law. It is often used in the context of food and drinks,
indicating that they meet the requirements of Islamic dietary guidelines. Halal extends beyond food and
encompasses various aspects of life, including business transactions and ethical conduct.

Example: Consuming meat from an animal slaughtered according to Islamic guidelines, such as saying
the appropriate prayer and following specific slaughter techniques, is considered halal.

Haram: Haram means forbidden or prohibited in Islamic law. It refers to actions, behaviors, or
substances that are explicitly prohibited and sinful. Muslims are required to avoid engaging in haram
activities.

Example: Consuming alcohol or pork is considered haram in Islamic dietary guidelines. Engaging in
activities such as theft, adultery, or usury is also considered haram.

Hawalah: Hawalah is a transfer of debt or liability from one party to another. It is a legal instrument used
in Islamic finance to transfer a financial obligation without the need for a formal sale or exchange. The
debtor becomes liable to the new creditor.
Example: Ali owes $1,000 to Hassan. Instead of Ali paying Hassan directly, Ali transfers his debt to Zaid
through hawalah. Now Ali is obligated to pay the debt to Zaid.

Ijarah: Ijarah refers to a lease or rental agreement in Islamic finance. It is a contract where one party
(the lessor) agrees to lease an asset to another party (the lessee) for an agreed-upon rent and duration.
The lessor retains ownership of the asset while the lessee utilizes it for an agreed period.

Example: A company leases office space from a property owner through an Ijarah agreement. The lessee
pays a monthly rent to the lessor for the use of the office space.

Ijarah-wal-iqtina: Ijarah-wal-iqtina is a type of lease-to-own agreement in Islamic finance. It combines

elements of an Ijarah (lease) and a sale contract. The agreement allows the lessee to gradually acquire
ownership of the leased asset through periodic rental payments and an additional price.

Example: Ali wants to purchase a car but cannot afford it upfront. He enters into an Ijarah-wal-iqtina
agreement with a car dealership. Ali pays monthly installments, which include rent and a portion of the
car's price. At the end of the agreement, Ali will own the car.

Istisna: Istisna is a type of contract in Islamic finance used for manufacturing or construction purposes. It
involves a buyer placing an order with a manufacturer or contractor for a specific asset to be produced
or constructed according to agreed-upon specifications.

Example: A company orders custom-made furniture from a carpenter through an Istisna contract. The
carpenter agrees to produce the furniture according to the buyer's specifications within a specific
timeframe.

Mudaraba: Mudaraba is a partnership contract in Islamic finance. It involves one party (the investor or
rabb-ul-mal) providing the capital, and another party (the entrepreneur or mudarib) contributing
expertise and effort. The profits generated from the venture are shared between the parties based on a
pre-agreed ratio.

Example: A person invests money in a Mudaraba partnership with a skilled trader. The investor provides
the capital, and the trader uses their expertise to engage in trading activities. The profits generated are
shared between them according to an agreed-upon ratio.

Musawamah: Musawamah refers to a general sale contract in Islamic finance. It is a transaction where
the buyer and seller negotiate the price of goods or assets without disclosing their cost or profit
margins.

Example: Two individuals engage in a Musawamah transaction at a marketplace. They negotiate the
price of a piece of artwork without revealing the original cost or profit margin.
Musharakah: Musharakah is a partnership contract in Islamic finance. It involves two or more parties
contributing capital to a business venture. Profits and losses are shared among the partners based on a
pre-agreed ratio, and each partner has a voice in the management of the business.

Example: Two entrepreneurs establish a Musharakah partnership to start a restaurant. They contribute
capital and jointly manage the business. The profits and losses are shared based on the agreed-upon
ratio.

Qard: Qard refers to an interest-free loan in Islamic finance. It is a benevolent loan extended to
someone in need, with the borrower obligated to repay only the principal amount borrowed.

Example: A person lends money to a friend in need through a Qard loan. The borrower is expected to
repay the exact amount borrowed without any interest or additional charges.

Riba: Riba refers to usury or interest in Islamic finance. It is the prohibition of any predetermined,
excessive increase in the amount of a loan or debt. Riba is considered exploitative and unjust.

Example:

any interest received in a bank account.

interest on any form of lending or borrowing.

loans taken for property purchases with an interest element.

loans taken out for educational courses (ie degree or Masters) with an interest element.

Riba Al-Fadl: Riba Al-Fadl refers to the prohibition of excess in the exchange of commodities of the same
type, where one party benefits from an unequal exchange. It specifically applies to transactions
involving the exchange of goods in different quantities or qualities of the same type.

Example: A person exchanges 10 kilograms of gold of higher purity for 11 kilograms of gold of lower
purity. This transaction would involve Riba Al-Fadl as one party benefits from an unequal exchange in
terms of quality or quantity.

Riba Al-Nasiah: Riba Al-Nasiah refers to the prohibition of excess in deferred financial transactions,
particularly when interest or increase is charged for the delay in repayment of debt. It applies to loans or
credit arrangements where a lender charges additional interest or fees for delayed payment.

Example: A person borrows $1,000 from a lender and agrees to repay $1,200 after one year. If the
lender increases the repayment amount due to the passage of time or delays in repayment, it would
involve Riba Al-Nasiah.

Shariah: Shariah refers to the body of Islamic law derived from the Quran, the teachings and practices of
Prophet Muhammad (Sunnah), and scholarly consensus. It serves as a comprehensive guide for Muslims,
covering various aspects of life, including religious, moral, social, and economic matters.
Sunnah: Sunnah refers to the practices, actions, and approvals of Prophet Muhammad. It encompasses
his sayings, actions, and silent approvals, providing guidance for Muslims on matters of religious, ethical,
and social conduct.

Wakalah: Wakalah refers to a contract of agency in Islamic finance. It involves one party (the principal)
appointing another party (the agent) to act on their behalf in a specific transaction or task. The agent is
entrusted with the responsibility to perform the assigned task within the boundaries of the agreed-upon
terms.

Example: A person appoints a lawyer as their agent through a Wakalah agreement to handle legal
matters related to their property sale. The lawyer represents the person and acts on their behalf
throughout the transaction.

Takaful: Takaful is an Islamic cooperative insurance concept based on mutual cooperation and shared
responsibility among participants. It is designed to provide protection against potential risks or losses.
Participants contribute funds into a pool, and claims are paid out of the collective contributions
according to the principles of fairness and solidarity.

Example: A group of individuals forms a Takaful insurance company. Each member contributes a specific
amount of money into the pool. If any member experiences a covered loss or damage, the necessary
funds are provided from the collective pool of contributions to compensate them.