Definition of Major Islamic Finance Instruments

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Search term: Islamic English

The money or property that the Rab al maal invests in a profit-seeking venture, often in a partnership such as a Mudarabah or Shirkah.

An arrangement whereby a valuable asset is placed as collateral for a debt. The collateral may be disposed of in the event of a default.

An increase, addition, unjust return, or advantage obtained by the lender as a condition of a loan. Any risk-free or “guaranteed” rate of return on a loan or investment is riba. Riba in all its forms is prohibited in Islam. In conventional terms, riba and “interest” are used interchangeably, although the legal notion extends beyond mere interest.

Also known as riba al fadl. A sale transaction in which a commodity is exchanged for an unequal amount of the same commodity and delivery is delayed. To avoid riba al buyu, the exchange of commodities from both sides must be equal and instant. Riba al buyu was prohibited by the prophet Mohammad to forestall riba (interest) from creeping into the economy.

Also known as usury of delay (riba al nasia). The usury of debt was an established practice amongst Arabs during the pre-Islamic period. It can occur as an excess increment on top of the principal, which is incorporated as an obligatory condition of the giving of a loan. Alternatively, an excess amount is imposed on top of the principal if the borrower fails to repay on the due date. More time is permitted for repayment in return for an additional amount. If the borrower fails to pay again, a further excess amount is imposed, etc.

An integral part of an act, such as a transaction, without which the act cannot be said to have been performed.

A payment order to draw money from the bank; used in the early Muslim period.