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Features
Takaful: More than just green shoots
Islamic Finance news
= Accounting and Auditing Organization for Islamic Financial Institutions
Bahrain-based Islamic international standard setting body established in 1991 for Islamic corporations and the industry. Members include central banks, Islamic financial institutions and other industry participants.

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= countable items measured in individual units rather than by volume, weight or length
Alternative spelling = `Adadiyyat
An example is eggs, which are customarily purchased by the dozen or half dozen rather than by weight

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= commission or fee charged for services


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= the hereafter


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= virtue, morality and manners in Islamic theology


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= rationale of profit sharing
Especially with regard to financial partnership (Shirkah) arrangements

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= Shariah jurists
Alternative spelling = Ulema


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= promise to sell


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= promise to buy


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= reliability, trustworthiness, loyalty, honesty
Alternative spelling = Amana
An important value of Islamic society in mutual dealings. It also refers to deposits in trust, where a person may hold property in trust for another.

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= agent
Someone who deserves compensation for completing a task, such as a mudarib in a Mudarabah or a zakat collector.

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= contract


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= set of beliefs


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= expert
Consultant in situations requiring an impartial, informed decision, such as the appraisal of property.

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= loan of small articles
Contract in which one party allows the other use of an asset for an indefinite period, without fee

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= currency or ready money
Gold, silver, coins, notes and any other form of ready cash. Often contrasted with dayn.

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= delayed-for-immediate sale
The sale price is paid immediately and delivery of the sale item is delayed. Synonymous with Bai al Salam.

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= deposit-secured sale
A sale agreement in which a security deposit is provided in advance as part payment towards the price of the commodity. The deposit is forfeited if the buyer does not meet his obligation.

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= sale and buy-back
The sale and buy-back of an asset for a higher price than that for which the seller originally sold it. A seller immediately buys back the asset he has sold on a deferred payment basis at a price higher than the original price. This can be seen as a loan in the form of a sale.

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= sale of debt for a debt
Prohibited sale, the most well known of which is where a lender extends his debtor’s debt repayment period in return for an increase on the principal, that is, interest.

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= future delivery
A contract whereby the payment is made in cash at the point of contract but the delivery of asset purchased will be deferred to a predetermined date.

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= deferred payment sale
Alternative spelling = Bai Muajjal
The sale of goods on a deferred payment basis. Equipment or goods requested by the client are bought by the bank, which subsequently sells the goods to the client for an agreed price, including a mark-up (profit) for the bank. The client may pay by installments within a pre-agreed period, or in a lump sum. This sale works in a similar way to a Murabahah contract, but with deferred payment.

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= debt financing
The provision of financial resources required for production, commerce and services through the sale and purchase of trade documents and papers. Bai Dayn is a short-term facility with a year or less maturity. Only documents evidencing debts arising from bona fide commercial transactions can be traded.

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= supply sale
When a supplier agrees to deliver to a client on a regular basis at an agreed price and mode of payment.

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= deferred payment sale
Alternative spelling = Bai Bithaman Ajil
The sale of goods on a deferred payment basis. Equipment or goods requested by the client are bought by the bank, which subsequently sells the goods to the client for an agreed price, including a mark-up (profit) for the bank. The client may pay by installments within a pre-agreed period, or in a lump sum. This sale works in a similar way to a Murabahah contract, but with deferred payment.

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= open bidding trading
The principle governing open auctions, where the asset is awarded to the highest bidder.

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= sale and buy-back
The sale and buy-back of an asset within a set time, when the original buyer agrees to the original seller's repurchase.

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= treasury


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= null and void


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= necessity
Muslims may disregard aspects of Shariah laws in order to save their lives, or to preserve the Islamic community.

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= debt
Alternative spelling = Duyun
Wealth that one is required to pay back to another

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= Creditor’s debt
A creditor’s forfeit on part of the debt when the debtor settles the balance of his debt earlier than scheduled.

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

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= liability
The concept may be likened to a virtual liability container that every responsible person has, which is constantly being filled with rights and obligations, such as the obligation to repay someone.

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= unit of currency
A unit of currency, usually a silver coin, used in the past in some Muslim countries and still used in some Muslim countries today, for example Morocco and the UAE.

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= to flourish
Success as measured in this world and Akhirah.

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= Shariah jurist
Alternative spelling = Fuqaha


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= poor person
Alternative spelling = Fuqara’


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= socially obligatory duties
Alternative spelling = Fard Kifaya
A collective duty of Muslims. The performance of these duties (for example funeral prayers) by some Muslims absolves the rest from discharging them. This term covers functions which the community fails to or cannot perform and hence are taken over by the state, such as the provision of utilities, or the building of roads, bridges and canals.

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= unsound or unviable
A forbidden term in a contract, which consequently renders the contract invalid.

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= dissolution of contract
Agreement canceled voluntarily by the parties. Compare Infisakh, used for cancelations that occur outside of the will of the contractual parties.

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= religious decree
Alternative spelling = Fatwah, Fatawa
Islamic legal opinion based on Quranic, Sunnah and Islamic legal precedent or the Shariah.

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= Islamic jurisprudence
The science of the Shariah. An important source of Islamic economics.

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= Islamic commercial jurisprudence


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= dealing with someone else’s property without permission
An example is when X negotiates and “closes” a deal with Y in which he sold some machinery without the owner of the machinery having made him his wakeel. X would be described as fuduli.

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= Gulf Cooperation Council
A political alliance and trade bloc consisting of six states of the Arabian Gulf: Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the UAE.

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= Mistake
A negative element that can affect the validity of `aqad. In Arabic, it connotes error in perception.

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= uncertainty
One of three fundamental prohibitions in Islamic finance (the other two being riba and maysir). Gharar is a sophisticated concept that covers certain types of haram uncertainty in a contract. It is an exchange in which one or more parties stand to be deceived through ignorance of an essential element of the exchange. Gambling is a form of gharar because the gambler is ignorant of the result of the gamble. The prohibition on gharar is often used as the grounds for criticism of conventional financial practices such as short selling, speculation and derivatives.

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=
Alternative spelling = Gharimun
A debtor who does not have the funds, after repayment of his debt, would not equal the nisab. The Shafi`i and Maliki jurists divide the gharimun into two types: (i) those whose debts were incurred in their own benefit; and (ii) those whose debts were incurred benefiting others. The gharimun are one of the eight groups mentioned in the Quran as legitimate recipients of zakah funds.

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= forfeiture
Wrongful appropriation of property by force

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= the Prophet's sayings and commentary on the Quran
Alternative spelling = Ahadith


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= pilgrimage to Mecca
There is a duty on every Muslim who is financially and physically able to carry out Hajj, the fifth pillar of Islam, at least once in his lifetime. The pilgrimage takes place in the week from the 8th until the 13th day of the 12th Islamic month of Dhul Hijjah.

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= ownership right
A tradable asset in the form of ownership rights.

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= lawful, permissible
The concept of halal has spiritual overtones. In Islam there are activities, professions, contracts and transactions that are explicitly prohibited (haram) by the Quran or the Quran. All other activities, professions, contracts and transactions are halal. This concept differentiates Islamic economics from conventional economics. In western finance all activities are judged on economic utility. In Islamic economics, spiritual and moral factors are also involved – an activity may be economically sound but may not be allowed in Islamic society if it is not forbidden by the Shariah.

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= security deposit
Sum paid by a party who places an order to purchase, as security for his promise.

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= Islamic school of law
Islamic school of law founded by Imam Ahmad Ibn Hanbal. Followers of this school are known as Hanbalis.

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= Islamic school of law
One of the major Islamic school of law, founded by Imam Abu Hanifa. Followers of this school are known as Hanafis.

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= rights on the financial assets
Haq Maliy are rights on the financial assets. Examples of such rights are haq dayn (debt rights) and haq tamalluk (ownership rights).

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= truth, right
A right which a party possesses, for example, the creditor’s right to payment.

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= unlawful, forbidden
Activities, professions, contracts and transactions that are explicitly prohibited by the Quran or the Sunnah. See halal above.

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= bill of exchange, remittance
Alternative spelling = Hiwala
A contract which allows a debtor to transfer his debt obligation to a third party who owes the former a debt. The mechanism of Hawala is used for settling international accounts by book transfers, thus obviating the need for a physical transfer of cash.

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=
The length of time that must pass before a Muslim in possession of funds equaling or exceeding the exemption limit (nisab) must pay zakat on his wealth. In the case of cash, gold and silver, it is one Islamic year, i.e. a lunar year of approximately 354 days.

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= gift
A gift voluntarily donated in return for a loan provided or a benefit obtained.

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= contingent hibah
Hibah contingent on the lifetime of the gift donor or the recipient.

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= conditional hibah
The gift donor stipulates that the recipient is to receive the gift upon the death of the former.

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= forbidden structure
Alternative spelling = Hiyal
A transaction which appears permissible, but is in fact structured in an un-Islamic way.

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= regulatory duty
The necessary steps in order to maintain a fair and orderly marketplace.

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= Islamic ruling
Alternative spelling = Ahkam


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= rebate
When a person withdraws the right to collect payment from a borrower.

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= Islamic Financial Services Board
A Kuala Lumpur-based international standard-setting organization that was set up in 2003 to promote the stability of the Islamic financial services industry by issuing global prudential standards and guidelines. The IFSB helps regulators govern Islamic financial institutions in compliance with Basel II and evolving global standards.

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= hoarding
The prohibited practice of purchasing essential commodities, such as food and storing them in anticipation of a price increase.

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= offer in a contract
Also see Qabul

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= leasing
Alternative spelling = Ijara
A lease agreement whereby a bank or financier buys an item for a customer and then leases it to him over a specific period, thus earning profits for the bank by charging rental. The duration of the lease and the fee are set in advance. During the period of the lease, the asset remains in the ownership of the lessor (the bank), but the lessee has the right to use it. After the expiry of the lease agreement, this right reverts back to the lessor. This is a classic Islamic financial product.

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= forward lease
If there is a reasonable expectation that something will be made, then we may structure a forward lease for which rent is collected today. The lessor, however, must refund the rent if he fails to deliver the object of the lease.

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= leasing to purchase
The principle governing an Ijarah contract at the end of the lease period, when the lessee buys the asset for an agreed price through a purchase contract.

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= buy-back leasing
A hire and purchase mode of financing where an Islamic bank finances equipment, a building or other facility for the client against an agreed rental, together with an undertaking from the client to repurchase the facility at the end of the contract. The rental and the purchase price are fixed so that the bank gets back its principal sum along with some predetermined profit.

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= consensus
The unanimous decision of all or the majority of leading jurists on a Shariah matter in a certain age. Ijma has traditionally been recognized as an independent source of law, along with the Quran, Sunnah and Qiyas.

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= effort, exertion, industry
A faqhi's endeavor to formulate a rule on the basis of evidence found in the Islamic sources.

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= monopoly


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= divergence of opinion among jurists


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= hoarding wealth by not paying zakat on it


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= legal effective cause
Basis for applying analogy in determining the permissibility or otherwise of a transaction.

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= conviction, faith or belief


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= financial partnership


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= moderation


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= reform


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= wastefulness
Lawful spending but exceeding moderation in quality or quantity; includes spending on objects that are incompatible with the economic standard of the majority of the population and spending on superfluous objects while necessities are not met. (Also see Tabzir)

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= guiding choice
Judicial preference for one legal analogy over another, usually when public welfare is concerned.

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= recurring sale
Different quantities are bought from a single seller over a period of time. Sometimes it is also referred to transactions whereby seller delivers different quantities in different installments to complete the full purchase. Some divergence among the scholars in terms of the timing of fixation and pricing.

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= advance purchase of goods or buildings
Alternative spelling = Istisna’a, Istisna’ah
A contract of acquisition of goods by specification or order, where the price is paid in advance, or progressively in accordance with the progress of a job. For example, to purchase a yet to be constructed house, payments would be made to the builder according to the stage of work completed. This type of financing, along with Salam, is used as a purchasing mechanism, and Murabahah and Bai Bithaman Ajil are for financing sales.

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= pre-agreed contract
The sale and repurchase of an underlying asset. Prices are agreed in advance, prior to the contract, to allow the bidding process to take place.

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= pre-Islamic period
The era just before the coming of prophet Muhammad and, more generally, to the state of affairs which characterized this era, which was plagued by shirk (the crime of associating partners with Allah), infanticide, tribal strife and so on.

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= ignorance (of morality or divinity)


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= pre-agreed contract
A unilateral contract promising a reward for a specific act or accomplishment, also known to be a contract of reward.

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= stipulated price for performing a service
Alternative spelling = Ju’ala
Applied by some in Islamic banking. Bank charges and commission have been interpreted to be ju'alal by the jurists and thus considered lawful.

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= guarantee
Shariah principle governing guarantees. It applies to a debt transaction in the event of a debtor failing to pay.

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= ruler, steward, custodian
Alternative spelling = khulafaa


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= fraud
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.

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

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= power to annul contract
The option to rescind a contract upon the appearance of a defect.

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=
Some Islamic banks give loans with service charges. The Council of the Islamic Fiqh Academy has resolved that it is permitted to charge a fee for loan-related services offered by an Islamic bank, provided that the fee relates to service-related expenses. The service charge can only be calculated accurately after all administrative expenditure has been incurred (at the end of the year). However it is permissible to levy an approximate charge on the client, and then reimburse/claim the difference when the actual expenses are known.

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= Islamic school of law
Islamic school of law founded by Imam Malik Ibn Anas. Followers of this school are known as Maalikis.

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= way of going
Alternative spelling = Madhahib
A fiqh school or orientation characterized by differences in the methods and therefore in the Shariah rulings that are deduced from them. There are four well-known madhahib among Sunni Muslims whose names are associated with the classical jurists who are said to have founded them (Hanafi, Maliki, Shafi`i and Hanbali).

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= detested
An action that one is rewarded for avoiding, but not punished for committing.

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= Capital or wealth
Valuable item that can be gainfully used according to the Shariah.

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= wealth that has commercial value


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= beneficial ownership
Usufruct associated with a given property, especially in leasing transactions. In an automobile lease, for example, “manfa’ah” might be used to describe the benefit which the lessee derives from the use of the car for the duration of the lease (as opposed to the actual ownership of the vehicle).

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= Shariah compliant property mortgage in the UK


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= general objectives of Islamic law


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= public good or benefit


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= gambling
One of three fundamental prohibitions in Islamic finance (the other two being riba and gharar). The prohibition on maysir is often used as grounds for criticism of conventional financial practices such as speculation, conventional insurance and derivatives.

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= goods that can be returned in kind


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= economic transaction
Alternative spelling = Mu'amalah, Mu'amalat, Muamalah
The lease of land or fruit trees for money, or for a share of the crop.

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= lawful objects


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= trust financing, profit sharing
Alternative spelling = Mudaraba, Modaraba, Modarabah
An investment partnership, whereby the investor (the rab al maal) provides capital to the entrepreneur (the mudarib) in order to undertake a business or investment activity. While profits are shared on a pre-agreed ratio, losses are born by the investor alone. The mudarib loses only his share of the expected income. The investor has no right to interfere in the management of the business, but he can specify conditions that would ensure better management of his money. In this way Mudarabah is sometimes referred to as a sleeping partnership. A joint Mudarabah can exist between investors and a bank on a continuing basis. The investors keep their funds in a special fund and share the profits before the liquidation of those financing operations that have not yet reached the stage of final settlement. Many Islamic investment funds operate on the basis of joint Mudarabah.

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= entrepreneur in a Mudarabah contract
The entrepreneur or investment manager in a Mudarabah who puts the investor's funds in a project or portfolio in exchange for a share of the profits. A Mudarabah is similar to a diversified pool of assets held in a discretionary asset management portfolio.

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= equal, unlimited partnership


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= qualified professional who issues fatawa, usually in response to questions posed


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= legal expert or a jurist who expends great effort in deriving a legal opinion or interpreting the sources of the la


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= Sukuk for specific projects
This technique allows a bank to float what are effectively Islamic bonds to finance a specific project. Investors who buy Muqarada bonds take a share of the profits of the project being financed, but also share the risk of unexpectedly low profits, or even losses. They have no say in the management of the project, but act as non-voting shareholders.

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=
Debt settlement by a contra transaction.

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= cost-plus financing
Alternative spelling = Morabaha, Morabahah, Murabaha
A form of credit that enables customers to make a purchase without having to take out an interest-bearing loan. The bank buys an item and sells it to the customer on a deferred basis. The price includes a profit margin agreed by both parties. Repayment, usually in installments, is specified in the contract. The legality of this financing technique has been questioned because of its similarity to riba. However, the modern Murabahah has become the most popular financing technique among Islamic banks, used widely for consumer finance, real estate, the purchase of machinery and for financing short-term trade.

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= agricultural contract
A contract in which the owner of agricultural land shares its produce with another person in return for his services in irrigating the garden.

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= general sale
The price of the commodity in question is reached through bargaining.

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= joint venture, profit and loss sharing
Alternative spelling = Musharaka
An investment partnership in which all partners are entitled to a share in the profits of a project in a mutually agreed ratio. Losses are shared in proportion to the amount invested. All partners to a Musharakah contribute funds and have the right to exercise executive powers in that project, similar to a conventional partnership structure and the holding of voting stock in a limited company. This equity financing arrangement is widely regarded as the purest form of Islamic financing. The two main forms of Musharakah are: Permanent Musharakah: an Islamic bank participates in the equity of a project and receives a share of the profit on a pro rata basis. The length of contract is unspecified, making it suitable for financing projects where funds are committed over a long period. Diminishing Musharakah: this allows equity participation and sharing of profits on a pro rata basis, and provides a method through which the bank keeps on reducing its equity in the project, ultimately transferring ownership of the asset to the participants. The contract provides for payment over and above the bank's share in the profit for the equity held by the bank. Simultaneously the entrepreneur purchases some of the bank's equity, progressively reducing it until the bank has no equity and thus ceases to be a partner.

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= partnership
One of the partners promises to buy the equity share of the other gradually until the title is completely transferred to him.

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= unrestricted


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= share-cropping
An agreement in which one party agrees to allow a portion of his land to be used by the other in return for a part of the produce of the land.

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= agricultural contract
A contract in which one person works the land of another person in return for a share in the produce of the land.

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= deception
The prohibited practice of deceiving and inciting a potential buyer during the course of pre-sale negotiations or bidding by egging him on.

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= exemption limit
Exemption limit for the payment of zakat, which differs for different types of wealth.

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=
The Islamic banking equivalent to non-performing-loans. NPF’s are based on a profit sharing basis and not interest as are their conventional counterparts.

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= discount
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 recognizing that the possession of a good has taken place.

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= acceptance in a contract
Also see Ijab

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= loan


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= benevolent loan
Alternative spelling = Qard Hassan, Qard al Hassan
A loan contract between two parties for social welfare or for short-term bridging finance. Repayment is for the same amount as the amount borrowed. The borrower can pay more than the amount borrowed so long as it is not stated by contract. Most Islamic banks provide interest-free loans to customers who are in need. The Islamic view of loans (qard) is that there is a moral duty to give them to borrowers free of charge, as a person seeks a loan only if he is in need of it. Some Islamic banks give interest-free loans only to the holders of investment accounts with them; some extend them to all bank clients; some restrict them to needy students and other economically weaker sections of society; and some provide interest-free loans to small producers, farmers and entrepreneurs who cannot get finance from other sources.

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= gambling
An agreement in which possession of a property is dependant upon the occurrence of an uncertain event. By implication it applies to those agreements in which there is a definite loss for one party and a gain for the other, without specifying which party will gain and which party will lose.

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=
Synonym for Mudarabah

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= analogical deduction
Derivation of the law on the analogy of an existing law if the basis or Illah of both is the same.

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= the holy scriptures of Islam


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= capital
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.

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= the investor in a Mudarabah contract
Alternative spelling = Rab al mal


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= collateral
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.

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= interest
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.

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= usury of trade
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.

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= usury of debt
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.

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= goods subject to fiqh rules on riba


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= bribery


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

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

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= voluntary charitable giving
Alternative spelling = Sadaqat


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= sound, correct
Opposite of Batil. Hadith of the highest level of authentication.

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= loan for short, intermediate or long term
Also a synonym for Salam. Unlike Qard, however, the amount given as Salaf cannot be called back before it is due.

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= advance purchase
Alternative spelling = Al Salam, Bai al Salam, Bai Salam
Advance payment for goods which are to be delivered at a specified future date. Under normal circumstances, a sale cannot be effected unless the goods are in existence at the time of the bargain. However, this type of sale is an exception, provided the goods are defined and the date of delivery is fixed. The objects of sale must be tangible goods that can be defined as to quantity, quality and workmanship. This mode of financing is often applied in the agricultural sector, where the bank advances money for various inputs to receive a share in the crop, which it then sells.

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= Shariah compliant property mortgage in the USA


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= currency sale
Refers to buying and selling of currencies.

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= Islamic school of law
Islamic school of law founded by Abu Abdullah Ahmad bin Idris or Imam Shafie. Followers of this school are known as Shafi'es.

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= Islamic jurisprudence
Alternative spelling = Sharia, Shari'a, Shari'ah, Syariah, Syaria, Syari'ah, Syari'a
Islamic cannon law derived from three sources: the Quran, the Hadith and the Sunnah A “Shariah compliant” product meets the requirements of Islamic law. A “Shariah board” is the committee of Islamic scholars available to an Islamic financial institution for guidance and supervision in the development of Shariah compliant products. A “Shariah advisor is an independent Islamic trained scholar that advises Islamic institutions on the compliance of the products and services with the Islamic law.

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= stipulation in a contract
Alternative spelling = Shurut
Pre-existing condition for a transaction to be valid

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= partnership
A contract between two or more persons who launch a business or financial enterprise to make a profit.

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= right of pre-emption
The right of pre-emption in sale transactions, for example, a real estate sale in which one party has the right to compel the vendor to sell all or part of the real estate in the event of a sale.

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= formal exchange
Parties’ willingness to enter into the contractual agreement, which therefore constitutes the contract itself.

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= bill of exchange
Alternative spelling = Suftaja, Suftajal
A bill of exchange between three parties (the payor, the payee and the transmitter), which was used for the delegation of credit during the Muslim period, especially the Abbasides period. It was used to collect taxes, disburse government dues, transfer funds by merchants and was commonly used by traveling merchants. Suftajahs could be payable on a future fixed date or immediately. It differs from the modern bill of exchange in that a sum of money transferred by suftajah had to keep its identity and payment had to be made in the same currency. Also it usually involved three persons (A pays a certain sum of money to B for agreeing to give an order to C to pay back to A). Finally, a suftajah could be endorsed. The Arabs had been using endorsements (hawala) since the days of the Prophet Muhammad.

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= Islamic bond (Plural. Also see Saak.)
An asset-backed bond which is structured in accordance with Shariah and may be traded in the market. A Sukuk represents proportionate beneficial ownership in the underlying asset, which will be leased to the client to yield the return on the Sukuk.

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= practice and traditions of the Prophet Muhammad


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

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= Takaful donation
A contract where a participant agrees to donate a pre-determined percentage of his contribution (to a Takaful fund) to provide assistance to fellow participants. In this way he fills his obligation of joint guarantee and mutual help should another participant suffer a loss. This concept eliminates the element of gharar from the Takaful contract.

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= wasteful spending
Especially on objects explicitly prohibited by the Shariah, irrespective of the quantum of expenditure. (Also see Israf)

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= intentionally hiding the defects of goods
Refers to the activity of a seller intentionally hiding the defects of goods. This activity is prohibited according to the Shariah principles.

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= Islamic insurance
Based on the principle of mutual assistance, Takaful provides mutual protection of assets and property and offers joint risk-sharing in the event of a loss by one of the participants. Takaful is similar to mutual insurance in that members are the insurers as well as the insured. Conventional insurance is prohibited in Islam because its dealings contain several haram elements, such as gharar and riba.

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= manipulation
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.

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= reverse Murabahah
In personal financing, a client with a genuine need buys an item on credit from the bank on a deferred payment basis and then immediately resells it for cash to a third party. In this way, the client can obtain cash without taking out an interest-based loan. It has two forms: Tawarruq Munazzam (organized Tawarruq), in which the client simply seeks credit and has no interest in the original asset for sale; and Tawarruq al Asli, where the client buys goods on credit and then sells them to get cash.

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= fee
The financial charge for using services, or manfaat (wages, allowance, commission, etc).

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= the Muslim community


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= Common plight
An unfavorable widespread situation affecting most people which is difficult to avoid.

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= Contracts of partnership


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= Contracts of exchange


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= Charitable contracts


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= deposit
Earnest money which forms part payment of the price of goods or services paid in advance, but will be forfeited in the event the transaction is cancelled. The forfeited money is considered as hibah (gift).

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= Deposit
Alternative spelling = Wadia, Al Wadia, Al Wadiah
The safekeeping of goods with a deposit on the original stated cost. An Islamic bank acts as the keeper and trustee of depositors' funds. It guarantees to return the entire deposit, or any part of it, on the depositor's demand.

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= Savings or deposits with guarantee
Goods or deposits entrusted to the care of a person, who is not the owner, for safekeeping. The depository becomes the guarantor, thereby guaranteeing repayment of the whole amount or any part of the deposits that is outstanding in the account of depositors, when so demanded. The depositors are not entitled to any share in the profits but the depository may provide returns to the depositors as a token of appreciation.

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= agency
Alternative spelling = Wakala, Al Wakala, Al Wakalah
Absolute power of attorney: where a representative is appointed to undertake transactions on another person's behalf. In terms of Takaful operations, Wakalah refers to an agency contract, which may involve a fee for the agent.

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= charitable trust
Alternative spelling = Awkaf, Awqaf
An endowment or a charitable trust set up for Islamic purposes (usually for education, mosques, or for the poor). It involves tying up a property in perpetuity so that it cannot be sold, inherited, or donated to anyone.

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= will or testament
Document detailing the manner in which a Muslim’s wealth is to be disposed of after his death.

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= religious tax
Alternative spelling = Zakah
An obligatory contribution which every wealthy Muslim is required to pay to the Islamic state, or to distribute amongst the poor. According to Islam, zakat – the third pillar of Islam – purifies wealth and souls. Zakat is levied on cash, cattle, agricultural produce, minerals, capital invested in industry and business. There are two types of zakat: Zakat al Fitr, which is payable by every Muslim able to pay at the end of Ramadan. This is also called Zakat al Nafs (poll tax). Zakat al Maal is an annual levy on the wealth of a Muslim above a certain level. The rate paid differs according to the type of property owned.

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With Takaful continuing to be the darling of the insurance industry and one of the fastest growing sectors in the Islamic finance sector, SCOTT WEBER investigates why, with such low penetration rates and high levels of economic growth in its key markets, has Takaful not seen greater success?

Low insurance penetration and strong economic fundamentals in countries with majority Muslim populations should almost guarantee rapid industry expansion. In certain choice jurisdictions this is the exactly the case: however, this rapid growth and nascent business offers its own problems of stability, solvency and supervision that are characterized by fragmented regional approaches, uncertain growth prospects, high levels of competition  and limited premiums.

Issues of solvency continue to loom large over the industry. Aggressive competition between Takaful operators has meant that they are fighting over a saturated demographic and thus failing to gain market share over their domestic competition and limiting opportunities for regional expansion. There is a developing trend in many emerging markets with notable Muslim populations that are embracing Shariah compliant products more willingly than conventional products. As such there are now many market advantages in running Shariah compliant products from a purely business perspective. With a genuine market for such products and services, there is an increasing acceptance and credibility in marketing Islamic products to the population at large. However, Shariah compliance alone does not a successful product make. Any product will certainly become more compelling to a certain target audience but the underlying product has to make financial sense over those available in the conventional market.

As the regional insurance markets continue to open up and multinational insurers reposition themselves on the world stage, the focus is shifting to up-and-coming markets that exhibit high growth potential – with select countries in the Middle East becoming an increasingly important focal point. The insurance industry in the Middle East is expected to experience high growth rates throughout the coming years, and policymakers, regulators and key players in the industry will have to address the challenges that lie ahead of them as the region’s insurance sector is becoming increasingly fragmented, requiring insurers to concentrate on profitability, scale and long-term sustainability.

Meanwhile, Asia has many positives going for it – think robust growth, high liquidity levels, and generally healthy fiscal positions. However, issues of volatility in the financial markets as a whole continue to constrain the industry. One of the key challenges for the Takaful industry at large has been locating appropriate assets for their various products. Taking a disciplined approach in matching assets with liabilities is a constant battle and the skittish state of the market further exacerbates the issue.

As a result Takaful companies are holding significantly more cash now than usual. This is due to their inability to lock in long-term assets that meet their requirement. Therefore Takaful companies are maintaining their liquidity position with a view to only accessing the fixed income and equity markets when the timing will guarantee higher yields.

Poised for growth
The Middle East insurance industry is undoubtedly poised for major growth. As markets become more global, business opportunities in the sector are set to increase. However, as markets change there will also be significant challenges to overcome, and with increases in market volatility and risk, it is essential that the key players in the regional insurance industry engage in discussions that will place the industry on a solid footing for future development.

The insurance industry in the Middle East has tremendous potential for growth given the relatively low insurance penetration levels, positive demographic and economic trends and rapid infrastructure development occurring throughout the region. While this points to the size of the growth opportunity, GCC insurers continue to face a number of challenges. The insurance industry in the GCC is highly competitive, with predatory pricing in the region negatively impacting on profitability and growth. The region also suffers from a significant number of small insurers that lack sufficient capitalization and skills to underwrite or invest funds. The region therefore is highly dependent on reinsurers and is ripe for consolidation.

Economic growth is the single most important driver of current insurance business in the GCC and insurers need to gear up to capitalize on the growth potential of the region’s insurance sector. This growth is also aided by increased government spending due to budget surpluses attained through high oil prices and state-led diversification.

Critically, this tremendous growth trajectory has been slightly skewed by the growth of the Takaful industry rather than underlying demand for Islamic insurance products. To ensure the Takaful sector’s longer-term viability, operators need to focus on product differentiation as opposed to competing on price. However, Takaful is expected to remain among the fastest growing segments of the insurance markets. The ability of Takaful operators to increase insurance penetration is critical to that success.

Uptake needed
The GCC has one of the lowest penetration and density rates in the world with insurance penetration in the region much lower than the global and emerging market average. While the penetration rates for the GCC as a whole have increased - from 0.6% in 2000 to 1.3% in 2010 - they remain significantly lower than the global average of 6.9%.

Given the high correlation of insurance penetration levels with GDP, the low regional penetration and density levels underscore the significant growth potential of the rapidly growing economies in the GCC. The insurance sector at large has a strong positive correlation with GDP. The IMF estimated real GDP growth for the region at 17.8% in 2010, up from a negative 18.8% in 2009. The region also demonstrates favorable demographics, with a young population and rising birth rates. Alpen Capital estimates that insurance premiums in the GCC currently stand at approximately US$18 billion in 2011 and will rise to US$37 billion by 2015, registering a compound annual growth rate (CAGR) of 20%.

The UAE and Saudi Arabia are likely to remain the two biggest markets in the region and are predicted to hold a 75% combined share in 2015; a slight reduction from the current level as other GCC states such as Qatar continue to register higher growth rates of up to CAGR 30% in the coming years. Saudi Arabia registered the highest penetration of 1.04% followed by Bahrain at 0.45%.

Gaining acceptance
Increasing acceptance of Takaful will continue to provide a strong growth impetus to the insurance sector as a whole, having increased by 31% in 2010 on a year-on-year basis. Ernst & Young estimates that the GCC Takaful market will continue to grow at 31%, reaching US$8.3 billion in 2011. The success of the Middle Eastern banking industry has shown that its participants understand issues relating to distribution better than their insurance counterparts. This has been compounded by a lack of critical mass in many of the GCC states, and over the years, a fragmentation of the industry.

A detailed study carried out by consulting group McKinsey on Islamic financial services has shown that for an Islamic-focused business model to work well, Islamic financial products must have a broad-based appeal. Takaful business will not be feasible if its marketing focuses on Muslims only. It has to appeal to the community at large through its core principles of transparency, ethical investment and equity.

According to a recent report by Moody’s, investment risk - due to the significantly concentrated and highly correlated investments in the local real estate and equity markets - is constraining the growth prospects of Middle East insurers and Takaful providers. The report notes that although Middle Eastern insurers hold very strong levels of capitalization relative to their underwriting risk, their exposure to the property downturn has elevated their credit risk.

It does however note that as more sophisticated regulatory supervision and risk management strategies roll out across the region these pressures will moderate. Moody’s also highlights that Shariah compliance limits the investment choices available to Takaful insurers and singles out the fact that Sukuk is also heavily exposed to the property market.

Viable alternative
Ultimately the Takaful industry in the Middle East continues to offer a viable alternative for the 36.1 million Muslims across the region. Any nascent industry will prove challenging in its formative years and Takaful is no exception. The industry continues to raise numerous issues and provide challenges to all those involved, however the raw figures and economic prospects in the GCC region verify that Takaful is holding its own and will continue its growth trajectory in the short-term.

Tellingly, few if any Takaful operators have failed during the recent economic downturn. While business models have had to be reined in and recalculated, their Takaful proposition and ability to capture a previous untapped segment of the marketplace has allowed them to continue. There are numerous issues that continue to face the Takaful industry across the Middle East, however: primarily a lack of awareness of the alternative Takaful proposition as well as a lack of critical mass attained by the numerous and fragmented operations.

As an emerging industry a number of associated risks also continue to constrain the Takaful industry: primarily rising competition between operators and an alignment into direct competition with the conventional insurance industry through product replication. The industry continues to remain fragmented, with a large number of smaller entities entering the market with limited capital and lax attitude to coverage due to insubstantial regulatory frameworks. However, as these companies grow the awareness and number of participants is only likely to increase. The result is that Takaful in the Middle East has gained initial traction and is now looking to build on its momentum.

Yardstick measure
Malaysia continues to provide the yardstick measure for Takaful regulation and remains the most mature market by some margin. However, this position should not create complacency and insurers must apply prudent risk management and underwriting discipline. As always, good distribution and investment strategies are required to succeed in any insurance business but the nascent Takaful business requires companies to go the extra mile. In Malaysia, where less than 45% of the population posses Life or Family Takaful policies, a multi-channel distribution strategy, supported by a network of Takaful agents, bancassurance and direct sales, comprise a key growth strategy for Islamic insurance providers.

Indonesian potential
Much has been said about Indonesia’s potential in terms of future Takaful penetration. With a population in excess of 245 million, the majority-Muslim nation offers fertile ground for the industry. However, Takaful development has begun to fall behind the conventional insurance sector and has not garnered quite the same public acceptance as it has in many other key Islamic financial markets.
 
Development of new distribution channels and products combined with an open attitude and cleverly targeted approach to marketing are essential to guarantee continued success. In order to meet current demand and future growth a rapid recruitment of insurance agents to sell dedicated Islamic products is required. Of Indonesia’s 226,000 insurance agents, who account for 85% of the total insurance market distribution, only 2% are dedicated to selling Islamic products.

Low Islamic banking penetration of only 3.4% and a limited number of physical branch locations in the vast nation are also hindering future growth and limiting bancaTakaful distribution. Alternative distribution channels such as telemarketing and direct marketing are also required to meet this shortfall and attract potential customers to the inherent values offered by Takaful: such as justice, mutual assistance, cooperation, trust and transparency.
 
Based on capital market figures and data from the ministry of finance’s supervisory agency, as of May 2011 there were three fully-fledged Family Takaful operators, 17 Family Takaful windows, two fully-fledged General Takaful firms, 18 General Takaful windows and three re-Takaful companies in Indonesia. The total insurance premiums offered in Indonesia in 2010 were approximately US$12.5 billion. As of December 2010, the market share of Family Takaful based on gross contribution was 5.85%, General Takaful and re-Takaful 2.09%, and the total market share of Family, General and re-Takaful was 4.71%.

Developing Takaful in Indonesia
Although Indonesia offers huge potential due to the number of possible participants, contributions are still low. This can be primarily be attributed to a lack of awareness of the benefits that Takaful can offer individuals, coupled with a lack of awareness of long-term financial planning and lower income levels.
 
Given the relatively limited exposure of Takaful in Indonesia, the regulatory framework offers ample operating license for small scale Takaful operations. Draft regulations are currently being prepared to further augment those already in place: including the standardization of Family and General Takaful terminology, draft proposals on good corporate governance, and legislation that will allow for the conversion of the Shariah unit of a conventional insurer into a fully-fledged Takaful operator. Encouraging Takaful windows to convert into fully-fledged Takaful providers will increase the overall market share and contributions; further boosting the industry’s credibility.

Indonesia does highlight several key issues within current Takaful offerings. Of primary concern is the lack of awareness in Takaful products due to limited promotional activities by banks and operators. This is coupled with a lack of simple products offered with affordable contributions that can be targeted to the middle and lower-middle class market to increase market share.

BancaTakaful has tremendous potential to be marketed in line with the growth of Islamic banking. Ultimately, there are many people who do not understand the unique proposition offered by Takaful, and tying Takaful into existing financial products could go a long way towards guaranteeing their acceptance. Existing agents in Takaful windows also need the necessary training to instill confidence when selling Takaful products.

Turning tide
In many of these key jurisdictions insurance is a relatively new concept, and Takaful is equally misunderstood. Changing attitudes and gaining acceptance is critical in this instance. As customers become increasingly sophisticated in their purchase of financial products Takaful operators need to step up their products and services to capture more than just the low-lying fruit and become mainstream candidates. With a sustained track record and revised operating and business plans put into effect, Takaful could easily benefit from the turning economic tide and the stronger investment markets it will bring. 

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Latest Issue
Wednesday 17th September 2014
Volume 11 Issue 37
   
Cover Story
IFN Rapid
News Briefs
Asset Management
Takaful
Ratings
Moves
IFN Reports
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  FAA to launch ‘first of its kind’ standard for Islamic finance in 2015
  Turkey going strong — with or without Bank Asya
  Muslim expat estate planning: A new market for wealth management?
  IFN Global Trendswatch
  IFN Funds Round-up: Islamic funds index outperforms
  Weekly Poll: Following IILM''s recent six-month Sukuk issuance, which would be the most preferable tenor for liquidity management?
  Fund Focus: AlKhair Capital diversifies portfolio with debut Sukuk Plus Fund
  A new kind of rating?
  Two in a day — Sovereign Sukuk market welcomes Hong Kong and Sharjah
  Malaysian tripartite merger: A force that could trigger mergers in the domestic market?
  Takaful continues growth story — but not without struggle
  Sovereign Sukuk: Oman and South Africa inch closer to their Sukuk debut
IFN Country Correspondents
  Large-scale projects providing impetus for Islamic finance
  New PPP law stimulates Shariah involvement
  UAE and Iraq hold meeting to discuss Islamic economy opportunities
  Tax and Sukuk: Uncertainty looms
IFN Sector Correspondents
  Project finance: Meeting commercial demand with retail structures
IFN Country Analysis
  Islamic finance: Offering faith and progress for Nigeria?
IFN Sector Analysis
  Looking towards an encouraging close for 2014
Features
  The legal and structural framework for the issuance of Sukuk
Sukuk are the most significant mechanisms for Islamic financial services to generate cash flows from the Islamic capital market and raise finance through Islamic capital market operations using Shariah compliant structures...
  Right of beneficiaries for endowment contracts: Fitting French life insurance to Islamic morality
The Islamic finance industry has yet to fully take off in France: but the insurance sector represents a positive opportunity for Shariah compliant ethics to access the market...
Case Study
Meezan Tahaffuz Pension Fund

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