Know your Syariah Terms and Concepts

Many Malaysians take up Islamic financing to help with our own personal needs, or sometimes to reap certain benefits from the Islamic banking products. But how well do you know your Syariah Terms and Concepts?

On Malaysia home loan’s previous post – Islamic Financing and Finance, Malaysia Home Loan talked about one of Islamic banking products, Home Financing-i. Today, Malaysia home loan is going to talk about Syariah Terms and Concepts.

Islamic banking is based on the principles of Syariah (from the Islamic point of view), does not allow paying and receiving on interest but promotes profit sharing in the conduct of banking business.

What differs Islamic banking from conventional ones are actually banking activities – Islamic banking prohibits practices of interest systems. Islamic banking practices buying and selling assets – Which is based on trading principles.

While the better part of Islamic banking floods the market, it’s not limited to only Muslims, rather to all individuals from all religious beliefs. The IBS (International Banking Systems) fully complies with Syariah law – They are required to set up Syariah advisory committees to ensure products, operations and activities complies with the Syariah principles.

Below are among the few common terminologies you can find in Islamic financing and banking:

1. Wadiah

Safekeeping. Wadiah allows the safekeeping of deposits in the bank with guaranteed refund when the depositor demands for it. The depositor, with the bank’s discretion, may be rewarded with a gift as a form of appreciation. (See Hibah)

2. Wakalah

Agency. A representative to undertake transactions on his/her behalf.

3. Hibah

Gift. Token of appreciation given voluntarily in return for benefit or loan obtained.

4. Bai’ al-Inah

Sell and Buy Back Agreement. The financier sells an asset to the customer on a deferred payment and then the asset is immediately repurchased by the financier for cash at a discounted rate.

5. Ijarah Thumma al-Bai’

Hire Purchase. It’s divided into 2 contracts – Ijarah is the first of two contracts where the customer leases his/her car from the banking institution at an agreed rental and period. Bai’, the second contract, enable customers to purchase a car at an agreed price after the leasing period ends.

6. Mudharabah

Profit sharing. Mudharabah is an arrangement or agreement between a capital provider and an entrepreneur, whereby the entrepreneur can mobilize funds for a business activity. Any profits made will be shared between the two (capital provider and entrepreneur) according to an agreed ratio while losses are borne solely by the capital provider.

7. Murabahah

Cost Plus. The selling of goods at a price, which includes a profit margin agreed by both parties. The purchase and selling price, profit margin and all other costs must be clearly stated at the time of the sale agreement

8. Musyarakah

Joint Venture. Applied usually for business partnerships, profits made on the basis of Musyarakah are shared on an agreed ratio while losses will be divided based on the equity participation ratio.

9. Bai’ Bithaman Ajil

Deferred Payment Sale. The selling of goods on a deferred payment basis at a price which includes a profit margin agreed by both parties.

10. Qardrul Hassan

Benevolent Loan. A loan extended on a goodwill basis, whereby the borrower is only required the repay the amount borrowed. However, the borrower may, at his discretion, pay extra (without promising it) as a token of appreciation.

    Source: (Bank Negara Malaysia)

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