Islamic finance glossary
Short, plain definitions of the terms that come up when asking whether a deal is halal. Each entry says what the term means in practice and links to the question where it matters.
- Riba
- Increase. Money lent and repaid with more, or the same kind of riba item swapped unequally or with delay. Forbidden by the Qur’an (2:275–279).
- Riba al-nasi’ah
- The riba of delay: an increase charged for time. Interest on a loan, a debt that grows when late, a same-kind swap with one side later.
- Riba al-fadl
- The riba of surplus: an unequal swap of the same kind on the spot, such as old gold for less new gold.
- Qard hasan
- A benevolent loan: money lent and repaid in exactly the same amount, with no benefit to the lender. The only halal loan.
- Murabaha
- Cost-plus sale: the financier buys an item, owns it, and sells it to you at a fixed higher price paid over time. Halal when the price never rises for delay and the financier really takes possession.
- Ijara
- Lease: rent for the use of a real asset the lessor owns and bears the risk of. Lease-to-own adds a separate promise to sell or gift the asset at the end.
- Musharaka
- Partnership: partners put in capital, share profit in an agreed ratio and share loss in proportion to capital. A diminishing musharaka is the usual halal home-finance structure.
- Mudaraba
- Profit-sharing: one side gives capital, the other works; profit is split by an agreed ratio and loss falls on the capital unless caused by the manager’s negligence. The basis of Islamic bank investment accounts.
- Salam
- Prepaid sale: the full price now for described goods delivered on a fixed date. The exception that lets farmers be paid before harvest. Not allowed for gold, currency or, in the Hanafi school, animals.
- Istisna’
- Made-to-order contract: a described item to be built or manufactured at a fixed price, paid in stages or at handover. A Hanafi-specific contract used for off-plan homes and construction finance.
- Tawarruq
- Buying goods on credit and selling them for cash to a third party to obtain money. Allowed as a real trade; the bank-organised form, where the bank arranges both sales, is ruled out by the OIC Fiqh Academy.
- ‘Ina
- Selling on credit and buying the same thing back for less cash from the same person: a loan with increase disguised as two sales. Forbidden in the Hanafi, Maliki and Hanbali schools.
- Sarf
- Currency exchange: money for money. Any rate between different currencies, but both sides must be delivered at once; the same currency must be equal.
- Gharar
- Uncertainty in what is sold, its price or its delivery, enough to make a deal a gamble. The reason options, CFDs and buying one named farm’s harvest are not allowed.
- Maysir
- Gambling: gaining from chance at another’s loss. Forbidden by the Qur’an (5:90). Speculation on price differences without owning anything falls here.
- Sukuk
- Certificates giving ownership of a share in real assets, with returns from those assets. The halal alternative to bonds, provided they do not guarantee your capital back like a bond.
- Bay’ mu’ajjal
- Sale on deferred payment: the price is fixed now and paid later, and may be higher than the cash price.
- Al-kharaj bi-l-daman
- “Profit goes with liability”: you may only earn on what you own and bear the risk of losing (Sunan Abi Dawud). The principle behind rent, trade profit and partnership.
- Hand to hand (yadan bi-yad)
- Both sides of an exchange delivered in the same sitting. Required for money for money and for same-kind riba items; the market’s normal settlement of a day or two counts as on the spot.
- AAOIFI
- The Accounting and Auditing Organization for Islamic Financial Institutions, whose Shari’ah standards most Islamic banks follow. This site uses them as the contemporary reference alongside Mufti Taqi Usmani.
- OIC Fiqh Academy
- The International Islamic Fiqh Academy of the Organisation of Islamic Cooperation, whose resolutions settle many modern finance questions across the schools.
- Madhhab
- A school of Islamic law. The four Sunni schools are Hanafi, Maliki, Shafi’i and Hanbali. This site follows the Hanafi school and notes where the others differ.