Definition, Key Principles, Key Words

Islamic Finance Definitions

The principles of Islam govern not only relations between God and man, but also social relationships including commercial transactions. For example, Islam forbids charging interest on loans, as this is seen as a form of usury. This ban on interest obviously creates a major distinction between Islamic banking and the rest of the international banking system.

Islamic Investment Guidelines
Islamic law requires that all commercial agreements have certain features, including:

Unconditional contract of sale between buyer and seller
Clearly defined goods, cost of goods, mark-up and payment date to be pre-agreed
The goods must be Islamically acceptable.
Goods and assets must exist and be owned by the seller and known to the buyer before title is transferred to the buyer.

Sukuk
A Sukuk is a Sharia-compliant bond

Murabaha
An unconditional sale contract where pre-approved and pre-agreed goods are sold at a cost-price plus mark-up for which the sale date is clearly defined and agreed. The concept of a Murabaha involves trading in goods or commodities and making profit through their purchase and sale in a way that conforms to Islamic guidelines. Murabaha contracts are those in which a financial institution purchases goods on behalf of a client, who makes deferred payments that cover costs and an agreed-upon profit margin for the financial institution

Salam
A Salam is primarily a deferred delivery sale contract usually used for commodity finance. It is similar to a forward contract where delivery is in the future in exchange for spot payment.

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