Islamic Finance Glossary
Clear, plain-language definitions of 48+ key Islamic finance and halal banking terms, written for Malaysia. From SBR benchmarking and ibra rebates to faraid inheritance and hibah, this glossary explains the terminology you'll encounter when comparing Islamic financial products.
Banking
- Wadiah
- Safekeeping or custody. A deposit arrangement where a financial institution holds funds as a custodian. The institution may use the funds (with permission) but guarantees the return of the full deposit amount. Used as the basis for some Islamic current and savings accounts.
Charitable
- Waqf
- An Islamic endowment: a charitable trust where assets are donated permanently for a specific purpose (education, healthcare, community benefit). The assets cannot be sold or transferred; only the income they generate is used for the designated purpose.
Contracts
- Arbun
- A down payment or earnest money in an Islamic contract. The buyer pays a non-refundable deposit to secure the right to purchase an asset at a later date.
- Istisna'a
- A manufacturing or construction contract where a buyer commissions the creation of an asset to be delivered at a future date. The price, specifications, and delivery timeline are agreed upon in advance. Used in construction and project financing.
- Salam
- A forward sale contract where the buyer pays the full price in advance for goods to be delivered at a future date. The quality, quantity, and delivery date must be specified. Historically used for agricultural commodities.
- Tawarruq
- A monetization arrangement where a buyer purchases a commodity on deferred payment terms, then immediately sells it to a third party for cash. Controversial among scholars: some permit it as a liquidity tool while others consider it a circumvention of riba.
- Wakalah
- An agency contract where one party (the principal) appoints another (the agent) to conduct transactions or manage investments on their behalf. The agent earns a fee or a share of profit. Used in investment management and some banking products.
Estate Planning
- Faraid
- Islamic inheritance law. A system of fixed shares that dictates how a deceased Muslim's estate is distributed among heirs. Designated shares go to the spouse, children, parents, and siblings according to Quranic guidelines. In Malaysia, faraid applies by default to Muslim estates, with the Syariah courts certifying each heir's share through a faraid certificate.
- Faraid Certificate
- The Syariah court document that certifies the fixed faraid shares of each heir in a deceased Muslim's estate in Malaysia. Estate administration then proceeds through the civil system: small estates through the Small Estates Distribution Unit (JKPTG), larger estates through the High Court or AmanahRaya, with assets distributed according to the certified shares.
- Hibah
- A lifetime gift under Islamic law. Because faraid shares apply only to what remains at death, a hibah made and delivered during your lifetime is a valid way to transfer specific assets to chosen recipients. In Malaysia, hibah is widely used in estate planning (including conditional hibah amanah structured through trustee companies), and takaful benefits can be paid to nominees as beneficiaries under a hibah nomination under IFSA 2013.
- Wasiat
- An Islamic bequest (will). A Muslim may direct up to one third of their estate to beneficiaries who are not fixed-share heirs (such as charities or individuals outside the faraid shares). Anything beyond one third, or to an existing heir, requires the other heirs' consent. In Malaysia the Wills Act 1959 does not apply to Muslims, so a wasiat operates under Islamic law administered through the Syariah courts, and trustee companies like AmanahRaya and as-Salihin provide professional wasiat writing and custody.
Financing Structures
- Diminishing Partnership
- See Musharakah Mutanaqisah. A co-ownership arrangement where one partner gradually buys out the other's share over time. A common halal home financing structure in Malaysia, offered by several Islamic banks alongside Tawarruq.
- Ijara
- A lease or rental agreement used in Islamic finance. The financier purchases the asset and leases it to the customer, with ownership transferring at the end of the term (Ijarah wa Iqtina). In Malaysia, the most common application is AITAB (Al-Ijarah Thumma Al-Bai), the Islamic hire purchase used for vehicle financing: the bank leases the vehicle to the customer, with ownership transferring through a sale at the end of the term.
- Mudarabah
- A profit-sharing partnership where one party (Rab al-Maal) provides capital and the other (Mudarib) provides expertise and management. Profits are shared according to a pre-agreed ratio. Financial losses are borne by the capital provider unless caused by the manager's negligence.
- Murabaha
- A cost-plus sale. The seller purchases an asset and resells it to the buyer at a disclosed, agreed-upon markup. The buyer pays the total amount in installments. The price and payment schedule are fixed and transparent at the time of the contract. Commonly used for home financing, auto financing, and business equipment purchases.
- Musharakah
- A joint partnership where all parties contribute capital and share profits and losses proportionally. Malaysian Islamic banks mainly apply it as Musharakah Mutanaqisah, the diminishing co-ownership structure used for home financing.
- Musharakah Mutanaqisah
- Diminishing partnership. A form of Musharakah where one partner's share decreases over time as the other buys it out. In Malaysian home financing, the buyer and bank co-own the property, the buyer pays rent on the bank's share, and each payment increases the buyer's ownership until it reaches 100%. Offered by banks like RHB Islamic alongside the more common Tawarruq structure.
- Qard Hasan
- A benevolent or interest-free loan. The borrower repays only the principal amount with no additional charges. It is considered a charitable act and is the only type of loan fully permissible in Islam.
General
- Amana
- Trust or safety. In Islamic finance, refers to a trust arrangement where assets are held by one party on behalf of another. Several Malaysian Islamic banking products use the concept for safekeeping arrangements.
- Halal
- Permissible under Islamic law. In finance, refers to products and transactions that comply with Shariah principles: avoiding interest, prohibited industries, and excessive uncertainty.
Governance
- AAOIFI
- Accounting and Auditing Organization for Islamic Financial Institutions. The primary international body that sets Shariah accounting, auditing, governance, and ethical standards for Islamic finance. Based in Bahrain and followed by institutions in over 45 countries.
- Fatwa
- A religious ruling or opinion issued by a qualified Islamic scholar (mufti) on a specific matter. In finance, a fatwa may certify that a product or transaction complies with Shariah principles.
Insurance
- Retakaful
- Shariah-compliant reinsurance. Takaful operators spread large risks by participating in retakaful arrangements instead of conventional reinsurance. Malaysia licenses retakaful operators under IFSA 2013, and local takaful operators disclose their retakaful arrangements in their financial statements.
- Takaful
- Islamic cooperative insurance. Participants contribute to a shared pool (fund) that provides mutual financial protection against loss or damage. Based on principles of cooperation, shared responsibility, and mutual benefit, unlike conventional insurance's transfer-of-risk model.
- Wakalah Model
- The dominant Takaful structure in Malaysia. Participants' contributions go into a risk fund after the operator deducts a disclosed wakalah (agency) fee, and claims are paid from the fund. Transparent operators print the full wakalah fee schedule by certificate year. Underwriting surplus belongs to participants and is distributed per the certificate terms.
Investment
- Sukuk
- Islamic bonds or certificates. Unlike conventional bonds that represent debt and pay interest, sukuk represent proportional ownership in an underlying asset, project, or investment. Returns are tied to the asset's performance rather than a fixed interest rate.
Malaysia Market
- Ceiling Rate
- The contractual maximum profit rate on a variable-rate Islamic financing in Malaysia. Because the bank's total profit must be fixed at contract time, the financing documents state a ceiling (commonly 10% or 10.5%). You pay the lower effective rate (SBR plus spread), and the difference is granted back as ibra. The ceiling caps what you can ever be charged, a protection conventional loans do not have.
- EPF Simpanan Shariah
- The Shariah option inside the Employees Provident Fund (KWSP), grounded in section 43A of the EPF Act. Members can elect to have their retirement savings managed under a Shariah-compliant portfolio endorsed by the EPF's Shariah Advisory Committee. The election is one-way (you cannot switch back to the conventional scheme), and dividends are declared annually from the actual performance of the Shariah portfolio, without the 2.5% statutory minimum guarantee that applies to Simpanan Konvensional.
- Ibra (Rebate)
- The rebate an Islamic bank grants when it collects less than the full contracted selling price, most importantly on early settlement of a Tawarruq or Murabahah financing. BNM guidelines require Malaysian Islamic banks to grant ibra on early settlement, and well-disclosed products publish the ibra formula or a calculator.
- Investment Account (IA)
- A Mudarabah or Wakalah-based account at a Malaysian Islamic bank, classified separately from Islamic deposits under IFSA 2013. Returns are based on the performance of the underlying assets and the principal is not guaranteed or PIDM-protected, unlike Qard and Tawarruq deposit accounts. Banks must disclose the fund performance and profit-sharing terms.
- List of Shariah-Compliant Securities
- The Securities Commission Malaysia's official list of stocks that pass its Shariah Advisory Council screening, updated twice a year in May and November. The screens cover core business activities and financial ratios. The list is the reference universe for halal stock investing in Malaysia, and indices like the FBM EMAS Shariah and FBM Hijrah Shariah track its constituents on Bursa Malaysia.
- PIDM
- Perbadanan Insurans Deposit Malaysia, the statutory deposit insurer. Islamic deposits at member banks are protected up to RM250,000 per depositor per member bank, with Islamic and conventional deposits covered separately. PIDM also runs the Takaful and Insurance Benefits Protection System for takaful certificates. Membership is not universal: development financial institutions such as Agrobank are not PIDM members.
- PRS (Private Retirement Scheme)
- Malaysia's SC-regulated voluntary retirement savings framework, supplementing the mandatory EPF. Shariah PRS funds invest contributions in Shariah-compliant equity, sukuk, and money market holdings, with core funds allocated by age. Contributions qualify for personal tax relief of up to RM3,000 a year, and minimum contributions start around RM100.
- SBR (Standardised Base Rate)
- The common reference rate Malaysian banks have used for new retail floating-rate financing since August 2022. The SBR moves only when Bank Negara Malaysia changes the Overnight Policy Rate (OPR), so every bank's SBR is identical and products compete purely on the spread. Islamic banks price financing as SBR plus a spread (for example, SBR + 0.80%). Scholars permit a benchmark reference because the underlying contract remains a genuine sale, lease, or partnership; the benchmark only sets the price.
- Tabung Haji
- Lembaga Tabung Haji, Malaysia's pilgrims fund board, established by statute to help Muslims save for Hajj. Deposits are managed in Shariah-compliant investments and hibah is declared periodically. Tabung Haji also manages Hajj registration and the pilgrimage queue, making an account a practical necessity for Malaysians intending to perform Hajj.
Prohibitions
- Gharar
- Excessive uncertainty or ambiguity in a contract. Prohibited in Islamic finance because it can lead to exploitation or disputes. Contracts must have clearly defined terms, subject matter, and obligations.
- Haram
- Prohibited under Islamic law. In finance, includes interest-based products, investments in alcohol, gambling, pork, weapons, tobacco, and adult entertainment industries.
- Maysir
- Gambling or games of chance. Prohibited in Islam. Financial transactions that resemble gambling, with speculative, chance-based outcomes rather than genuine economic activity, are considered maysir.
- Riba
- Interest or usury. One of the most strictly prohibited practices in Islamic finance. Includes any guaranteed, predetermined return on a loan or deposit regardless of the underlying economic outcome. Conventional mortgages, personal loans, and savings account interest are all forms of riba.
Roles
- Rab al-Maal
- The capital provider in a Mudarabah partnership. This party provides the funds but does not actively manage the investment. They bear financial losses (unless due to the manager's negligence) and share in profits per the agreed ratio.
Zakat
- Hawl
- One full lunar year (approximately 354 days). Zakat becomes obligatory when qualifying wealth above the Nisab threshold has been held for one complete Hawl.
- Nisab
- The minimum threshold of wealth that makes Zakat obligatory. Equivalent to the value of 85 grams of gold or 595 grams of silver (whichever is lower). A Muslim whose total qualifying wealth exceeds the Nisab for one full lunar year must pay Zakat.
- State Zakat Bodies
- Zakat in Malaysia is administered at state level by each state's Islamic religious council or its collection arm, for example Pusat Pungutan Zakat (PPZ-MAIWP) for the Federal Territories and Lembaga Zakat Selangor. They publish nisab values, collect zakat on income, savings, business, and gold, and distribute to the eight asnaf categories.
- Zakat
- One of the Five Pillars of Islam. An obligatory annual charitable contribution of 2.5% of qualifying wealth above the Nisab threshold. Applies to cash, gold, silver, investments, business assets, and other forms of wealth held for one full lunar year (Hawl).
- Zakat al-Fitr
- A special charitable contribution required at the end of Ramadan, before Eid al-Fitr prayers. Unlike regular Zakat (which is wealth-based), Zakat al-Fitr is a fixed amount per person in the household, paid to ensure the poor can celebrate Eid.
- Zakat Tax Rebate
- In Malaysia, zakat paid on income to a state religious authority (such as PPZ-MAIWP or Lembaga Zakat Selangor) is a direct rebate against individual income tax payable, not just a deduction. Businesses receive a deduction capped at a share of aggregate income. Keep official receipts from the state zakat body to claim the rebate.
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Quick Answer
This glossary covers 45+ essential Islamic finance terms used in Shariah-compliant banking, investing, and financing in Malaysia. Each term includes a plain-language definition and context for how it applies to real products, from Qard savings and SBR-priced financing to Takaful and faraid inheritance.
Key Takeaways
- 45+ Islamic finance terms defined in plain language
- Malaysia-specific terms: SBR, ceiling rate, ibra, PIDM, EPF Simpanan Shariah, PRS, Tabung Haji
- Covers banking, investing, financing, Takaful, Zakat, and estate planning
- Includes Murabaha, Musharakah, Ijarah, Riba, Nisab, Faraid, Sukuk, and more
- Cross-linked to relevant product comparison pages
Reviewed by: HalalWallet Editorial Team•Last reviewed: 2026-03-06•Disclosure: No provider pays for placement or ranking on this page. Editorial policy and full disclosures.
Reviewed quarterly and updated for major content changes.
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HalalWallet. “Islamic Finance Glossary: 45+ Key Terms Explained.” HalalWallet, https://www.halalwallet.asia/glossary. Accessed 2026-08-07.
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This page is reviewed against HalalWallet editorial standards and source documentation.
Reviewed by: HalalWallet Editorial Team
Last reviewed: 2026-03-06