What is Islamic finance?

Many commonly used conventional financial products run afoul of Islamic prohibitions of riba (translated as usury or interest) and gharar (translated as risk or uncertainty).

As a result many Muslims are left facing a tough decision about whether to use conventional financial products that violate their faith or to forego purchasing a house or car until they can save, on their own or with help from family, enough money to purchase it outright.

Islamic finance is a set of financial products designed in consultation with a Shari'ah board to comply with the fiqh al-mu'amalat (Islamic law pertaining to financial transactions). A Shari'ah board is composed of several mufti, experts in Islamic jurisprudence qualified to issue fatawa (religious decrees). If the Shari'ah board decides the products are permitted (halal), they issue a fatwa (religious decree), which certifies the product's Shari'ah-compliance.

This is just a basic glossary. If you want a more detailed glossary of Islamic financial terms, Harvard University's Islamic Finance Project DataBank has a comprehensive glossary. The Meezan Bank glossary is quite comprehensive as well.

Amana: A transaction in which one party holds the property of another in a safekeeping trust.

Batil': Invalid (as in a contract or transaction).

Bay': Trade or commercial activity.

Bay'-bithaman-'ajil: Deferred payment sale. Customer approaches a bank and requests that the bank purchase an item for the customer. The bank purchases the item and sells it to the customer at an agreed-upon markup in installments. Same as murabaha.