Islamic Finance
Glossary
Key terms in Zakat, Khums, halal investing, and Islamic finance — explained clearly for every school of thought.
- InvestingBusiness ScreeningEvaluating whether a company's core business activities are permissible under Islamic law before investing.
- PurificationDividend PurificationThe process of donating the non-permissible portion of investment dividends to charity to cleanse one's earnings.
- FiqhFatwa(فتوى)A non-binding Islamic legal opinion issued by a qualified scholar (mufti) in response to a specific question.
- InvestingFinancial ScreeningThe process of evaluating a company's financial ratios — debt, interest income, and cash — against Shariah compliance thresholds.
- FinanceGharar(غرر)Excessive uncertainty or ambiguity in a contract. Transactions with significant gharar are considered impermissible in Islamic finance.
- ZakatGold Nisab ThresholdThe Zakat threshold based on 85 grams of gold (Sunni) or 69.12 grams (Ja'fari). Used to determine if wealth meets the minimum for Zakat.
- InvestingHalal InvestingInvestment practices that comply with Islamic principles — avoiding interest (riba), excessive uncertainty (gharar), and prohibited industries.
- FiqhHanafi(حنفي)The largest Sunni school of jurisprudence, founded by Imam Abu Hanifa. Considers all gold and silver zakatable regardless of personal use.
- FiqhHanbali(حنبلي)A major Sunni school of jurisprudence founded by Imam Ahmad ibn Hanbal. Exempts permissible jewelry kept for wearing or lending, little or much.
- InvestingHaram Income(حرام)Income derived from sources that are prohibited under Islamic law, such as interest (riba), gambling, or alcohol sales.
- ZakatHawl(حول)The lunar year (approximately 354 days) that must pass on wealth above Nisab before Zakat becomes due.
- FiqhIjtihad(اجتهاد)Independent legal reasoning by a qualified scholar to derive Islamic rulings on matters not explicitly addressed in the Quran or Sunnah.
- PurificationIncome PurificationThe broader practice of cleansing any impermissible earnings from one's income — including investment returns, interest, and other sources.
- InvestingIslamic IndexA stock market index that only includes companies meeting Shariah compliance criteria, such as the Dow Jones Islamic Market Index.
- PurificationKhums(خمس)A 20% (one-fifth) tax on annual surplus income in Ja'fari (Shia) jurisprudence, applied after legitimate expenses are deducted.
- FiqhMadhab(مذهب)A school of Islamic jurisprudence. The four major Sunni madhabs are Hanafi, Maliki, Shafi'i, and Hanbali.
- FiqhMaliki(مالكي)A major Sunni school of jurisprudence founded by Imam Malik. Exempts permissible jewelry kept for wearing; jewelry kept as savings, for a dowry or for trade is zakatable.
- FinanceMaysir(ميسر)Gambling or games of chance. Any transaction where the outcome depends entirely on chance is prohibited in Islamic finance.
- FinanceMudarabah(مضاربة)A profit-sharing partnership where one party provides capital and the other provides expertise. Losses are borne by the capital provider only.
- FinanceMurabaha(مرابحة)A cost-plus sale where the seller discloses the original cost and adds an agreed-upon profit margin. Widely used in Islamic banking.
- FinanceMusharakah(مشاركة)A joint partnership where all parties contribute capital and share profits and losses according to their investment ratio.
- ZakatNisab(نصاب)The minimum wealth threshold that makes Zakat obligatory. Based on the value of gold (85g) or silver (595g) for Sunni schools.
- InvestingPurification RatioThe percentage of investment income (dividends) that should be donated to charity to "purify" earnings from a Shariah-compliant stock.
- FinanceRiba(ربا)Interest or usury — any guaranteed, predetermined return on a loan or investment. Strictly prohibited in Islamic finance.
- ZakatSadaqah(صدقة)Voluntary charity in Islam, given beyond the obligatory Zakat. There is no minimum amount or specific timing requirement.
- PurificationSahm al-Imam(سهم الإمام)Half of the Khums payment designated for the Imam's share, typically paid to a Marja' (religious authority) or their representative.
- PurificationSahm al-Sadat(سهم السادات)Half of the Khums payment designated for needy descendants of the Prophet Muhammad (Sayyids/Hashemites).
- FiqhShafi'i(شافعي)A major Sunni school of jurisprudence founded by Imam al-Shafi'i. Exempts permissible jewelry in its relied-upon position; other gold and silver is zakatable.
- InvestingShariah-Compliant StocksStocks that pass both business activity and financial ratio screens according to Islamic finance standards like AAOIFI.
- InvestingSukuk(صكوك)Islamic financial certificates, often called "Islamic bonds," that represent ownership in an underlying asset rather than a debt obligation.
- FinanceTakaful(تكافل)Islamic insurance based on mutual cooperation and shared responsibility, structured to avoid the gharar present in conventional insurance.
- ZakatUshr(عشر)Agricultural Zakat — a tithe of 5% or 10% on crops and produce, depending on the irrigation method used.
- ZakatZakat al-Fitr(زكاة الفطر)A per-person charity given at the end of Ramadan before Eid prayer, intended to purify the fasting person and provide for those in need.
- ZakatZakat al-Mal(زكاة المال)Zakat on wealth — the annual 2.5% obligation on accumulated assets that meet or exceed the Nisab threshold.
- ZakatZakatable WealthThe portion of a person's total wealth that is subject to Zakat calculation — excluding personal-use items like a primary home and vehicle.
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