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Finance Glossary

Getting a loan can be confusing. That's why we've put together a glossary of terms that might help clarify things!

Debt
An amount owed for funds borrowed. The debt is secured by a note, bond, mortgage, or other instrument that states repayment and interest provisions. The note, in turn, may be secured by a lien against property or other assets. Debts in different forms all imply intent to pay back the amount owed by a specific date as set out in the repayment terms.

Default
A failure to discharge a duty. The term is most often used to describe the occurrence of an event that cuts short the rights or remedies of one of the parties to an agreement or legal dispute, for example, the failure of the mortgagor to pay a mortgage instalment, or to comply with mortgage covenants.

Equity
The value of property in an organisation greater than total debt held on it. Equity investments typically take the form of an owner’s share in the business, and often, a share in the return, or profits. Equity investments carry greater risk than debt, but the potential for greater return should balance the risk.

Ijarah
A form of leasing contract in which there is a transfer of ownership of service (for use of an asset) for a specified period for an agreed upon lawful consideration. In this scenario, a financial institution purchases an asset as per specification provided by the client. The period of lease and the lease rental fee are set in advance and may be determined by mutual agreement according to nature of the asset. During the period of the lease, the asset remains in ownership of the bank (as lessor), but the client (as lessee) has the right to use it.

Ijarah Muntahia-bi-tamleek
A lease ending in the transfer of the ownership to the lessee in such a way that the lease and sale are kept separate and independent transactions. 

Loan Agreement
A written contract between a lender and a borrower that sets out the rights and obligations of each party regarding a specified loan.

Market Consistent Valuation
A valuation of the participants’ risk fund’s assets and liabilities that is consistent with either the assessment of their risk and value by market participants (“mark-to-market” valuation) or, in the absence of a direct market evaluation, the valuation Updated: January 2018 5 No Term Definition principles, methodologies and risk parameters that market participants would expect to be used (“mark-to-model” valuation).
Principal The original amount of money borrowed in a loan or mortgage excluding any interest.

Qarḍ
The payment of money to someone who will benefit from it provided that its equivalent is repaid. The repayment of the money is due at any point in time, even if it is deferred.
Security A pledge made to secure the performance of a contract or the fulfillment of an obligation. Examples of securities include real estate, equipment stocks or a co-signer. Mortgages are a form of security with strong legal standing, because they are publicly registered following a formal legal procedure. A mortgage gives the lender holding a mortgage security the right to reclaim the asset being financed, if repayment is not made.

Term
Refers to the maturity or length of time until final repayment on a loan, bond, sale or other contractual obligation.

Usufruct
A legal right to use and derive profit from property belonging to someone else provided that the property itself is not damaged.

Wa’ad Promise or undertaking 
Commonly found in Islamic finance transactions and utilised in purchase and sale undertakings.

Wakalah
An agency contract where one party appoints another party to perform a certain task on its behalf, usually for payment, fee or commission.

Wakeel
An agent or delegated authority.

Sources
https://www.ifsb.org/
https://www.cimaglobal.com/
http://www.islamic-banking.com/

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