Islamic Finance Glossary
Clear, plain-language definitions of 45+ key Islamic finance and halal banking terms, written for the UK. From home purchase plans and expected profit rates to faraid inheritance and Shariah-compliant ISAs, 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 the UK, faraid does not apply automatically: you need a valid will directing faraid distribution, otherwise intestacy rules decide who inherits.
- Hiba
- A lifetime gift under Islamic law. Because faraid shares apply only to what remains at death, a hiba made and delivered during your lifetime is a valid way to transfer specific assets to chosen recipients. In the UK, lifetime gifts can also reduce inheritance tax if made more than seven years before death.
- Intestacy Rules
- The statutory rules that decide who inherits when someone dies without a valid will. In England and Wales, the spouse and children take fixed statutory shares that do not match faraid; Scotland and Northern Ireland apply their own versions. An Islamic will is the only way to make faraid legally binding on a UK estate.
- Wasiyya
- An Islamic bequest. 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 the UK, a wasiyya clause is written into a valid will alongside the faraid distribution.
Financing Structures
- Diminishing Partnership
- See Musharakah Mutanaqisah. A co-ownership arrangement where one partner gradually buys out the other's share over time. The most common halal mortgage structure in the UK, used in home purchase plans from Islamic banks and home finance providers.
- 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 UK home purchase plans, the rent you pay on the provider's share of the property is an Ijara component alongside the Diminishing Musharakah co-ownership.
- 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. UK providers apply it mainly as Diminishing Musharakah in home purchase plans, where the customer and provider co-own the property and the customer buys out the provider's share over time.
- Musharakah Mutanaqisah
- Diminishing partnership, usually called Diminishing Musharakah. A form of Musharakah where one partner's share decreases over time as the other buys it out. This is the dominant structure behind UK home purchase plans: the buyer and provider co-own the property, the buyer pays rent on the provider's share, and each acquisition payment increases the buyer's ownership until it reaches 100%.
- 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 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
- Takaful
- Islamic cooperative insurance. Participants contribute to a shared pool that provides mutual financial protection, based on cooperation and shared responsibility rather than the transfer-of-risk model of conventional insurance. Dedicated takaful products are limited in the UK retail market; some scholars permit conventional cover where no takaful alternative exists.
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.
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.
UK Market
- AER (Annual Equivalent Rate)
- The standardised UK rate figure that shows what a savings rate would be if profit were paid and compounded once a year, allowing direct comparison between accounts. UK Islamic banks quote expected profit rates as AER so they can be compared with conventional accounts.
- Cash ISA (Shariah-compliant)
- An Individual Savings Account whose returns are free of UK income tax, offered in Shariah-compliant form by Gatehouse Bank using expected profit rates instead of interest. Deposits up to the annual ISA allowance grow tax-free, and HMRC treats expected profit the same as interest for ISA purposes.
- Expected Profit Rate (EPR)
- The rate UK Islamic banks quote on savings accounts instead of interest. Your deposit is invested in Shariah-compliant assets and the bank targets the quoted rate, monitoring performance so it can be paid. Unlike interest, it is not a contractual guarantee, though UK Islamic banks have historically paid their quoted expected rates.
- FSCS (Financial Services Compensation Scheme)
- The UK's statutory deposit protection scheme. Eligible deposits at PRA-authorised banks, including Islamic banks like Al Rayan, Gatehouse, BLME, and QIB UK, are protected up to the scheme limit per person per banking licence. Note that Nomo operates under BLME's licence, so those deposits share one limit. E-money apps like Algbra and Kestrl are not covered.
- Grant of Probate
- The legal document UK executors need to administer a deceased person's estate when there is a valid will. With an Islamic will in place, the executor distributes the estate per faraid shares. Without a will, the process runs through letters of administration and intestacy rules instead, which do not follow faraid.
- Home Purchase Plan (HPP)
- The UK's regulated Shariah-compliant alternative to a mortgage. Structured as Diminishing Musharakah with Ijara: you and the provider buy the property together, you pay rent on the provider's share, and acquisition payments increase your ownership to 100%. Regulated by the FCA as home purchase plans rather than mortgages.
- SIPP (Self-Invested Personal Pension)
- A personal pension where you choose the investments, making it a common route to a fully halal retirement portfolio. Contributions receive tax relief at your marginal rate, growth is tax-free, and access starts from age 55 (rising to 57 in 2028). Providers like Wahed and Penfold offer Shariah-compliant options.
- UCITS ETF
- An exchange-traded fund regulated under the EU/UK UCITS framework, tradeable on the London Stock Exchange through any UK broker. Islamic UCITS ETFs such as the iShares MSCI World Islamic ETF track Shariah-screened indices and are the lowest-cost route to diversified halal investing.
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.
- 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.
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Quick Answer
This glossary covers 45+ essential Islamic finance terms used in Shariah-compliant banking, investing, and financing in the UK. Each term includes a plain-language definition and context for how it applies to real products, from expected profit savings and home purchase plans to Islamic wills and faraid inheritance.
Key Takeaways
- 45+ Islamic finance terms defined in plain language
- UK-specific terms: home purchase plan, expected profit rate, FSCS, Cash ISA, SIPP, Sharia pension fund, intestacy rules
- 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.co.uk/glossary. Accessed 2026-08-19.
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Sources and review process
This page is reviewed against HalalWallet editorial standards and source documentation.
Reviewed by: HalalWallet Editorial Team
Last reviewed: 2026-03-06