Glossary ‘Adalah Fairness or justice Adverse selection The increasing risk of making the wrong choice due to inadequate information and ineffectiveness of the selection process Al ghunmu bil ghurmi Every profit has risk attached to it Al-kharaju bidh-dhamani Revenue is gained by bearing a responsibility Al-hisba Reward, calculation Al-‘urf Habits (tradition) that developed and apply in general in a society Altman Z-score A scoring method in credit risk measurement created by Edward Altman in 1968 Amanah Trustworthy Arbitration A strategy of gaining profit by utilizing a commodity’s price difference in different location Asymmetric information A condition of inequality in information between parties that are about to or have already entered a contract At-ta’awun Mutual assistance Ba’i al-‘urbun Deferred sale contract with down payment (‘urbun) Balance scorecard A method of performance measurement by using financial and nonfinancial indicators, covering the short-term and long-term and involving internal as well as external aspects that can be used to judge current conditions as well as future planning Bancassurance A banking service providing an insurance product to provide coverage and an investment product to fulfill the client’s long-term financial needs Bay’ Sale or trading Bay’ ad-dayn bi ad-dayn Sale of a debt for a debt Bay’al wafa A sale in which one party sells a particular good by being indebted to the buyer, with the agreement that after the seller fulfills the debt, the object sold is returned to the seller again Bay’al amanah A sale in which the seller informs the buyer of the purchase price of the object sold Bay’al ‘Inah A sale in which the seller immediately purchases the goods he or she had just sold at a higher price and paid in installments; this is done to circumvent the syariah prohibition over usury Bay’ al-‘Inah A sale where the owner of the goods sells those goods in cash to the buyer, and then the buyer sells the goods to the previous owner by credit at a higher price than the cash price (this sale is a dishonest sale—this is same with before, please use the before) Bay’ al mu’ajjal Jual beli dengan pembayaran tangguh (Sale with deferred payment) Bay’an naqdan A sale in which the seller and the buyer both hands over goods and payment for goods at the time of the sale contract Risk Management for Islamic Banks: Recent Developments from Asia and the Middle East. Imam Wahyudi, Fenny Rosmanita, Muhammad Budi Prasetyo, Niken Iwani Surya Putri. © 2015 by John Wiley & Sons Singapore Pte. Ltd. Published 2015 by John Wiley & Sons Singapore Pte. Ltd.
Bay’as salam or as-salaf A sale in which the price is paid full at time of contract and delivery of commodities is done at an agreed time in the future and with the specifications of commodities as agreed in the contract. Bay’s ash-sharf Exchange of currencies Bay’ul muqayadah A barter sale Bay’ul mutlaqah A usual sale Bay’ bi tsaman ‘ajil A sale in which the payment is deferred Capital surcharge Additional capital over capital already present; it can be permanent or temporary Catastrophic A risk with a very high possible loss value; usually very rare Channeling A method in a linkage program in which the bank’s partner (the smaller financial institution) acts as the bank’s agent and does not have the right to make financing decisions without the bank’s permission (Capital) conservation buffer Buffer capital used to guarantee the sustainability of a bank’s operations to prevent bankruptcy when the bank experiences losses Corporate governance Corporate governance which regulates the relationship between a firm’s stakeholders Countercyclical capital buffer Buffer capital to protect the banking sector when the development of the credit market is imbalanced by requiring banks to gradually increase capital when credit growth is high, increasing the bank’s ability to absorb losses CreditRisk+ model A model developed by Credit Suisse First Boston in 1997 using an actuarial approach; in this model, risk is measured based on the probability distribution of the frequency of occurrence and the severity of the loss Credit scoring Assessment given by the bank to its client for financing requested based on a scoring system Cut loss (policy) A form of policy to cover a position, both manual and automatic, to limit losses to preserve equity from erosion; this policy is usually applied in market risk management Dayn Debt Dhaman Responsibility Diminishing musyarakah A decreasing musyarakah, a partnership between several parties where the ownership of a party slowly decreases as time passes due to partial transfer of ownership from one party to another through sale of ownership Din Religion Displaced commercial risk A risk in which the bank is “forced” to distribute a profit share to its depositors at a “competitive” rate that is larger than the rate-of-return based on previously agreed-upon ratio ERM (enterprise risk management) An approach that integrates a group of risk measures and harmonizes various policies, methodologies, systems, and bank infrastructures, such as governance system, capital management, and risk management activities Escrow account An account opened to accommodate a special fund; withdrawal can only be done by fulfilling certain requirements in accordance with the instructions or contracts between the depositor of that account and another party with involved with it Executing program A method in linkage program where the bank’s partner (the smaller financial institution) is given the right to make decisions on channeling financing to its clients
Fat-tail loss distribution A loss distribution that allows for the occurrence of a loss value that is far larger than usual, generally used for catastrophic risks Financial inclusion A process to ensure that access to financial products and services is available to low-income groups at a fair and acceptable price, and managed transparently by relevant institutions Financing The process of channeling third-party funds held by the Islamic bank to the public (debtor) Fiqh A field in Islamic syari’ah that discusses Islamic law, covering various aspects of the life of men and women in their relationship with their Lord as well as with fellow created creatures Fiduciary risk A risk that emerges when the bank fails in taking responsibility over the trust given by the depositor to manage their funds, such as failure to return their funds or to safeguard depositor interest Fraud A transgression against the law that is done on purpose Gharar Naturally occurring uncertainty that can cause a person to be in danger due to imperfect information, without any element of intent from the parties transacting Ghubn Inequality Granularity A portfolio consisting of many financing yet with very small individual value Hadith The collected sayings, actions, provisions and agreement of Rasulullah shalallahu ‘alaihi wassalam that is used as stipulation or law Haircut (policy/strategy) A form of strategy (policy) to limit losses experienced using a certain percentage to reduce the market (fair) value of financing that corresponds to its risk; this policy is usually applied in credit risk management Hajjah Need or necessity Halal In keeping with the Syari’ah; divinely permitted Hamish jiddiyah Security deposit Haram Divinely prohibited Hawalah Transfer of debts between debtors Hijrah Crossed over from conventional to Islamic banking Hilah A trick used in a transaction to avoid something prohibited Hilatul-riba Shadow usury Idiosyncratic risk A unique and very specific risk that occurs due to factors only present in certain individuals or institutions, and nowhere else (also called unique risk) Ihtihsan Juristic preference to consider something good Ijarah A form of exchange where the object is service; the scope of this contract is very broad and includes custody services, rental services, transportation services, and the service of an employee working for a company Ijab-qabul Statements of entering the contract Ikhtiar Work, effort Ikhraha Coercion IMBT Ijarah mumtahia bi tamlik, a rental/leasing contract that allows for the transfer of ownership of the rented/leased object from the asset owner to the renter/lessee; this contract is done by renting/leasing the asset for an agreed period, and then followed with a sale or a grant contract of the asset after Information opacity Information limitation that caused something to be less trustworthy Insider trading The sale of securities involving someone with access to internal information related to the company issuing the security
Iqaalah Cancelation of sales contract IRB Internal ratings-based—a risk measurement method that allows the bank to calculate its own risk; only banks that fulfil certain criteria are allowed to use this method Istishna’ A form of order to produce an object that has yet to be available at the time the contract is entered. Payment for this contract can be done in cash or credit. ‘Iwad The basic condition that can determine whether a sale is a lawful sale or not Joint financing Joint financing to a micro, small- or medium enterprise (MSME) done by the bank together with its partner in its linkage program, where the bank usually bears the majority of the financing capital. Joint venture Penggabungan beberapa badan usaha untuk mendirikan satu bentuk usaha bersama dengan kontribusi modal secara bersama-sama (A business established by several parties through joint capital investment) Ju’alah Contest Kaafil Guarantor Kafalah Guarantee Kaffah Holistic Kauniyah Evidence in the universe; Qur’an verses Khata’ Mistake Khiyar The right to choose to continue or discontinue a contract La darara wa la dirara Tidak boleh membahayakan dan tidak boleh dibahayakan (Must not be harmful and should not be jeopardized) Leasing Refers to operating lease Li-tabarru’ contract A contract that is purely intended to bring one closer to Allah Ta’ala, such as shadaqah (mutual assistance), zakat (alms, charity) kafalah, and wadhiah (safe keeping) Li-tijari contract A group of commercial business contracts Linkage program A financing program yang bersifat kemitraan yang biasanya dilakukan oleh bank bekerjasama dengan institusi keuangan yang lebih mikro untuk selanjutnya disalurkan ke sektor riil (A financing program that is a partnership that is usually done by the bank in collaboration with the micro finance institutions to further channeled to the real sector) Liquidity buffer Liquid asset reserve that the bank must own to maintain its liquidity level; the limit on this reserve will be heavily reliant on the condition and characteristic of each bank Liquidity coverage ratio The ratio used to see whether a bank’s assets can cover its short-term liquidity needs Longer-term structural ratio Rasio yang digunakan untuk menganalisis risiko, dihitung dengan cara membagi utang jangka panjang dengan penjumlahan seluruh pembiayaan jangka panjang. Makin tinggi rasio ini, makin berisiko institusi tersebut. (The ratio used to analyze the risk, is calculated by dividing long-term debt by the sum of long-term financing. The higher this ratio, the more risky the institution.) Lump sum Pembayaran secara sekaligus (tidak dengan cicilan) (Lump sum payment, not by installments) Maal al-mutaqawwam Assets owned legally, comply with syari’ah, and can be traded at a price Maqashid syari’ah The purpose of syari’ah revelation Maslahah Benefits
Maysir Gambling Mazhab Literally meant a path or way of passage; terminologically, it meant following an opinion whose truth is trustworthy Mitigation A series of efforts to minimise risk potential and the impact of risk occurrence Moral hazard A situation where a party in a transaction commits an act based on bad intentions that can potentially cause losses to other parties Mortgage-backed securities Securities that represent claims to the cash flows obtainable from mortgage loans through a securitization process Mu’awadhah Exchange Mudharabah A partnership in which one partner contributes capital while another partner contributes expertise, labor, or efforts to manage the capital, with the stipulation that any profit is divided based on prior agreement, while any loss is divided based on the proportion of capital contribution (which means it is completely held by the capital owner) Mudharabah muqayyadah A partnership where the capital owner places certain limitations on the fund manager (mudharib); this limitation can be in the form of maturity, business location, business field, management policies, and so forth, but even so, the capital owner should ensure the limitations given do not obstruct the business run by the fund manager (mudharib) Mudharabah mutlaqah A partnership where the capital owner provides complete freedom to the fund manager (mudharib) to use the funds entrusted for any business field that the fund manager (mudharib) considers as worthy to work in Mudharib Debtor/businessperson/entrepreneur managing the mudharabah funds Mugharasah A partnership contract for planting trees Mukharabah A partnership between a landowner and cultivator to work on a land together where the capital to cultivate it comes the cultivator (similar to musyarakah, as all the parties in the contract contribute capital) Murabahah A sale where the seller informs the buyer of the cost of goods sold and then negotiates a sale margin with the buyer; this type of sale is often called the cost plus margin sale Murabahah li al-amir bi al-syira’ Murabahah with order Musaqat A partnership between a landowner and cultivator in which the division of the gains between them is based on the agreement at the beginning of contract Musawamah A sale with price haggling Musyarakah A partnership between two or more parties where each partner involved contributes capital with the stipulation that profit is divided according to prior agreement, while loss is divided based on capital contribution Musyarakah mutanaqishah A musyarakah contract where the portion of ownership of one party is gradually relinquished to another party through sale of ownership Muzara’ah A partnership between the landowner and cultivator to utilize a plot of land, in which the capital to cultivate the land comes from the landowner (similar to mudharabah, as the land and additional capital comes from one party) Nasi’ah usury A usury that occurs due to delays in debt payment with surplus, or the delivery of usurious commodities in the exchange of the same type or commodity group; in modern finance, bank interest falls under this category Nisbah The profit-sharing ratio that has been agreed by the parties entering a partnership contract (syirkah)
Off-balance sheet When an asset or liability is not recorded in the balance sheet of an institution In an Islamic bank, the mudharabah muqayyadah transaction can be categorized as an off-balance sheet component On-balance sheet The record of an asset or liability in the balance sheet of an institution Opportunity cost The cost of opportunity lost due to not choosing the investment/ choice Procyclicality A strong interaction within the financial sector and between the financial sector and the real sector that can obstruct economic growth when the economy is in a prime condition, or cause a troubling recession when the economy is weak Profitability risk The risk that the targeted profitability level is not achieved Qabdhu Handover of a transaction object Qadhi Judge Qardh Debt, loan Qurudh usury A usury that occurs in the event of debts and loans Rahn Lien, pledge, collateral RAROC (risk-adjusted return on capital) A method to measure the rate of return on capital after calculating the contribution of the element of risk Rebalancing The process of returning a portfolio into its initial composition Reinvestment risk A risk in which, due to the number of defaulted debtors, the bank cannot channel funds to the public to gain the same profitability level as it did before Re-takaful Reinsurance Riba Usury, an excess or increase in loan or debt transaction Riba buyu’ Type of usury caused by sale of usorious commodities, which is gold, silver, dates, wheat, sya’ir (like wheat) and salt. Risk An uncertainty that can generate loss Risk-adjusted performance Performance evaluation based on the risk calculation related to the performance achievement Risk appetite The expected degree of risk acceptance by the stakeholders in a company Risk-based pricing A price-setting method based on the risk level and profile faced Risk limit The allowed limit of risk tolerance Risk matrix A table used in risk analysis in which the rows in the table show the type of risk, while the columns show the risk probability as well as the effects RiskMetricTM model A model developed by J.P. Morgan in 1997 using a transition matrix basis and correlation between assets in calculating a portfolio’s expected loss Risk profile A complete portrait of risks at a particular time period, consisting of risk description, risk-causing factors, risk probability, risk effects, and the strategy in facing risk, as well as the person in charge of controlling the risk Risk register A document constructed to register the risk profile of an institution; it usually consists of risk description, risk-causing factors, risk probability, risk effects, and the strategy in facing risk, as well as the person in charge of controlling the risk Risk-return trade-off The higher the return expected, the higher the risk that must be borne; the opposite is also true: the lower an object’s risk, the lower the return Risk tolerance The level of risk that can be taken with regard to the level of capital reserve that is quantitatively prepared to anticipate the effects of risk Salam A form of sale where the buyer pays the entire price upfront for the delivery of the goods by the seller at some future period. In a salam contract, the seller and the
buyer will have to agree on the price, quantity, quality, and the time of delivery to avoid uncertainty. Scenario analysis A process of estimating the conditions that can occur in the future and its effects through several constructed assumptions Severity Loss value Shahibul maal Capital owner, investor in a mudharabah contract Stakeholder A group of people and/or institutions with particular interests in a firm Standardized measurement method A risk measurement method (market) that is standardized or set by regulation both in risk scope, asset classification, weight, and the amount of capital charged Stress testing A simulation used to measure the maximum limits of an institution’s capability in absorbing the worst effects of risk, can be done through scenario analysis. Subprime mortgage Housing credit usually provided to borrowers with low credit ratings and high risk; to compensate for the higher risk borne, the bank usually charges a higher price (interest) to these debtors Sukuk Plural of sakk, which means certificates; are syari’ah-compliant financial instrument representing ownership over an underlying asset, project or future cash flow Sunna Traditional/social custom and legal practice Sunatullah Allah Ta’ala’s provisions applicable to His creatures Swap A transaction exchanging currencies or interest rate of a security with another currency or the interest rate of another security through cash purchase and credit resale or cash sale and credit repurchase, to avoid losses due to exchange rate or interest rate movement by locking the exchange/interest rate at a fixed rate during the contract Syaikh Religious scholars Syarah Explanation Syari’ah-compliant product A product that was created after the era of Rasulullah shalallahu ‘alaihi wasallam and has fulfilled syari’ah rules and principles Syari’ah-based product A product already in existence since the era of Rasulullah shalallahu ‘alaihi wasallam and lawful in Islam Syirkah A partnership contract between two people or more with various agreements constructed that bind all partners involved Systematic risk A risk that spreads in a system systematically Systemic risk A risk whose effect touches all the elements in a system Ta’awun Mutual assistance Tadlis Penipuan yang disebabkan oleh kesengajaan dari salah satu pihak yang berkontrak untuk memanipulasi atau meyembunyikan informasi (Deception caused by deliberate action of one of the contracting parties to manipulate or conceal information) Taghrir Fraud Takaful Insurance Tauliyah A sale contract where the seller discloses the cost of goods sold to then request the buyer to purchase at that price; the seller does not expect any profit, merely a return of capital invested Tawarruq A financial contract where the buyer buys an easily sellable asset at higher price, with deferred payment, to raise cash for the buyer. Tenor The term of a contract/financing Treasury Fund management
‘Ujrah Reward, commission, or salary charged for services/work provided by one party to another. ‘Ulama An individual in the Muslim community with a deep knowledge of the Islamic syari’ah Ummah People, society Undiversified risk A risk that cannot be diversified away Unique risk See idiosyncratic risk Unsystematic risk A risk that only occurs at a particular individual or institution and does not spread systematically to the system as a whole Unsystemic risk A risk that only occurs at a particular individual or institution and cannot spread to the entire system Usufruct The utility of an asset Usury Excess return on the principal of a loan without compensation (‘iwad) Value at Risk A statistic-based approach (standard deviation), of a bank’s loss distribution over a particular risk. This approach can be used to calculate the maximum loss of a bank at a particular level of significance, such as 1 percent, 5 percent, or 10 percent. Wa’ad Promise Wad’iyah A sale contract where the seller is willing to sell the product at a Discounted price below purchase price. This is due to various reasons, such as the seller encountering liquidity issues, the product has not been selling well in the market, the product will spoil if not sold soon, etc. The seller discloses the purchase price in order to increase buyer confidence. Wadhiah yad amanah A pure safekeeping contract where the party entrusted with the deposited object is not allowed to utilize the entrusted object, does not charge safekeeping costs, and is not responsible for any losses/damage incurred by the entrusted object (unless due to negligence or deliberate bad faith). In this contract, the entrusted object remains the property of its original owner and can be retrieved from safekeeping by said owner at any time. Wadhiah yad dhamanah The safekeeping is a form of debt, because the party entrusted with the deposited object is allowed to use the object and enjoy the benefits of such an action. The consequence of this is, the party entrusted with the object must return it in its initial condition, both in terms of quantity as well as quality, without any required additions Wakalah Agency, representative Wakalah bil ujrah An agency with remuneration involved, included as a part of ijarah Zero-sum game A situation where one party experiences a win and another suffers losses; the total profit gained by one party is the same with the loss suffered by the other because the property/wealth/object competed for is only transferred from one party to another