Definitions and Interpretations of General Terms of Islamic Banking and Finance

The following are definitions and interpretations of terms of Islamic banking and finance used anywhere in this blog.

A

Account(s)                                   The Interest-Free Account(s) opened and maintained by the Customer with the Bank.

Advance Payment                      Is a method under which a seller receives payment from a buyer prior to shipment or the agreed upon goods or rendering the agreed upon service.

Agent                                            A person(s), either natural or legal, appointed by the Bank to provide any part of the Service.

ATM                                              An Automated Teller Machine, Cash Handling Machine or any ard Operated Machine or device whether belonging to the Bank or other participating banks or financial institutions nominated from time to time by the Bank, which accepts and/or dispenses cash and cheques in addition to other banking services.

Authorized Person                      A person authorized by the Customer (whether in the Account Opening Form or otherwise) to act on behalf of the Customer in relation to the Account(s) and any transactions in relation to such Account(s).

B

Bank Guarantee(BG)/Kafalah    Where it is a contract of guarantee or surety given by one party to discharge the liability of a third party in the case of default.

Business Day                              A day on which the Bank or any of its branches are open for business.

C

Cash Withdrawal                         A cash withdrawal from an Account maintained with the Bank through counters, ATMs, a point of sale (POS) and other cash dispensing outlets made available by the Bank/IFB Window.

Conflict of Interest                      A situation where a staff member or members of his/her immediate family or a close friend personally get the benefit as a result of the decision taken in his/her official capacity.

Consignment Basis Payment-i   It is a method of payment in which the title to the goods remains with the seller until an agent (distributor) in the foreign country sells them. Payment is made to the seller if and when the agent (distributor) sells the goods.

Corporate Customer                   A Customer who is a legal person.

Current Account-i                       The Interest-Free Current Account(s), structured on the IFB concept of Qard opened and maintained by the Customer with the Interest-Free Bank.

Customer                                     A natural or legal person who is the Account holder named in the Account Opening Form.

Customer’s Instructions           Instructions given by the Customer to the Bank.

D

Deposit                                        Funds deposited in an Account or any other Account maintained with the Bank at any point of deposit made available by the Bank.

Deviation                                     Financing requests which are not covered in this financing process procedure. The nature of the financing or issues raised therein is without or beyond the spirit of this procedure.

Discretionary Financing Limits (DFL)       Financing approval authority given to an individual ora team.

Documentary Collection-i /Cash against Document (CAD)    Is a method under which banks handle a seller’s commercial documents with or without financial documents in accordance with instructions received from the seller in order to deliver the documents to the buyer (importer) against payment or acceptance or against other terms and conditions.

Documentary Letter of Credit -i (L/C)        Is a written undertaking by a bank given to the

Draft or Bill of Exchange          A signed order by one party, the drawer, addressed to another, the drawee, directing the drawee to pay a specified sum of money to the order of a third person.

E

Exceptions                                  The financing and advances approved by variations from the financing process procedure. However, the nature of the financing request or issues raised therein is within the spirit of the financing procedure.

Exposure Limit                           The aggregate financing/loan or extension of financing by the Bank to an individual/group of trade partner(s)/debtor(s)/borrower(s).

F

Financing                                    Loan and/or advances, Sales contracts financing.

Financing Approval Form (FAF)   The principal financing decision making the document on which relevant information on the financing request; recommendations and the financing decision of the Financing Approval Teams/individuals to be recorded.

Financing Officer                        The Bank’s performer involved in the financing process: negotiation, evaluation, analysis, recommendation, approval, follow-up and collection.

Financing Risk Rate                   A system employed by the bank to differentiate the degree of financing risk of the trade partner/debtor/borrower.

Financing Risk                            The potential loss to the Bank when its trade partner/debtor/borrower fails to meet its obligation with agreed terms and conditions.

Financing/Loan Portfolio           Total Financings/loans and advances extended to all trade partners/debtors/borrowers in any sector, any form of business ownership, geographical location or others.

Financing/Loan Pricing              Service charges, fees, commissions, and others to be charged on financings/loans, advances and guarantees extended to customers by the Bank.

Franco Valuta-i (Permit)             Is issued to importers of goods on which no foreign exchange is payable by the importing country.

G

Grace period                                A period during which the trade partner/debtor/borrower relived from either principal, profit or both repayments.

I

Individual Customer                    A Customer who is a natural person

Interest-Free Banking Window   Separate units within a conventional bank that exclusively offer Interest-Free services.

Investment Period                       A period of one, three, six, nine or twelve calendar months or more as shall be selected by the Customer in respect of the tenure of a Mudarabah Account.

J

Joint Account                              An Account opened in the name of two or more Customers.

L

Letter of Credit Amendment      Alteration of terms and conditions on the letter of credit. According to UCP 600, all documentary credits are irrevocable i.e. that cannot be canceled or amended without the agreement of issuing bank, a confirming bank (if any), and beneficiary. However, if all such parties agree on the change, the applicant submits an application to the issuing bank to make the requested changes to the letter of credit. This can be initiated either by the applicant or by the beneficiary.

Letter of Credit at Sight              Under this method, payment is made without recourse to the exporter (beneficiary). Means payment to the beneficiary is to be effected immediately upon presentation of complying documents.

Letter of Credit Deferred Payment        The exporter receives an Undertaking, in return for the correct documents, that payment will be made at the date stated in the L/C. There is no draft involved nor is there any recourse to the exporter. Once issued, the undertaking must be honored at the due date.

Letter of Credit on acceptance   Under this method of payment, the confirming or issuing bank accepts Draft (bill of exchange). Whosoever accepts the draft, there is no recourse to the exporter and the draft must be paid at maturity.

Letter of Credit-i by Negotiation    The negotiating bank may effect Payment with recourse to the exporter (beneficiary) unless the nominated bank confirms the L/C.

Loan Recovery process             The collection of impaired financings/loans through negotiation with the customer and legal means.

M

Major shareholder(s)                  All shareholder(s) in the case of PLC. And at least top ten major shareholder(s) and/or those shareholder(s) who owned at least 70% of the total share value of the Company in case of Share Company.

Mudarabah Deposit                    A partnership in which the customer (Rabb-ul-Maal) provides the deposit/capital and the Bank (Mudarib) provides its expertise and skill in relation to the investment of such capital. Profit, if any, is shared between the parties as per an agreed ratio while the loss, if any, is borne solely by the Mudarabah Investor (as the case may be).

Mudarabah Fixed Time Deposit Account   The Interest-free Deposit Account based on Mudarabah structure opened and maintained by the Customer with the Bank for a specified term.

Mudarib                                       The Agent (The Bank) in a Mudarabah partnership who provides the expertise and management.

Murabahah Import letter of Credit     The request of the client the bank imports the goods for him utilizes its own funds through an LC established to the seller with whom the buyer has a contract. The bank, in turn, sells the goods to their client at the price agreed upon, which includes the bank's profit.

N

Negotiation                                  The purchase by the nominated bank of drafts(drawn on a bank other than the nominated bank) and/or documents under a complying presentation, by advancing or agreeing to advance funds to the beneficiary on or before the banking day on which reimbursement is due to the nominated bank (Art,2 UCP 600)

Non Performing Financings/Loans (NPFs)     Bad debts as defined in the Directives of the National Bank of Ethiopia.

Non-Financial Transaction         Electronic data consisting of information or sets of information initiated remotely and electronically transmitted via Internet Banking relating to the Account(s) and/or other business activities with the Bank. This will include an e-mail message which will be treated as a Customer's Instruction.

P

Permissible                                Permitted and anything allowed by the Shari’ah.

Islamic financing principles              

Profit Calculation Period           In relation to a Mudarabah Account, a period of one, three, six, nine or twelve calendar months as shall be applicable to the Customer determined by the Bank, for which profits on the Mudarabah Funds are calculated.

Profit Equalization Reserves     It is a determined reserve account maintained with the bank by deducting from net profits before appropriations, for the purpose of compensating profit payment deterioration and subsequent depletion of depositors balance due to loss, if any. It is also used to equalize profit payments with agreed upon rate in the case when a prevailing year profit is smaller to cover the profit

Profit Payment Date                    The date on which the Bank pays the Customer’s share of the Profit Amount seller at a request of the buyer to make payment or to accept and pay Draft (bills of exchange) drawn by the seller up to a stated sum of money within a prescribed time limit and against stipulated documents provided that the terms and conditions of the credit are complied with.

R

Record of Loss                           An outstanding record of loss or written-off financings/loans and advances on a specific customer.

S

Sales Contract                            The financing contracts of Mark up (Murabahah), Advance payment against Deferred Delivery of Goods (Bai Salam), and Work-in-progress (Istisna).

Shari’ah Advisor/Consultant      An independent board or consultant appointed by the Bank to ensure all products and services; related policies and agreements of IFB are in compliance with Shari’ah rules and principles.

Shari’ah                                        A way or path. In Islam, Shariah refers to the divine guidance and laws of rules and principles supplemented by the juristic interpretations of Islamic scholars.

Shipping Guarantee-i                 An undertaking issued by the Bank to secure any claims by the shipping lines on the buyer as a result of the release of goods without presentation of the original bills of lading(due to delays in transit or goods arrive before shipping documents are presented to the bank). Similar to BG-i, it is based on the Islamic concept of kafalah

Small Export Items (Permit)       A small export items sent abroad for a sample, gift, repair, replacement, exhibition and trade fair and personal effects and belongings.

SWIFT                                           Means Society for Worldwide Interbank Financial Telecommunications, a computer network which provides Inter-bank communication facilities worldwide.

T

The Sales Contract                     It is a legal contract for the exchange of goods, services or property to be exchanged from seller to buyer for an agreed upon value paid or promise to pay the sum.

Trade partner/Debtor                   Borrower/Customer of the Bank.

V

Value Date                                   The date on which a transaction entry to an Account becomes subject to profit, if applicable.

W

Wakalah Import Letter of Credit     Is an agency relationship between the bank and its client. The bank will act on behalf of its client and the client will authorize the bank to represent him in issuing the L/C using the client’s own fund, checking for compliance of documents when a payment claim is made. The bank receives payment/commission or Ujra for the service provided.

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