Islamic Finance Glossary
Clear, plain-language definitions of 46+ key Islamic finance and halal banking terms, written for Kenya. From Mudarabah pool profit-sharing and KDIC deposit protection to faraid inheritance and the Kadhi's Courts, this glossary explains the terminology you'll encounter when comparing Islamic financial products.
Banking
- Mudarabah Pool
- The investment pool an Islamic bank forms from Mudarabah deposits. The bank, as Mudarib, deploys the pool into Shariah-compliant financing; the actual income is calculated periodically and shared between the bank and depositors per the disclosed profit-sharing ratio. Ask any Islamic bank how its pool results and depositor shares are published before opening a savings account.
- 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 Kenya, faraid applies to Muslim estates because the Law of Succession Act exempts them from its distribution rules; the Kadhi's Courts determine the shares and heirs obtain a grant of representation for legal title.
- Grant of Representation
- The court document Kenyan heirs need to administer a deceased person's estate and claim assets such as bank balances, shares, and land. Issued through the court system under the Law of Succession Act; for Muslim estates the Kadhi's Courts determine the faraid shares where parties submit to their jurisdiction. Land also needs the succession registered against the title.
- 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. Kenyan law recognizes lifetime gifts; land transfers still require normal conveyancing and registration at the land registry.
- 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 Kenya a wasiyya operates alongside the default faraid distribution, which applies to Muslim estates under the Law of Succession Act exemption.
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 Kenya, offered by Islamic banks nationwide.
- 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 Kenya, vehicle and equipment financing are the most common applications: the financier purchases the asset and leases it to the customer, often with takaful coverage bundled into the arrangement.
- 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. Kenyan Islamic banks apply it mainly as Diminishing Musharaka for home and asset financing, and in business financing partnerships.
- Musharakah Mutanaqisah
- Diminishing partnership, usually called Diminishing Musharaka in Kenya. A form of Musharakah where one partner's share decreases over time as the other buys it out. This is the dominant home financing structure at Kenyan Islamic banks: the buyer and bank co-own the property, the buyer pays rent on the bank's share, and each unit purchase 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 Kenyan Islamic banking products use the concept for safekeeping arrangements; National Bank of Kenya's Islamic window is branded National Amanah after it.
- 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
- Retakaful
- Shariah-compliant reinsurance. Takaful operators spread large risks by participating in retakaful arrangements instead of conventional reinsurance. Ask an operator about its retakaful panel as part of assessing how seriously it treats Shariah compliance across the whole risk chain.
- Takaful
- Islamic cooperative insurance. Participants contribute to a shared pool (fund) that provides mutual financial protection against loss or damage. Based on principles of cooperation, shared responsibility, and mutual benefit, unlike conventional insurance's transfer-of-risk model.
- Wakalah Model
- The takaful structure used in Kenya. Participants donate contributions into a common pool, and claims are paid from it. The operator acts as Wakeel (agent) for a disclosed Wakalah management fee rather than profiting from underwriting, and surplus after claims and expenses belongs to participants. Takaful Insurance of Africa states this structure on its product pages.
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.
Kenya Market
- CBK (Central Bank of Kenya)
- Kenya's banking regulator. The CBK licenses commercial banks, including the full Islamic banks (Gulf African Bank, Premier Bank Kenya, DIB Bank Kenya) and the conventional banks that run Islamic windows. Kenya has no separate Islamic banking law; Shariah compliance is governed by each bank's own Shariah supervisory board rather than a statutory framework.
- KDIC (Kenya Deposit Insurance Corporation)
- The statutory deposit insurer for CBK-licensed banks. KDIC protects deposits up to KES 500,000 per depositor per member institution, and the cover applies to Islamic bank deposits the same as conventional ones. SACCO deposits are not KDIC-insured; SACCOs fall under SASRA or cooperative registration instead.
- SACCO (Savings and Credit Cooperative)
- A member-owned cooperative that takes savings and provides financing to members. Shariah-compliant SACCOs such as Taqwa SACCO and Crescent Takaful Sacco replace interest-based lending with Islamic contracts like Murabaha, and eligibility is built on member savings rather than payslips. SACCO deposits are not KDIC-insured.
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.
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.
- Ushr
- The Islamic levy on agricultural produce, charged at 10% of output from naturally irrigated land and 5% from artificially irrigated land. In Kenya it is self-assessed and paid directly by the farmer alongside personal Zakat; there is no state collection.
- 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 Kenya. Each term includes a plain-language definition and context for how it applies to real products, from Mudarabah savings pools and Murabaha financing to takaful and faraid inheritance.
Key Takeaways
- 45+ Islamic finance terms defined in plain language
- Kenya-specific terms: CBK, KDIC, SASRA, IRA, CMA, RBA, SACCO, Kadhi's Courts
- 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.
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HalalWallet. “Islamic Finance Glossary: 45+ Key Terms Explained.” HalalWallet, https://www.halalwallet.co.ke/glossary. Accessed 2026-08-07.
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This page is reviewed against HalalWallet editorial standards and source documentation.
Reviewed by: HalalWallet Editorial Team
Last reviewed: 2026-03-06