Glossary of Islamic Finance Terms
Acquisition Payments: Payments on Account made to acquire a property under the Promise to purchase at a pre-agreed price. These are often equivalent to amortization in a conventional mortgage. In the aggregate, these are termed On Account Balance.
Additional Rent: Reimbursement to the Lessor of real estate taxes and casualty insurance. Such amounts may be held in escrow and segregated from the Basic Rent and Acquisition Payments to facilitate both Servicing and timely payment of obligations as well as adjustment upwards or downwards according to the Lessor’s actual payments compared to prior estimates granted to consumers.
Certificate Holder: The party holding a Trust Participation Certification by direct endorsement of the obligors or through assignment.
Consumer Beneficiary: The consumer participant in IJARA™ will benefit from a irrevocable trust formed by the IJARA™ Originator to hold the property. The consumer’s Initial Payment on Account and ongoing Payments on Account will determine the degree to which the consumer is beneficiary of the Trust.
Default: If a consumer fails to make the Monthly Payment or Rental Payment under the Lease, then the consumer will be issued a Notice of Default indicating that the consumer has failed to make its contractual payments on time. The consumer will have a specific period to cure defaults, after which the Lessor may invoke the Promise to Purchase and foreclose the consumer out of his or her beneficial interest in the property.
Financier/Financier Beneficiary: The licensed lender who closes the IJARA™ transaction will be a beneficiary of the trust established to hold title and lease the residence to the Consumer Beneficiary. The Financier Beneficiary will take the risks customary to those of a lender.
Initial Payment on Account: The equivalent to a down payment, this is the money at the closing by the consumer and may range from 3% of the cost to 20% or higher.
Late Charge: A flat charge levied in the event that the obligor under the TPC also the Lessee fails to make a scheduled Monthly Payment. The charge of $50 is meant to cover the Servicer’s average costs of collection.
Lessor: A financier as beneficiary of a trust providing property to a consumer for occupancy and eventual acquisition.
Maximum Rent: A statutory ceiling on Rent payable under the Lease.
Memorandum of Lease and Promise to Purchase: This is the recorded document giving reference to the lease and the promise to purchase, neither of which is recorded.
On-Account Payment: Also called Payments on Account, these are the equivalent of amortization. From a Sharia’a perspective, whether or not disbursed to the financier, these are considered like a savings account accreting to the value of the home to be acquired by the consumer at the Maturity of the Lease.
Partial Pre-Payment: Any On-Account Payment, not in the full amount of a scheduled Payment, which exceeds the scheduled On-Account Payment in any given period. Such payment is used to curtail or shorten the term of the On-Account accretion and thereby the Lease Maturity.
Power of Sale: This is the traditional remedy for a financier of a residence built into the Promise to Purchase. Once a consumer has received a Remedies Notice in light of his or her continued failure to meet his or her obligations, then the financier is able to fore-close the consumer out of any property rights and sell the property through this mechanism.
Pre-Payment: Any On-Account Payment, in the full amount of a scheduled Payment, which exceeds the scheduled On-Account Payment in any given period. Such payment is used to curtail or shorten the term of the On-Account accretion and thereby the Lease Maturity. Such payment may also result in an early buy-out of the Lease.
Promise to Purchase: A document enabling a consumer to buy-out a Lease of a residence at a specific price according to a schedule. The document further enables a financier to seize and sell property according to customary residential foreclosure rules.
IJARA™/ IJARAH™ Arrangements: A process to acquire a home in a lease to own concept entailing an operating lease of property, a consumer’s promise to purchase the same at an agreed price, a means to foreclose the consumer out of the property through the consumer’s failure to make payments or keep the promise, a note like negotiable instrument which conveys beneficial property ownership along with the proportionate share of the consumer’s payments according to schedule, and a lessor’s promise to sell to the consumer.
Sharia’a: Islamic rules and regulations governing how Muslims may bind and conduct themselves in their commercial, personal and spiritual affairs.
Specific Payments: Any required payments other than Monthly Payments.
Trust Participation Certificate: A negotiable document conveying beneficial ownership in a property held in a trust to an investor in a manner consistent with contemporary securitization.