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IFE End of Chapter

QuestionAnswer
1. Briefly discuss the creation of money in the world. • Barter system before money • Inconveniences of barter system led to money as medium of exchange • Creation of money led to establishment of Islamic financial institutions
2. Discuss the early establishment of commercial banking in Europe. • Started in 14th century in Florence • Became more established during Industrial Revolution
3. Which three groups of people established the original banking system in the Western world? What are their similarities to a modern bank? • Rich and reputable merchants • Money lenders • Goldsmith
4. Define Islamic finance. • Financial system based on Sharia law • Derives from Quran
5. Briefly discuss the distinctive features of Islamic finance. (8) • Religious basis- Sharia law • Prohibition of interest • Link to real assets • Bank as a partner • Profit and loss sharing • Prudent selection • Productive investment • No unnecessary/ excessive risk
6. Give a summary of economics in ancient times. • Mainly controlled by rulers/ religious leaders • Price as intrinsic value v. by supply/ demand • Private property initially owned by God • Money only a medium of exchange—no value
7. Who is Adam Smith and what is his role in modern economic thought? • Money was a factor of production • Posited concept of economic scarcity
8. Briefly describe the four classic economic models. • Market i. No gov’t intervention • Mixed-market i. Important economic sectors under gov’t control • Mixed-socialist i. Some vital sectors under gov’t control • Command i. Gov’t decides production, distribution, consumption
9. Describe Islamic economics. • Based on social and economic justice and interpretation of the Quran
10. Discuss the principles of Islamic economics. (7) • Religion and economics are intertwined • Economics/ social fairness • Property owned by creator with man as trustee • Avoid wastage • Encourage productive activities • Halal trade encouraged; haram prohibited • Share wealth with Zakat
11. What is Islam’s solution to the classic economic problem? • Man should not have unlimited wants • Man should increase resources God has provided
12. How is property ownership dealt with in Islamic economics? • Allah is ultimate property owner • All humans should access natural resources • Property can be acquired through productive activities or exchange • Islam limits accumulation of wealth and requires charity • Discourages waste
13. What is Sadaqah? • Voluntary charity
14. Discuss Zakat as a financial and social welfare tool in Islamic economics. • Takes wealth from well-to-do Muslims and gives to those in need • Rewards of Zakat are increased prosperity and purifying sins
15. Why is Zakat an important feature of the Islamic welfare society? How is it different from a conventional tax? • Important? i. Social insurance ii. Benefits neediest • How differen? i. Money used in productive endeavors is taxed only on income ii. Idle money is taxed on principal
16. Does Islamic economics agree to assign a cost to capital? • Allows for cost of capital through profit sharing • Share in both profit and loss
18. Discuss some of the achievements of Islamic finance during the early days of the Islamic civilization. • Prophet acted as an agent for wife’s trading business • Encouraged creation of trade/ business contracts • Profit sharing with trading • Development of Islamic mercantile law
19. Why is the period between the 12th century and the 20th century so meaningful for Islamic finance? What happened during this period and why? • Islamic finance gradually disappeared • Ottoman Empire fell • Western financial institutions became dominant • Colonization of Muslim world
20. Discuss the Mit Ghamr story. • First experiment in Islamic finance with farmers in Egypt • Had savings, investment, and Zakat accounts
21. What is Tabung Haji? Why is it important in the development of modern Islamic finance and banking? • Institution in Malaysia • Manage savings of Hajj pilgrims
22. What roles did the Islamic Development Bank and the Dubai Islamic Bank have in the progress of modern Islamic finance and banking? • IDB i. Foster economic development of Muslim countries • DIB i. First fully fledged commercial Islamic bank ii. Largest and most reputable Islamic bank
23. Discuss the rapid growth of modern Islamic finance and banking amongst the Muslim-majority countries. • Grown quickly since tapping an unserved market • Mainly offers Sharia compliant alternatives to Western banking products • Linked to religious movements in Muslim-majority countries after they gained independence • Islam is fastest growing religion
24. Discuss the spread of modern Islamic finance and banking in the non-Muslim countries of the world. • Western banks starting to offer Islamic banking windows or subsidiaries
25. What are the main sub-sectors within the modern Islamic finance and banking industry? • Islamic banking • Islamic insurance (Takaful) • Islamic capital markets • Islamic non-bank commercial institutions
26. Discuss the status of the modern Islamic finance and banking industry globally. • Large presence, especially in Muslim countries • Muslim population growing • Presence in Western + Asian countries growing as well
27. Walk through the timeline of the development of the modern Islamic finance and banking industry. • Commercial banking first arrives in Muslim countries with Barclays Bank Cairo in 1890s • Mit Ghamr founded in 1960s • 1970s-1990s = formative period • 1990s- now = innovation period
1. A key principle related to Islamic finance is: a. Encouragement to use Riba and loss b. Earning money from money c. Avoid hoarding d. Hoarding c- avoid hoarding
2. Which one below is not forbidden in Islamic finance and banking: a. All kinds of risk b. Hoarding of goods c. Speculative behaviour d. Making money out of money a- all kinds of risk
3. Which are correct a. Islamic finance was born in the early 7th century b. Islamic finance contracts like Mudaraba and Musharaka were in use for trade and business c. Islamic traders and ships faced frequent events of mutiny while at sea a & b
4. Western conventional banking was established by three groups of people. Which group below is not one of them? a. Rich merchants b. Goldsmiths c. Money lenders d. Land owners d- landowners
5. Islamic economics ensures: a. Socio-economic justice b. Harmony between the moral and material needs of society c. Shariah compliance in economic activities d. All of the above d- all of the above
6. Which statement below best describes this goal of Zakat? a. To finance government expenses only b. To encourage holding cash c. To encourage productive activities d. To discourage acquisition of material goods c- to encourage productive activities
7. Islamic economics differs from conventional economics a. To create public good b. To encourage profitable ventures c. To moderate profit through application of Zakat d. To control acquisition of material goods a - to create public good
8. The world’s first Islamic banking experiment happened in: a. UK b. Malaysia c. Egypt d. Bahrain c- Egypt
9. The first commercial Islamic bank of the world was set up in: a. Egypt in 1963 b. Dubai in 1975 c. Saudi Arabia in 1960 d. Malaysia in 1970 b- Dubai in 1975
10. The world’s first commercial Islamic bank was: a. Qatar Islamic Bank b. Dubai Islamic Bank c. May Bank Islamic d. Commercial Bank of Dubai b- Dubai Islamic Bank
1. Islam and trading arrived in Malaysia and Indonesia after the Europeans did true
2. Dubai Islamic Bank is the world’s first commercially successful Islamic bank true
3. Islamic mercantile law for trading and partnership was already developed before European commercial law was developed true
4. London is an important centre for Islamic banking and insurance true
5. Islamic finance began from the time of the Prophet and continued growing uninterrupted to the present. false
6. The main objective of Islamic banks is to make attractive returns for their shareholders false
7. The main objective of Islamic banks is to ensure Haram activities are not financed. false
8. The main objective of Islamic banks is to provide an alternative to interest-based finance true
9. The main objective of Islamic banks is to finance the construction of masjids false
10. The goal of Islamic economics is to ensure socio-economic justice false
11. The goal of Islamic economics is to provide freely available financing for Muslims false
12. The goal of Islamic economics is to establish harmony between the moral and material needs of society. true
13. Conventional banks base their lending criteria largely on creditworthiness and collateral. true
14. Islamic banks base their lending criteria on investment potential and managerial capability of the borrower rather than on collateral only. true
15. Hoarding of any goods is not allowed in Islamic finance. true
1. Khalid has kept £2 million in his savings account. profit at an average rate of 6%. Sara invested £2 million in a bakery business. She earned £150,000 last year and took £60,000 as her annual salary to manage the business. Zakat? Khalid= 0.025 x (1.06)2,000,000 = 53,000 Sara= 0.025 (90,000) = 2,200 Zakat applies on money kept in banks and money earned after expense. This encourages productive activity for those who wish to pay less money in Zakat.
Amna has kept her AED1 million in her savings account @ 3% profit. . Mariam invested her AED1 million earned AED70,000 in the first year. Mariam and her friend kept AED30,000 each as their annual management salary and split the rest as their profit. Amna= 0.025 x (1.03)1,000,000 = 25,750 AED Mariam= (70,000 – 60,000) = 10,000/2 = 5,000 x 0.025 = 125 AED
1. Define Shariah. • Islamic law • Comprehensive code of conduct for life given by God
2. What are the two types of Shariah rulings? Discuss both. • Obligatory i. Wajib- mandatory ii. Mustahabb- recommended iii. Mandoub/ Mubah - netural iv. Makruh- discouraged v. Haram- forbidden • Declaratory i. Make it easy to implement obligatory rulings
3. What does Maslahah mean in Shariah? What are the categories of Maslahah? • Maslahah = best interest of the public • Categories i. Daruriyyat - essential ii. Hajiyyat – complementary iii. Tahsiniyyat – luxuries
4. Categorize the primary and secondary sources of Shariah. • Primary i. Quran ii. Sunnah (acts, sayings, practices of the prophet) • Secondary i. Ijma (jurists applying Quran to contemporary situations) ii. Qiyas (analogical deductions)
5. What are the three ways of expanding the Shariah law? • Ijtihad—independent interpretation by a scholar to expand Sharia to situations not covered before • Ikhtiyar—choosing from past views • Dururah—some relaxation in rules may be considered if it is a necessity
6. Briefly explain what Qiyas and Ijma mean. • Qiyas- applying an old ruling to a new matter with similar characteristics • Ijma- Jurists debating and providing opinions on Sharia issues not yet covered – means community CONSENSUS on a matter of law
7. Discuss the schools of Islamic jurisprudence. • Sunni i. Maliki ii. Hambali iii. Shafi iv. Hanafi • Shiite i. Jaafari
8. How important is ethics in Shariah-compliant business and finance? Discuss. • Inherently ethical since based on religious doctrines • Essential to Islamic finance
9. What are the three main prohibitions in Islamic finance? Briefly explain each. • Prohibition of interest/ Riba i. Money is just a medium of exchange • Prohibition of uncertain dealings/ Gharar i. Unnecessary risk/ uncertainty • Prohibition of speculation/ Maysir i. Games of chance
10. What are the two types of Riba transactions described in the Quran and the Sunnah? • Riba al Nasiah i. Main type of Riba ii. Interest • Riba al Fadl i. Exchanging smaller amount of superior quality with larger amount of inferior quality
11. Describe each with an example. What are the main differences between them? • Riba al Nasiah o Interest on a loan • Riba al Fadl o Exchanging 2 superior dates for 3 inferior dates
12. What are the criticism directed towards Riba by Islamic jurists and economists? • Borrower pays lender irrespective of success of underlying economic activity, even if the borrower experiences a loss • Lender is paid fixed interest • Allocation of interest is inefficient since it is linked to creditworthiness and not productivity
13. What is Gharar? Give two examples of Gharar in a financial contract. • Taking excessive risk/ uncertainty • Examples i. Sale of crop of field that has not yet been cultivated ii. Selling a car without revealing specifications
14. What is Maysir? Why is it a prohibition in Shariah law? Give a contemporary example of something that constitutes Maysir. • All kinds of games of chance where one could gain or lose significantly • Example i. All kinds of gambling
15. Identify three sources of making gains that would not be permissible in Islamic finance. • Interest on loans • Future contracts • Poker
16. Discuss any four principles of Shariah besides the three main prohibitions. • Only halal assets • Original permissibility • Relieving of hardship > providing benefit • Removing extreme hardship
17. Briefly discuss the differences between Shariah law and Western contemporary law. • Sharia law is completely religion based • Sharia law is not country specific • Sharia law has less global uniformity
18. What is a Shariah Supervisory Board? • Body with a group of Sharia scholars that assist IFIs in operating in accordance with Islamic law • Advisory body and has authority over BOD
19. Discuss the formation of the Shariah Supervisory Board. • Shareholders appoint members • BOD and management set up strategic goals
20. What is the status of the Shariah Supervisory Board within an Islamic financial institution? • Varies- some have in-house SSB, others have central bank SSB
21. What kind of conflicts can the Shariah Supervisory Board be involved in? • Between SSB members • Between BOD and SSB • Between management and SSB
22. Define the supervisory and advisory role of the Shariah Supervisory Board. • Supervisory i. IFI set up supervision ii. Day-to-day IFI supervision iii. Annual supervision • Advisory i. Provide guidance on Sharia issues ii. Clarify new developments iii. Maintain documentation
23. Discuss in detail the supervisory function served by the Shariah Supervisory Board. - set up stage (5) i. Set up IFI ii. Put SSB in company documents iii. Develop policies/ services iv. Review promotional material/ IT structure v. Initial Sharia training
23. Discuss in detail the supervisory function served by the Shariah Supervisory Board. - day to day (4) i. Supervise daily activities ii. Approve products, investments, projects iii. Manage charity iv. Sharia documentation
23. Discuss in detail the supervisory function served by the Shariah Supervisory Board. - day to day (2) i. Sharia audit + report ii. Sharia governance review
24. What kind of advisory functions does the Shariah Supervisory Board have? • Guidance on Sharia issues • Advise BOD/ management on Sharia issues • R&D • Seminars/ trainings • Communication with Sharia scholars • Study fatwa • Clarify Sharia rulings • Document ruling process
25. What is corporate governance? • Set of rules, laws, and policies by which a corporation is managed to safeguard the best interests of stakeholders
26. How similar or different is corporate governance from Shariah governance? • Sharia governance includes all the aspects of corporate governance and goes above and beyond to ensure religious accountability
27. Briefly discuss the Shariah governance process. • Appointment of SSB members • Coordination between SSB and IFI • External and internal Sharia audits • Sharia reports/ certificates
1. Which one below is not correct about Shariah law? a. Sharia law is given by Allah b. Sharia law is updated every 30 years c. The same Sharia law apply d. The Muslim population can derive rules but cannot create new law b. Sharia law is updated every 30 years
2. Which one below is not a method of elaborating Shariah law? a. Ijtihad b. Qiyas c. Dururah d. Ikhtiyar b. Qiyas
3. The three methods of elaborating Shariah law are: a. Quran, Sunnah and Ijtihad b. Ijtihad, Ikhtiyar and Dururah c. Ikhtiyar, Ijtihad and Qiyas d. Ijma, Qiyas and Dururah b. Ijtihad, Ikhtiyar and Dururah
4. Which one below is not a source of Shariah law? a. Quran b. Sunnah c. Ijma d. Shariah lawyer d- Shariah lawyer
5. The sources of Shariah are in the order: a. Quran, Sunnah, Qiyas, Qanoon b. Quran, Sunnah, Ijma, Qiyas c. Quran, Sunnah, Ijma, Ikhtiyar d. Quran, Sunnah, Qanoon, Ikhtiyar b. Quran, Sunnah, Ijma, Qiyas
6. Which principle listed below is not one of the key principles related to Islamic finance? a. Prohibition of Riba b. Prohibition of earning money from money c. Prohibition of profit d. Prohibition of Maysir c. Prohibition of profit
7. The Shariah rules expand over time through different methods. Which of the following means independent interpretation by an Islamic legal scholar? a. Ijma b. Ijtihad c. Qiyas d. Maysir b. Ijtihad
8. The Shariah rules expand over time through different methods. Which of the following is not one of these methods? a. Ijma b. Ijtihad c. Qiyas d. Murabaha d. Murabaha
9. The Shariah rules expand over time through different methods. Which of the following means reasoning by analogy by a single Islamic scholar? a. Ijma b. Ijtihad c. Qiyas d. Maysir c. Qiyas
10. The Shariah rules expand over time through different methods. Which of the following means consensus (agreement) by several Islamic scholars? a. Ijma b. Ijtihad c. Qiyas d. Maysir a. Ijma
11. Islamic finance prohibits the sale of undeliverable goods or goods without a specified price. This transparency in contracts is also known as prohibition of: a. Gharar b. Maysir c. Riba d. Ijara a. Gharar
12. Which principle listed below is one of the key principles related to Islamic finance and banking? a. Prohibition of profit b. Prohibition of Gharar c. Prohibition of Shariah Supervisory Board d. Prohibition of public good b. Prohibition of Gharar
13. Which of the following principles apply to Islamic banking and finance? a. Prohibition of speculative behaviour b. Only Shariah-approved activities are permissible c. Prohibition of all profit making d. Both a and b d. Both a and b
14. One of the key principles related to Islamic finance is: a. To encourage the use of Riba and Gharar b. To earn money from money c. To avoid hoarding d. Hoarding c. To avoid hoarding
15. Unlawful earnings a. Excessive gains in business transactions and undue profits b. Excessive commissions and service charges by some banks and financial institutions c. Exploitation of a seller’s distress while buying their property d- all of the above
16. What is the main challenge for SSB/main area for future development? a. Increase competitiveness of Islamic banks b. Staff SBBs with scholars who also know finance c. Promote Islamic banking d. Ensure Shariah-compliant regulations b- find finance savvy SSB scholars
17. The Shariah Supervisory Board is compulsory in all Islamic banks to: a. Ensure the bank is profitable b. Hire staff qualified in Islamic finance c. Help the Islamic bank compete d. Ensure all bank transactions comply with Shariah d. Ensure all bank transactions comply with Shariah
a. SSB audits the final transactions of the bank for Shariah compliance b. SSB audits all transactions of the bank for Shariah compliance c. SSB audits all transactions of the bank for charity d. SSB audits only doubtful transactions b. SSB audits all transactions of the bank for Shariah compliance, thus ensuring the bank’s profit is permissible
19. As the Islamic finance and banking industry grows, the Shariah Supervisory Board needs to help develop new innovative and competitive products, so the role of the SSB in this regard would be to: a. Review new products and services proposed by management for Shariah compliance and suggest any modifications if necessary
20. The Islamic banks must follow Shariah requirements and also follow the regulations of the central bank at the same time. Which statement below best describes the role of the Sharia Supervisory Board in this regard? a. SSB reviews regulations provided by the central bank and seeks exemptions or suggests alternatives if these regulations are contrary to Shariah
21. The most suitable scholar to be appointed to an SSB would be: a. both quantitative and qualitative skills b. has extensive work experience in the finance c. knows Shariah and is also familiar with finance d. has worked as a Shariah lawyer c. A person who has in-depth knowledge of Shariah and is also familiar with finance and banking
22. Not a function? a. Ensure Shariah-compliant b. To provide day-to-day consultations and advice to the IFI on Shariah issues c. To review investments made by the IFI d. To review the salaries and bonuses of the management of the IFI d. To review the salaries and bonuses of the management of the IFI
23. Which one below is not a problem related to the Shariah Supervisory Board? c. Shariah scholars use various sources like the Quran, Sunnah, Ijma and Qiyas
24. Which of the below is a major responsibility of the Shariah Supervisory Board? b. To ensure that the bank’s products and services comply with Shariah principles
25. The SSB a. Consists of scholars from finance and banking disciplines b. Consists of scholars qualified from recognized Shariah institutions c. Is a department within the conventional bank d. Is a department within the central bank b. Consists of scholars qualified from recognized Shariah institutions
1. Under central bank supervision an Islamic bank can operate without a Sharia Supervisory Board. true
2. Riba or interest is not prohibited when it is small and simple, but only when it is large and compound. false
3. Riba is the increase, addition, expansion or growth of the loan amount true
4. Riba is any uncertainty or ambiguity. false
5. Gharar is uncertainty or ambiguity. true
6. Gharar is the sale of items whose existence or characteristics are certain. false
7. Gharar is the sale of undeliverable goods, or those without a specified price. true
8. Gharar is all parties in the contract knowing all conditions. false
9. Gharar Fahish is tolerated and Gharar Yasir is prohibited in Islamic finance false
10. A lottery ticket is an example of Maysir. true
11. Maysir is the sale of probable items whose existence or characteristics are not certain. false
12. Maysir is the premium paid by the borrower to the lender along with the principal amount for the loan or for its extension. false
13. Maysir is all kinds of gambling or games of chance. true
14. Maysir is a risk taken to win without any productive activity involved and has the possibility of losing true
15. The Shariah Supervisory Board ensures compliance of transactions to Shariah law. true
16. The Shariah Supervisory Board makes sure that the bank chooses the most profitable investments false
1. Define Islamic banking. • Provides commercial banking services in a Sharia framework • No Riba—replaced with profit and loss sharing
2. What are the core objectives of an Islamic bank? (8) • Offer Sharia compliant financial services • Halal only activities • No Riba, Gharar, Maysir • Back every transaction with real assets • Give value to human efforts • Allocate resources efficiently • Encourage savers to invest • Act ethically
3. Discuss the similarities between a conventional and an Islamic bank. i. Commercial entities matching surplus people with borrowers ii. Offer current accounts iii. Offer accounts where depositors can leave money for a fixed period and earn interest iv. Use interbank market for liquidity management
4. Describe the relationship of banks with the central bank. • Central bank = supervisor, clearing house, lender of last resort
5. What are the generic risks faced by all banks? Briefly explain each. (8) • Liquidity/ funding risk • Excess liquidity • Default/ credit risk • Market price risk • Operational risk • Interest rate risk • Currency exchange risk • Settlement risk
6. Discuss the risks specific to Islamic banks. (7) • Sharia compliance • Default • Moral hazard • Adverse selection • Equity investment • Higher costs
7. Compare ‘risk sharing’ in Islamic banking versus conventional banking. • Conventional banks transfer risk from the depositors/ banks to the borrowers • Islamic banks share risk between depositors, bank, borrowers
8. Define financial intermediation in modern banking and why it is important. • Process by which banks match savers with borrowers • Banks are the trusted intermediary • Banks earn margin from difference between what they charge borrowers and what they pay savers
9. What is financial intermediation in conventional banks? • Collects deposits at a fixed interest rate • Charge borrowers a higher interest rate • Banks take liquidity and credit risk
10. Explain financial intermediation in Islamic banks. • Interest is replaced with profit and loss sharing • Mudaraba based ii. Rab al maal provides money iii. Mudarib provides effort • Money must be applied to productive assets • Financing is either asset-backed or participation
11. What financial intermediation models can an Islamic bank use? (3) • 2-tier Mudaraba i. Depositors as rab al maal, bank as mudarib ii. Bank as rab al maal, entrepreneurs as mudarib • 2 windows model i. 2-tier model w/ RR 1. 100% for demand 2. 0% for investment • Wakala i. Bank manages funds with a fixed fee
12. How do Islamic banks smooth out the profits given to depositors? Why is this important? • PER i. High profit years, amount is moved to reserve before distributions to shareholders or investment account holders • IRR i. Amount moved after bank takes out income as Mudarib ii. Deposited to investment account holders
13. Conventional banks are also participating in Islamic finance and banking. What are the different distribution options used by them? • Windows = within existing distribution channels but separate windows • Branches = dedicated branches • Subsidiaries = separate legal entity
15. Discuss the main sources of funds for Islamic banks. (3) • Current accts i. Can withdraw at any time ii. Amanah (trust) or Wadia (deposit) • Savings accts ii. Bear some risk and receive some profit • Investment accts i. Mudaraba ii. Applied to profit/ loss ventures iii. No guarantee
16. What are the common applications of funds of an Islamic bank? • Short term i. Murabaha ii. Salam • Medium term i. Ijara ii. Istisna • Long term i. Mudaraba ii. Musharaka
Which products are deferred exchange contracts, and which are equity-based products? • Deferred exchange (debt-like financing) i. Murabaha ii. Salam iii. Istina iv. Ijara • Equity based i. Mudaraba ii. Musharaka
17. What are the requirements of a valid Shariah-compliant contract? (8) • Parties consent • Adults/ mentally sound • Acceptable Sharia subject matter • Item of exchange should exist and seller should own • No riba, gharar, maysir • Linked to real asset • Offer + acceptance • Transfer of ownership follows exchange
18. Briefly discuss a few unilateral contracts used in Shariah-compliant commerce. (5) • Wad = unilateral promise • Hiba = gift • Waqf = charitable endowment • Qard hasan. = benevolent loan • Wassiyyat = will
19. Describe examples of bilateral Shariah-compliant contracts. (5) • Muawadat = contracts of exchange • Shirkah = contracts of partnership • Dhamanah = contracts of security • Wakala = contracts of agency • Wadia = contracts of deposit/ safe custody
20. Discuss the common exchange contracts used in Islamic finance and banking. (9) • Murabaha • Salam • Sarf • Rahn • Istisna • Musawama • Arbun • Khalafa • Hawala
21. What is the Shariah position on buying and selling of foreign exchange, especially forward transactions? • Future trading is not permitted • Trading of currency must be done via Sarf
22. Discuss common retail and corporate products and services offered by an Islamic bank. • Retail: i. Current, savings, investment accounts ii. Credit cards iii. Home financing • Corporate: i. Trade finance 1. Letters of credit 2. Bills of exchange 3. Banker’s exchange 4. Banker’s guarantee ii. Project finance iii. Syndication
23. Why is it important to develop Islamic financial accounting procedures? • Islam emphasizes transparency/ accountability • Necessary in global business • Growth of Islamic finance/ banking necessitates • Islamic banking is distinct from conventional banking and needs distinct accounting
24. What are the objectives of Islamic financial accounting? (6) • Consider uniqueness of IFIs • Measure financial information accurately/ fairly • Transparency • Growth of sector requires accounting • Give standardized information to shareholders • Ensure Sharia compliance
25. Describe the features of Islamic financial accounting. (6) • Same framework as conventional with Sharia compliance modifications • Double entry method • Sharia compliance clearly applied • Unique products recognized • Generated for internal + external users • Includes calculation + application of Zakat
26. Standardization in Islamic banking is required to reduce confusion. Briefly discuss any one confusion. • Confusion over how to deal with Islamic specific products like Murabaha/ sukuk
27. Discuss the challenges faced by Islamic banks today. (9) • Profit and loss system • Sharia scholar confusion • Multi-skilled Sharia scholars • Global auditing • Tax • Default • Regulation • Employees • Partnership structure
28. How did Islamic banking fare during the financial crisis of 2007–2008? held up well
29. List the most important international Islamic regulatory and standard setting bodies. (10) - AAOFI - IFSB - LMC - IILM - IIFM - IIRA -CIBAFI -IICRCA -IDB -International Fiqh Academy
30. Discuss the AAOIFI and its main functions. • Standard setting bodies for IFIs • Clearly identify accounting items • Ensure reasonable returns/ Zakat • Review standards • Ensure consistent Sharia rulings • Encourage ethical practices
31. Discuss the IFSB and its main functions. • Capital adequacy requirements • Standard setting body
32. Briefly describe the LMC, IILM, IIFM and IIRA. • LMC/ IILFM i. Provide liquidity in interbank market ii. Sharia compliant liquidity • IIFM i. Standards for capital market • IIRA i. Ratings like Moody’s/ S&P for Islamic products
33. What roles do CIBAFI and IICRCA play in Islamic finance and banking? • CIBAFI i. Represent Islamic finance globally ii. Like a bankers’ association • IICRCA i. Mediation for Islamic financial/ commercial disputes
34. Discuss the IDB and its main functions. • Promote Islamic economics and finance • Islamic version of world bank
35. What is the International Islamic Fiqh Academy? • Final ruler on Sharia issues • Most important institution
36. How does the FSA in the UK deal with Islamic banks? (5 issues) i. FSA is not a religious body ii. Unsure how to deal with unique instruments like Sukuks iii. Loss from investment accounts iv. Conflicts of interest from PER/ IRR reserves v. Sharia compliance issues
1. Which of the following principles applies to Islamic banking and finance? a. Prohibition of speculative behaviour b. Only Sharia-approved activities are permissible c. All profit-making is impermissible d. a and b d- a and b
2. Islamic banks: a. Pay interest to their depositors b. Charge interest to their lenders c. Do not provide financing without collateral d. Base their investing criteria on the investment potential of the project and not just on collateral d. Base their investing criteria on the investment potential of the project and not just on collateral
3. Which of the following is a characteristic that differentiates Islamic banks a. The absence of interest in all financial dealings b. Making profit from trade c. Allocation of funds to areas that benefit society d. Provide home financing a. The absence of interest in all financial dealings
4. Islamic banks: a. Base their investment decisions entirely on the collateral submitted by the client b. Base decisions on the investment potential of the project c. May accept interest on their liabilities but donate it to charity b. Base their investment decisions on the investment potential of the project and not just on collateral
5. Applying Islamic finance principles means: a. Islamic banks cannot provide lines of credit that bear interest b. Islamic banks can make money out of money c. No restriction on speculative behaviour d. Avoiding all kinds of risks a. Islamic banks cannot provide lines of credit that bear interest
6. The main objective of Islamic banks is to: a. Provide funds for Muslims b. Make maximum profits for shareholders c. Finance building of Masjids and other Muslim religious institutions d. Provide an alternative to interest-based banking d. Provide an alternative to interest-based banking
7. The main objective of Islamic banks is to: a. Ensure Halal activities are not financed b. Finance the building of Islamic schools c. Provide Riba-free banking products and services d. Develop the retail and consumer banking in Muslim countries c. Provide Riba-free banking products and services
8. Which statement below does not apply a. Does not charge interest on funds given as loans b. Does not pay interest to its depositors c. Provides collateral-free loans to Muslims only d. Ensures no Haram business activity is financed c. Provides collateral-free loans to Muslims only
9. Which of the following is true? a. Selling money for money is ok b. Any profits made are not ok c. A deferred sale at a price higher than the cost is not permitted d. A deferred sale at a price higher than the cost is permitted d. A deferred sale at a price higher than the cost is permitted
10. The main Islamic banking products are: a. Musharaka, Mudaraba and Murabaha b. Ijara and Istisna c. Salam d. All of the above d- all of the above
11. An Islamic bank is a business, and so must make profit. Which of the statements below best explains the mechanism by which the Islamic bank earns profit? c. The Islamic bank finances various needs of customers, linked to assets, on the basis of sale, leasing or partnership and earns a share of the profit from the transaction
12. Not a contract requirement? a. Assets need to be in existence b. Sales profit should be reasonable c. Owner should own the asset d. Asset should be in physical or constructive possession of owner b. Sales profit should be reasonable
13. Abdulla agrees to sell his house to Ahmed at the market price. Is the sale valid under Islamic finance? d. No, the sale is not valid because the specific price has to be stated under the Islamic finance contract requirements
14. Rafe took a loan of £10,000 from Helen for a small business. The business incurred a loss and the capital reduced to £5,000. Can Rafe ask Helen to share in the loss? Which statement below is the best answer? b. Yes, because in Islamic finance two parties always share the profit and loss because it is just and fair. Rafe does not have to pay the full amount to Helen
15. In Badr’s grocery store there is surplus flour currently. He decides not to sell it now and to do so in the future, when there is a deficit of flour. Is this transaction acceptable under the principles of Islamic economics? Why? c. No, because Badr is hoarding food, and hoarding food and other necessities is unlawful under Islamic economics
16. Noor purchased 1,000 bags of sugar from Islamic Bank on credit. While transporting the bags to her factory, the sugar was destroyed by heavy rains. Choose the statement that correctly explains who bears the loss. d. Islamic Bank bears the loss because the heavy rains were an act of God and nature, and there was no insurance in place to cover the loss of the goods
17.which one below is not an aspect of the relationship between central banks and Islamic banks? a. Lender of last resort b. Supervisor regarding monetary policy c. Shariah supervisory d. Clearing house c. Shariah supervisory
18. Which international IFI is based in Dubai? a. LMC b. IFSB c. IICRCA d. GCIBFI c. IICRCA
19. The key function of the IIFM is to: a. Create an interbank money market b. Set up accounting standards c. Mediate in IFI disputes d. Develop, regulate and promote Islamic capital and money markets d. Develop, regulate and promote Islamic capital and money markets
The creditor–debtor relationship does not apply to Islamic banking. true
Islamic banks use a high level of expertise and technical know-how to evaluate and monitor financing projects to ensure profitable use of funds. true
Islamic banking transactions have to be based on tangible assets and not on intangible assets. false
4. Conventional banks and Islamic banks cooperate on various issues true
5. Compared with conventional banks, Islamic banks take more risk. true
6. Under central bank supervision in Muslim-majority countries an Islamic bank can operate without a Sharia Supervisory Board. false
1. What are the three requirements of a Shariah-compliant sales contract? • Item already exists • Seller owns item • Item is in physical/ constructive possession of seller
2. Define Musawama. • Bargain sale • Buyer/ seller agree on price without any reference to cost • Buyer can bargain on price • Ex: buying something from a shop
3. What does a Murabaha contract mean? • Trust sale • Sales contract where profit is made by selling at a cost-plus basis • Bank purchases an item at the request of the customer and adds a pre-agreed profit to it and sells it back to the customer
4. What are the types of Murabaha contract? Describe them all. • Ordinary Murabaha i. Client asks bank to acquire an asset without any promise they will buy it back • Murabaha with a promise i. Client makes a promise to buy the item once the bank acquires it
5. Which kind of Murabaha contract is more commonly used by the banks? Why? • Murabaha with a promise • Less risky
7. How is the Murabaha profit calculated? • Either a lump sum amount or a fixed percent on cost
8. Describe the process for ordinary Murabaha. • Client asks bank to purchase an item • Bank sources item, buys it, and assumes all risks • Bank makes formal offer to buyer • Buyer has OPTION to take the bank up on offer and buy the item
10. Discuss some practical applications of the Murabaha contract in modern Islamic banking. (5) • Retail finance • Working capital financing • Medium- and long-term business financing • Syndicated loans • Trade finance
Discuss the process of trade finance with Murabaha (6) i. Importer asks Islamic bank to open LoC ii. Bank opens LoC and sends to exporter + bank iii. Murabaha w prom bt Islamic bank and importer iv. E ships goods and e bank sends docs to IFI v. IFI k confirms ownership vi. I pays in Murabaha contract
11. What is Tawarruq? • Reverse Murabaha • Client purchases an item from a seller via an Islamic bank • Islamic bank sells the item to 3rd party spot • Client imm raises money and pays bank
Discuss the controversy related to Tawarruq • Controversial because i. Transaction not linked to any real economic activity ii. Very similar to Riba
14. Bank and the client are both aware of the sales price to the client and agree, but the cost of the car to the client is not disclosed and is known only to the bank and the car dealer. Does this transaction meet the requirements of a valid Murabaha • Client must know the cost of the asset, so it is not a valid Murabaha contract
1. Which one below is not a Shariah requirement for Murabaha? a. Existence of the asset b. Existence of a sales contract c. Sales price to be specified later d. Sales is on deferred payment c. Sales price to be specified later
2. Murabaha is executed when: a. Money is sold for money b. A good or service is sold for money c. A commodity is sold for a commodity d. A commodity is sold for a service b. A good or service is sold for money
3. Which restriction below is not applicable for Murabaha: a. No rollover is allowed b. No late penalty can be paid to the bank for its income c. No price renegotiation is allowed d. No profit can be charged on the asset sold by the bank d. No profit can be charged on the asset sold by the bank
4. Tangible and non-tangible goods subject to Murabaha must be: a. Halal b. Real c. Have commercial value d. All of the above d. All of the above
a. Murabaha is a sale of items at a price including cost of purchase minus profit margin, agreed b. Murabaha is a sale of items at a price including cost of purchase plus profit margin, agreed c. Murabaha is rent d. Murabaha is a loan b. Murabaha is a sale of items at a price including cost of purchase plus profit margin, mutually agreed by buyer and seller
6. A Murabaha transaction is considered as Shariah compliant if: a. tangible/ intangible goods b.aware of the original cost of the goods and add. costs incurred c. profit on the goods is agreed at the beginning of the contract d- all of the above
7. If the buyer defaults: a. The bank can renegotiate the price b. The bank can charge late payment fees c. The buyer pays a penalty that is donated to charity d. The bank can do nothing c. The buyer pays a penalty that is donated to charity
8.car, priced at QAR100,000 with a Murabaha contract from Q Bank. The bank’s required markup is 5%. How much will Eman pay each month if the total repayment period is 5 years? a. QAR2,500 b. QAR1,750 c. QAR1,500 d. QAR1,250 b. QAR1,750 = 1.05(100,000) / (12 x 5) = 1750
9. A customer needs financing to purchase a machine for their factory and plans to use a Murabaha. Which structure below appears most accurate? b. A Murabaha is structured between the Islamic bank, the manufacturer of the machine and the customer, creating two sales contracts: one where the manufacturer sells to the bank and the second where the bank sells to the customer
10. A corporation contracted with an Islamic bank using the Murabaha contract to purchase a fleet of trucks from a manufacturer. Is it allowed for the corporation to take delivery of the trucks directly from the manufacturer? a. Allowed, if legal title to the trucks passes to the bank prior to delivery to the corporation
Musawama and Ijara are two types of Murabaha. false
Murabaha is usually a deferred credit sale true
3. Murabaha profit is mutually agreed between bank and client.= true
. The bank acts as a middleman in Murabaha true
5. In Murabaha, the client is informed of the cost of the asset, the markup is not required to be disclosed. false
6. In Murabaha, the price of goods is decided later. false
purchase a house costing IDR2 million on a Murabaha basis from Indonesia Islamic Bank. All other indirect costs of acquiring the property are IDR50,000. The bank agreed on a reasonable profit rate of 8%. The repayment will be made monthly over 20 years Total cost = 1.08(2,000,000) + 50,000 = 2,210,000 Total months = 20 x 12 = 240 Total price = 2,210,000 Cost per month = 2,210,000/ 240 = 9208.3
2. car priced at PKR360,000. She wants to finance the car w/ Murab aha.The bank’s required profit markup is 3.5% per annum for 5 years. Total cost? How much will the monthly payment on this Murabaha auto-financing be? Total cost w/ markup = 1.035(360,000) = 372,600 Cost per month = 372,600/ (5 x 12) = 6210
Core differences between conventional economics and Islamic economics? (9) 1. ownership of wealth 2. wants and resources 3. accumulation of wealth 4. market economy 5. role of the state 6. inheritance 7. economic cycles 8. reward for capital 9. social welfare
Differences between conventional banks and islamic banks? (11) 1.risk taking 2. economic v. social forces 3. price of money 4. profit/ loss sharing 5.deposit guarantee 6. income link 7. asset link 8. size of banks 9. bank/ client relationship 10. default pmt 11. restrictions
contrast conventional financial intermediation to islamic financial intermediation (7) 1. religious requirement 2. social/ ethical responsibility 3.fiduciary responsibility 4. project selection 5. terms of financing 6. monitoring 7. leverage v. risk sharing
10 murabaha conditions 1. halal 2. identify costs 3. identify markup 4. 3rd party seller 5. inform defects 6. immediate delivery 7. spot/ deferred repayment 8. penalty for delay 9. client can make advanced pmt 10. promise to buy
process for murabaha with promise 1. client asks bank to purchase item 2. bank sources/ negotiates cost/ markup 3. client promises to buy 4.bank purchases/ gives wakala 5. sales contract/ murabaha executed 6. bank has ownership & delivers 7. client accepts murabaha + ownership +pays
challenges/ problems of murabaha -markup appears like interest/ based on LIBOR -risk of murabaha w/o promise -ownership risk for bank -cannot rollover & dishonest clients can delay -more expensive bc/ double taxation + capital gain -cannot be securitized
compare murabaha to conventional loan (9) 1.type of contract 2.product description 3. repayment 4. relationship of bank + asset 5. profit margin 6. risk related to asset 7.extensions 8. early pmt discount 9.in case of default
1. Define a Mudaraba contract. • Equity based trust financing • One party provides entire capital (Rab al maal) • One party provides time/ effort (Mudarib)
2. How is Mudaraba used in Islamic financial intermediation? v=• Used on both asset and liability side • Source and deposit funds on Mudaraba basis
3. Describe the characteristics of a Mudaraba agreement. Why is it called a silent partnership? • Rab al maal not involved in actual management of business (silent partner) while Mudarib is the managing partner • Capital invested is called Ras al maal • Agree to profit sharing ratio
4. What are the liabilities of the Rab Al Maal and the Mudarib in case of loss? Are there any exceptions? • Rab al maal liable for financial loss up to capital contribution • Mudarib only loses time and effort unless loss due to fraud, negligence, or conditional violation
5. Discuss the process of profit calculation in case of a Mudaraba contract. • Bank aggregates profit from applying depositor funds to projects • Bank bears loss as Rab al maal and if the entire bank loses depositors lose money • Profit cannot be fixed amount or fixed percent as capital—must be % of profit
6. What PROVISIONS are related to the Mudaraba contract used by the Islamic banks? What are their importance? • Provisions i. Doubtful accounts, investment decline
6. What RESERVE FUNDS are related to the Mudaraba contract used by the Islamic banks? What are their importance? • Reserve funds i. PER 1. Maintain level of return for investment account holders 2. Before allocating money to Mudarib ii. IRR 1. After allocating money to Mudarib 2. Protect investment account holders from future losses
7. Why is Mudaraba called a limited recourse debt finance? • Rab al maal has first claim to cash flows until original capital is recovered • Limited bc/ only applies to project cash flows not other Mudarib assets • Debt investment until break even --> equity investment + profits shared
8. Describe in detail a two-tier Mudaraba structure. • Replaces interest-based banking • Tier one: depositors as Rab al maal, bank as Mudarib • Tier two: bank as Rab al maal, entrepreneurs as Mudarib
9. Describe the restricted Mudaraba. What is the Arabic name for it? • Mudaraba al Muqayyadah • Rab al maal provides certain restrictions for use of capital • Applied for restricted investment accounts
10. Describe the unrestricted Mudaraba? What is the Arabic name for it? • Mudaraba al Mutlaqah • Mudarib has complete authority to pick use of funds • Applied for unrestricted investment accounts
11. What is the difference between restricted and unrestricted Mudaraba? • In restricted Mudaraba, Mudaribs are limited in their projects by the Rab al maal • In unrestricted, the Rab al maal provides no limitations
12. What are the types of Mudaraba when classified based on the operational perspective? (3) • Bilateral/ simple i. 2 parties: Rab al maal and Mudarib • Multilateral i. Several capital providers for 1 Mudarib • Two-tier/ re- i. First contract w/ Mudarib and Rab al maal ii. Mudarib becomes Rab al maal to a new Mudarib in second contract
13. Discuss the main Shariah conditions related to Mudaraba identified by the Shariah scholar Muhammad Taqi Usmani. (6) - capital known - profit sharing at pre-agreed ratio - Rab al Maal bears loss -Some restrictions -Security only for negligence -termination
14. Discuss all the conditions related to the Mudaraba contract. (6) -limited liability of both parties -mudarib cannot transfer responsibility/ mix funds -IFI pool profits -reserves for income smoothing -bank depositors can lose -ordinary v. capital loss
Ordinary v. capital loss i. Ordinary = arises in business activity & can be offset against reserves ii. Capital = loss of funds before venture & requires renegotiation
15. What challenges and problems does the Mudaraba contract face in Islamic banking? (4) • High risk bc/ Rab al maal must trust Mudarib • Difficult to apply on demand side • Limited legal protection for rab al maal • Borrowers want to be equity, bank want to be debt
16. What are the key applications of the Mudaraba contract in current Islamic banking? • IFI financial intermediation • Venture capital, project finance, unit/ real estate investment trusts
17. Compare the Mudaraba contract with interest-based conventional banking. • For Mudaraba contracts, what bank earns in spread is related to success of business activity, not fixed as in conventional banking • IFI depositor income also linked to real economy
1. Loss of capital prior to commencement of the Mudaraba venture is called: a. Operating loss b. Capital loss c. Business loss d. Non-operating loss b- capital loss
2. Mudaraba profit is arrived at after: a. All costs are deducted b. Direct costs are deducted c. All capital is recovered d. All of the above a- all costs are deducted
3. Which relationship does not fit with a Mudaraba? a. Between investment account holders as Mudarib and the bank as Rab al Maal
4. Rab al Maal in a Mudaraba contract is the: a. Working partner b. Sleeping partner c. Sharia scholar d. Seller of assets b. Sleeping partner
5. Mudarib in a Mudaraba contract is the: a. Sleeping partner b. Working partner c. Sharia scholar d. Buyer of assets b. Working partner
6. A Mudaraba contract is also called a: a. Full partnership b. Silent partnership c. Corporation d. Sole proprietorship b. Silent partnership
7. In Mudaraba the Rab al Maal provides: a. The entire capital for the project b. Part of the capital for the project c. Only time and effort for the project d. No capital for the project a. The entire capital for the project
8. In Mudaraba the Mudarib provides: a. Total time and effort for the project b. Part of the time and effort for the project c. Part of the capital for the project d. The entire capital for the project a. Total time and effort for the project
9. Profits in the Mudaraba contract are shared: a. In a ratio of 50:50 b. In a pre-agreed ratio c. In a ratio varying from year to year depending on the profits d. All profits to the capital provider b. In a pre-agreed ratio
10. Financial losses in the Mudaraba contract are always: a. Shared in a ratio of 50:50 b. Shared in a pre-agreed ratio c. Borne entirely by the Rab al Maal d. Borne entirely by the Mudarib c. Borne entirely by the Rab al Maal
11. The liability of the Mudarib is limited to: a. All financial losses b. All time and effort contributed c. Part of the time and effort contributed d. No liability b. All time and effort contributed
12. In tier one of the Mudaraba for Islamic banking: a. The depositor is the Rab al Maal b. The Islamic bank is the Mudarib c. The Mudarib contributes expertise but no capital d. All of the above d. All of the above
13. In tier two of the Mudaraba for Islamic banking: a. The depositor is the Mudarib b. The Islamic bank is the Mudarib c. The borrower or investor is the Mudarib d. The contract has no Mudarib c. The borrower or investor is the Mudarib
14. In restricted two-tier Mudaraba: a. Investments can be made in areas dictated by the Islamic bank only b. Only Halal business can be invested in c. The entrepreneur or Mudarib has the right to manage the investment d. All of the above d. All of the above
15. In a Mudaraba, the Rab al Maal’s risk of financial loss is for: a. The entire period of the contract b. A short period at the beginning of the contract c. A short period at the end of the contract d. A short period in the middle of the contract a. The entire period of the contract
1. Mudaraba is a sales contract at the price of cost plus a markup. false
2. Mudaraba is a partnership contract with both partners contributing capital. false
3. Mudaraba is a partnership contract with one partner contributing the entire capital. true
4. In restricted Mudaraba the Rab al Maal chooses the type of business to invest in true
5. In unrestricted Mudaraba the Mudarib is not allowed to choose the type of business to invest in. false
6. Mudarib cannot mix their own funds with those of the Rab al Maal. true
7. The Mudarib needs to guarantee the capital contributed by the Rab al Maal. false
8. The Mudarib needs to guarantee a minimum profit for the Rab al Maal. false
9. The Mudarib needs to compensate the Rab al Maal for any loss caused by their negligence or dishonesty. true
10. In Mudaraba profit and loss is shared by the two parties in a pre-agreed ratio. true
Created by: graceatnyu
 

 



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