Bonus: Islamic finance Flashcards
In Islamic finance what is the name for interest?
Riba
What must wealth be generated from?
Legitimate investment in assets
What can wealth not be generated from?
Not just from lending money and charging interest
What must providers of finance take on in order to generate a return?
Some risk
What types of trade are prohibited?
Unethical ones like…
Alcohol, tobacco, gambling
Are speculative activities like futures and options allowed?
No
What are the 5 types of Islamic finance?
▪ Mudaraba ▪ Musharaka ▪ Murabaha ▪ Ijara ▪ Sukuk
Describe Mudaraba
Investor provided money to an activity
Expert provides skills to an activity
With Mudaraba, how are profits shared?
Profits shared between the partners based on a signed agreement
With Mudaraba, who bears the losses?
The investor alone (up to a limit of the capital provided
What type of equity finance is Mudaraba considered similar to?
Rights issue
Describe Musharaka
Investor provided money and skills to an activity
Expert provides money and skills to an activity
With Musharaka, do money and skills have to be provided in equal proportions?
No
With Musharaka, how are profits shared?
In accordance with the original contract between partners
With Musharaka, how are losses shared?
In proportion to capital invested
What equity finance is Musharaka similar to?
Joint venture equity finance
Describe Murabaha
Bank buys asset from supplier
Sells to customer who pay in installments
With Murabaha, who bears the risk?
The bank
With Murabaha, what cannot be changed?
The amount to be charged even is customer is late paying
With Murabaha, is it short or long term finance?
Short term
Describe Ljara
Islamic equivalent of a lease
The lessor buys the asset and leases it to the company needing the asset
With Ljara, Who bears the risk?
The lessor
With Ljara, who is usually the lessor?
A bank
With Ljara, how does the lessor build a return?
In the lease payments
With Ljara, who bears responsibility for maintenance and insurance.
The lessor
Describe Sukuk
Investor pays cash to SPV
SPV buys asset and Leases it to a company
The investor gets a bond and payments from distributions
With Sukuk, who owns the asset?
The SPV
With Sukuk, is it long or short term?
Long term
