Bonus: Islamic finance

Question 1

In Islamic finance what is the name for interest?

Answer 1

Riba

Question 2

What must wealth be generated from?

Answer 2

Legitimate investment in assets

Question 3

What can wealth not be generated from?

Answer 3

Not just from lending money and charging interest

Question 4

What must providers of finance take on in order to generate a return?

Answer 4

Some risk

Question 5

What types of trade are prohibited?

Answer 5

Unethical ones like…

Alcohol, tobacco, gambling

Question 6

Are speculative activities like futures and options allowed?

Answer 6

No

Question 7

What are the 5 types of Islamic finance?

Answer 7

▪ Mudaraba
▪ Musharaka
▪ Murabaha
▪ Ijara
▪ Sukuk

Question 8

Describe Mudaraba

Answer 8

Investor provided money to an activity

Expert provides skills to an activity

Question 9

With Mudaraba, how are profits shared?

Answer 9

Profits shared between the partners based on a signed agreement

Question 10

With Mudaraba, who bears the losses?

Answer 10

The investor alone (up to a limit of the capital provided

Question 11

What type of equity finance is Mudaraba considered similar to?

Answer 11

Rights issue

Question 12

Describe Musharaka

Answer 12

Investor provided money and skills to an activity

Expert provides money and skills to an activity

Question 13

With Musharaka, do money and skills have to be provided in equal proportions?

Answer 13

No

Question 14

With Musharaka, how are profits shared?

Answer 14

In accordance with the original contract between partners

Question 15

With Musharaka, how are losses shared?

Answer 15

In proportion to capital invested

Question 16

What equity finance is Musharaka similar to?

Answer 16

Joint venture equity finance

Question 17

Describe Murabaha

Answer 17

Bank buys asset from supplier

Sells to customer who pay in installments

Question 18

With Murabaha, who bears the risk?

Answer 18

The bank

Question 19

With Murabaha, what cannot be changed?

Answer 19

The amount to be charged even is customer is late paying

Question 20

With Murabaha, is it short or long term finance?

Answer 20

Short term

Question 21

Describe Ljara

Answer 21

Islamic equivalent of a lease

The lessor buys the asset and leases it to the company needing the asset

Question 22

With Ljara, Who bears the risk?

Answer 22

The lessor

Question 23

With Ljara, who is usually the lessor?

Answer 23

A bank

Question 24

With Ljara, how does the lessor build a return?

Answer 24

In the lease payments

Question 25

With Ljara, who bears responsibility for maintenance and insurance.

Answer 25

The lessor

Question 26

Describe Sukuk

Answer 26

Investor pays cash to SPV
SPV buys asset and Leases it to a company
The investor gets a bond and payments from distributions

Question 27

With Sukuk, who owns the asset?

Answer 27

The SPV

Question 28

With Sukuk, is it long or short term?

Answer 28

Long term