Islamic Finance

Question 1

What is the word for Islamic Law?

Answer 1

Sharia

Question 2

What is the word for ‘interest’ in Islamic finance?

Answer 2

Riba

Question 3

What are the 3 principles of islamic finance?

Answer 3

• Share profits and losses
• No interest (riba) can be earned
• Finance is restricted to Islamically accepted transactions.

Question 4

Instead of Interest (riba) being charged, how are returns earned?

Answer 4

By investing in the underlying activity which generates a profit

Question 5

What are the 5 main sources of finance within the Islamic model?

Answer 5

1. Murabaha ( trade credit)
2. Ijara ( Lease Finance)
3. Sukuk (debt finance)
4. Mudaraba (equity finance)
5. Musharaka (venture capital)

Question 6

In accordance with Sharia, all parties involved in a transaction can make informed decisions without being mislead or cheated, and reward should be based on effort rather than for simple ownership and control. What is this an emphasis on?

Answer 6

Fairness

Question 7

In accordance with Sharia, speculation is not prohibit. What types of finance would this eliminate?

Answer 7

Options and futures

Question 8

In Islamic banking there are two financing techniques. What are they?

Answer 8

1. Fixed income modes - Murubaha, ijara and sukuk

2. Equity modes of finance - Mudaraba and Musharaka

Question 9

Murabaha is like a …

Answer 9

trade credit or loan

Question 10

What is the key distinction between Murabaha and a loan?

Answer 10

The bank will take ownership of the asset, which is then sold to the borrow for a profit, but they pay the bank in instalments. NO interest penalties for late payment!

Question 11

Ijara is the equivalent of…

Answer 11

a lease finance.

Question 12

Under what concept is the use of an underlying asset transferred for consideration?

Answer 12

Ijara

Question 13

Ijara usually has a fixed period and price. What other specifications are there?

Answer 13

• Use of leased asset specified in contract
• Lessor is responsible for major maintenance
• Lessee is held for maintaining asset in good shape

Question 14

Sukuk holders are equivalent to….

Answer 14

Bond holders

Question 15

How is Sukuk different to a bond?

Answer 15

Sukukholders are a partial owner in the underlying asset and are entitled to a share of the profits (but will also bear a share of the losses)

Question 16

Mudaraba is a type of which finance?

Answer 16

Equity

Question 17

A special kind of partnership where one partners gives money to another for investing it in a commercial enterprise. One parter provides the finance and the other provides the skills.

Answer 17

Mudaraba.

Money provided - Rab ul mal
SKills provider - Mudarib

Question 18

In Mudaraba the profits are shared on what basis?

Answer 18

A pre agreed ratio

Question 19

In Mudaraba, who bears the loss?

Answer 19

The Lender of the money.

Question 20

A relationship between two or more parties who contribute capital to a business. and divide the net profit and loss pro rata is known as what?

Answer 20

Musharaka

Question 21

How is the profit and loss shared between parties in Musharaka??

Answer 21

Profit - pre agreed ratio

Loss - in line with capital contributions.