Deck 28: Islamic Finance

Question 1

Which of the following describes a feature that applies to a Musharakah contract?

A)There is no guarantee of the capital.
B)The capital providers are involved in business decision making
C)The profit shared is limited to an agreed ratio.
D)For the capital provider the losses are unlimited.

Answer 1

C

Question 2

Uncertainty in a transaction is known as:

A)Gharar.
B)Haram.
C)Riba.
D)Takaful.

Answer 2

A

Question 3

Which of the following statements is true?

A)In a Mudarabah contract the depositor's liability is essentially shared between the depositor and the entrepreneur.
B)In a Mudarabah contract the depositor manages the asset in partnership with the entrepreneur.
C)In a Mudarabah contract the capital provider bears all the losses except in the case of misconduct or negligence.
D)In a Musharakah contract the depositor provides all the capital with none being provided by the entrepreneur.

Answer 3

C

Question 4

Mudarabah accounts are:

A)A profit sharing contract where the capital provider agrees to share the profits from an investment between themselves and the business owner in a prearranged ratio.
B)A savings account which allows the bank to use the investors funds provided they obtain explicit permission to do so.
C)A financing contract where the bank purchases an asset at a deferred delivery date in exchange for immediate payment.
D)A profit and loss sharing contract where all parties to the contract pool their investments and take common ownership of investment assets in proportion to their initial stake.

Question 5

Since the 1970's the Islamic banking industry has grown at:

A)Between 5% and 10% per annum.
B)Between 10% and 15% per annum.
C)Between 15% and 20% per annum.
D)Between 25% and 30% per annum.

Question 6

In 2010 global assets held under Islamic financial management are estimated to total:

A)$500-$750 million.
B)$1-$2 billion.
C)$100 billion.
D)$1 trillion.

Question 7

Usury,or the charging of interest is prohibited in the original teachings of which of the following religions?

A)Christianity.
B)Islam.
C)Buddhism.
D)All of the Above.

Question 8

A Mudarabah contract differs from a Musharakah contact in several ways.Which of the following is not true in respect of the two forms of contract?

A)In Musharakah all the partners to the contract provide investment capital,whilst in Mudarabah one party provides all the investment capital to another.
B)In Musharakah all parties to the contract can provide management services to the enterprise,in Mudarabah the management is the responsibility of the entrepreneur receiving the capital.
C)In Musharakah the goods are owned by the provider of the capital alone,whilst in Mudarabah the assets are jointly owned by all partners to the contract in relation to the proportion of their investment.
D)In Musharakah the partners liability is essentially unlimited,whilst in Mudarabah the liability of the provider of the capital is limited to their original investment.

Question 9

Current account holders with an Islamic bank do not receive interest on the amounts in their accounts however; they do receive 'Hiba'.Hiba is:

A)A regular payment based upon a percentage of the balance on the account
B)A pre-arranged percentage share of the profits made by the bank on the current account
C)A gift given at the banks discretion
D)A pre-arranged percentage of the profits on the investments made by the bank

Question 10

Which of the following statements is not a key difference between Islamic and conventional banks.?

A)A conventional bank aims to maximize profits for the shareholders and provide adequate returns to depositors.
B)Conventional bank financing is interest orientated and both fixed and variable rates can be charged for the use of money.
C)In conventional banking speculative ventures can be.and are undertaken.
D)In conventional banking depositors gain interest and a guarantee of principal repayment.

Question 11

Islamic financial companies are reluctant to invest in the relatively higher risk equity financed projects.What proportion of their portfolio is typically equity financed?

A)1%
B)5%
C)10%
D)15%

Question 12

Riba is a fundamental doctrine of Islamic finance.Riba is:

A)Usury,whereby the borrower pays back more than the amount borrowed to take into account the time value of the money.
B)Ambiguity,in relation to outcomes of transactions,for example gambling.
C)A forbidden practice,for example investing in gambling or businesses producing alcohol.
D)Profit and loss sharing,whereby both parties share the profits and the risks.

Question 13

Which of the following is not true in a Islamic finance contract:

A)Should be in accordance with shariah principles.
B)The profit ratio should not be disclosed.
C)Should avoid any source of ambiguity.
D)Should avoid Riba.

Question 14

What is 'zakat'?

A)An insurance premium charged for holding an Islamic insurance account.
B)A type of savings account based upon the value of an underlying asset purchase.
C)A religious tax levied on institutional profits and bank reserves.
D)A charge that investors must pay to the Islamic bank for their services.

Question 15

Which of the following businesses would not be supported by Islamic finance?

A)An entertainment and casino group
B)A clothing retail group
C)Housing construction company
D)A agricultural equipment supplier

Question 16

Which of the following is seen by many as a key advantage of the principle of profit and loss sharing?

A)The Islamic bank will have an interest in the success of projects it invests in,leading to a closer relationship between bank and entrepreneur.
B)The Islamic bank reduces its exposure by sharing its losses with customers
C)The Islamic bank is able to provide the community with funds for good causes.
D)The bank takes no part in any decision making in respect of the management of the company.

Question 17

Debt- or Asset-based financing:

A)Is designed so that the bank purchases an asset that it then resells to the customer on credit.
B)Is a system whereby the bank provides investment capital by purchasing debt instruments,which it then provides to a customer to be administered and managed by the customer.
C)Is not allowed by Shariah.
D)Forms less than 5% of the portfolio of a typical Islamic finance house.

Question 18

Which of the following are true with regard to Islamic finance?

A)Interest bearing transactions are allowed only when they do not relate to prohibited activities such as alcohol,or gambling.
B)All interest-bearing transactions are prohibited.
C)Interest can be charged only on mortgages or loans secured on assets such as houses.
D)Interest can only be paid on savings not on loans.

Question 19

Islamic financial institutions invest according to the principles of the Qur'an and the writings of the prophets embodied in the Sunna.Institutions abide by these principles under the guidance of:

A)The shariah courts in their country of origin.
B)Their board of directors.
C)A management committee appointed by the shareholders.
D)An independent shariah board separate from their board of directors.

Question 20

Which of the following statements are true?

A)Islamic financial institutions do not seek to maximize shareholder wealth as do conventional banks.
B)Islamic banks raise their initial capital by equity participation,but investors do not gain a return from bank profits
C)Islamic financial funding is only provided to projects that have the most favorable return-for-risk forecasts and bestow some social benefit at the same time.
D)Islamic banks can invest in non-Halal projects provided they enter into profit and loss sharing arrangements with the entrepreneur.

Question 21

A company enters into an Islamic finance contract,where the bank buys good worth $500,000 with an agreement to resell the goods to the company on credit with a 20% markup price.What is the final cost to the company?

A)$ 550,000
B)$ 600,000
C)$ 500,000
D)$ 520,000

Question 22

Which of the following describes Murabahah?

A)An asset-based investment where the investor owns an interest in an underlying asset in proportion to their investment
B)An Islamic bank buys some form of durable asset and leases it to the customer for a rental payment based on a prearranged schedule
C)An Islamic bank agrees to buy an asset and resell it to the customer on credit
D)A gift given at the banks discretion

Question 23

The interpretation of Islamic shariah principles is attributed to five main schools of thought.Which of the following is not one of these schools of thought?

A)Maliki
B)Hanafi
C)Nakheel
D)Hanbali

Question 24

Which of the following modes of Islamic financing is the most popular gobally?

A)Equity Financing
B)Lease Financing
C)Asset Financing
D)Derivatives Financing

Question 25

Ijarah financing is a growing area for Islamic financing?
An Ijarah contract is:

A)A contractual arrangement whereby the bank finances the high-purchase of an asset which reverts to the bank at the end of the higher purchase arrangement
B)A contractual arrangement whereby the bank buys some form of durable asset and leases it to the customer for a rental payment based on a prearranged schedule
C)An insurance policy protecting the customers against loss or damage to a durable asset.
D)A contractual arrangement whereby the bank purchases an asset for a deferred delivery date in exchange for immediate payment.

Question 26

In 2008 the Islamic banking system was growing at what rate?

A)5% - 10%
B)10% - 15%
C)15% - 20%
D)Over 20%

Question 27

Which of the following describes Hiba?

A)An asset-based investment where the investor owns an interest in an underlying asset in proportion to their investment
B)An Islamic bank buys some form of durable asset and leases it to the customer for a rental payment based on a prearranged schedule
C)An Islamic bank agrees to buy an asset and resell it to the customer on credit
D)A gift given at the banks discretion

Question 28

The modern Islamic banking movement began with the establishment of the Local Islamic Bank in the city of Mit Ghamr,Egypt in 1963.

Question 29

To highlight the growing importance of Islamic finance in global business,the Dow Jones (DJ)and Financial Times Stock Exchange indicator (FTSE)have created their own Islamic securities indices.

Question 30

Which of the following is not seen as a significant challenge to Islamic financial institutions in the future?

A)A shortage in qualified personnel
B)Ambiguity in application
C)Lack of interest in non-conventional sources of finance
D)Lack of standardization

Question 31

Which of the following is true for the 2008 financial crisis?

A)The conventional banks suffered greater losses than the Islamic banks.
B)Islamic banks suffered greater losses that conventional banks.
C)The losses in each sector were similar.
D)The losses were restricted to those institutions who held predominantly mortgage portfolios.

Question 32

The main reason for Islamic banks suffering as a result of the 2008 financial crisis was:

A)Losing money on the derivatives market.
B)Losing money on toxic debt.
C)The downturn in the economy.
D)Loss of confidence in the banking system.

Question 33

A conventional bond is a debt instrument.The issuer owes the investor an amount of money consisting of both the principal and interest payment.Such instruments are not allowed under shariah because?

A)The interest element of the bond contravenes 'sunna'
B)The interest element of the bond contravenes 'riba'
C)The interest element of the bond contravenes 'gharar'
D)All of the above are true

Question 34

A construction company is looking at a new project,but requires finance to pay for materials.They approach an Islamic bank who agree to buy the materials and resell it to the company on credit.What is this type of contract called?

A)Takaful
B)Musharakah
C)Ijarah
D)Murabahah

Question 35

Ijarah represents what percentage of total Islamic finance portfolios?

A)5%
B)20%
C)40%
D)50%

Question 36

The main difference between 'takaful' and conventional insurance is?

A)The ways of investing the participants funds.
B)The number of participants.
C)The term of the contract.
D)The ratio of risk sharing.

Question 37

A 'Sukuk' or Islamic bond differs from a conventional bond,because?

A)A conventional bond is a debt instrument,while a sukuk is an asset-based investment where the investor owns an interest in an underlying asset in proportion to their investment.
B)A conventional bond provides a significantly higher return by providing interest on the investment.
C)Governments are involved in the conventional bond market but there is no government involvement in sukuk.
D)Conventional bonds are suited to raising funds for large scale capital projects,while sukuk is only suited to small scale business projects

Question 38

Which of the following describes Ijarah ?

A)An asset-based investment where the investor owns an interest in an underlying asset in proportion to their investment
B)An Islamic bank buys some form of durable asset and leases it to the customer for a rental payment based on a prearranged schedule
C)An Islamic bank agrees to buy an asset and resell it to the customer on credit
D)A gift given at the banks discretion

Question 39

During the 2008 financial crisis Islamic banks were initially more resilient to financial losses.Which of the following is not true?

A)Islamic banks faced financial losses when the financial crisis reached the 'real' economy.
B)Islamic banks are prohibited from trading in debt.
C)Islamic banks are prohibited from trading in stocks.
D)After the 2008 crisis more countries and investors became interested in Islamic finance.

Question 40

Islamic finance is perceived to suffer from a lack of international standardization.Which two organizations are working to develop standardized rules and products?

A)The Shariah Supervisory Board and the IASB
B)MENA and the Dow Jones Index
C)Bank of Dubai and IASB
D)AAOIFI and IFSB

Question 41

Islamic Finance aims at maximizing profit and wealth and spreading prosperity among all members of society.

Question 42

In your own words outline the key differences between Islamic and conventional financing.

Question 43

Explain in your own words the three key principles of Islamic finance.

Question 44

Islamic banks provide savings accounts (also called Wadiah)and can use the funds for whatever investment it decides upon without informing the savings account holders,although the bank must guarantee the deposit principal against any damage or loss.

Question 45

'Riba' means excessive ambiguity.

Question 46

While Islamic banks cannot charge interest on loans,both Islamic and conventional banks pay interest on savings accounts.

Question 47

Some scholars believe that the differences between Islamic and conventional financial institutions are only in terminology and not in practice.

Question 48

Islamic banks' losses in the first wave of the 2008 financial crisis were minimal and some Islamic banks remained profitable despite the decline in economic activity.One of the reasons put forward for this resilience is that Islamic financial institutions are prohibited from dealing in loans and debts and are not allowed to trade in the derivatives market.

Question 49

What are some of the perceived challenges faced by Islamic finance if it is to become a global alternative to conventional financial institutions?

Question 50

A partnership between an Islamic bank and other partners,in which all partners contribute to the capital of the project,is called a Mudarabah contract.

Question 51

During the 2008 financial crisis Islamic banks were more resilient in avoiding direct financial losses.Why do you think this might have been?
Explain your reasoning.

Question 52

Islamic financial instruments are quoted on the worlds securities indices.

Question 53

Zakat is imposed on corporate profits or upon reserves in the case of banks.

Question 54

Neethal Ltd.is a construction company.The company has evaluated a major development project requiring an investment of $10,000,000.The company has insufficient capital and requires a capital injection of $4,000,000.The company therefore approaches an Islamic bank.The bank decides to buy the materials required and resell it to the firm on credit with a 15 per cent mark up price.You should calculate the cost of capital to the firm,and explain what the bank's risk is in this case and how you could minimize that risk exposure?
Would it make any difference if the company,borrowed the amount from a conventional bank?
Justify your answer assuming the conventional bank interest rate is 15 per cent.

Question 55

Ijarah,or leasing,finance makes up only 20% of the total Islamic financing and continues to decline in importance.

Question 56

Islamic Finance has proven unsuitable as a financing mechanism for large scale public projects.

Question 57

Asset based financing is the most often used form of Islamic financing and Murabahah and Salem are the most commonly used modes in this kind of financing

Question 58

Islamic banks raise their initial capital by using equity participation in which the shareholders are owners and partners in the bank's business.