Question 1

Equity investment in listed companies is considered to be of higher risk than for venture capital investment. .

Accepted Answer

Venture capital investment typically involves investing in early-stage companies with uncertain futures, which is generally considered riskier than investing in established, publicly traded companies.

Question 2

The fluctuations in foreign exchange rates lead to market risk.

Accepted Answer

Market risk, also known as systemic risk, refers to the potential for investors to experience losses due to factors that affect the overall performance of the financial markets. Fluctuations in foreign exchange rates can significantly impact the value of investments in different currencies, thus leading to market risk.

Question 3

The relationship between the IIFS and Investment Account Holders IAH. is a fiduciary relationship.

Accepted Answer

In the context of Islamic finance, the relationship between Islamic Financial Institutions (IIFs) and Investment Account Holders (IAHs) is indeed a fiduciary one, where the IIFs act as trustees managing the funds of the IAHs based on Islamic principles and mutual agreement.

Question 4

The new IFSB guiding principles were meant to replace the existing framework of Basel Committee on Banking Supervision BCBS. guidelines used in all the banks and financial institutions across the world.

Accepted Answer

The IFSB (Islamic Financial Services Board) guiding principles are designed to complement the existing BCBS (Basel Committee on Banking Supervision) guidelines, not to replace them. They provide a framework tailored for Islamic financial institutions, which operate alongside conventional ones.

Question 5

According to IFSB-1, market risk is defined as the risk of losses in on-balance sheet positions arising from movements in market prices.

Accepted Answer

The answer of According to IFSB-1, market risk is defined...

Question 6

Once Islamic banks and financial institutions decide to lend or extend financing facilities, then they would have exposure to credit risk.

Accepted Answer

Islamic banks, like conventional banks, face credit risk when they extend financing to customers because there is always the possibility that the borrower may fail to meet the terms of the financing agreement.

Question 7

The due diligence process must follow the granting of any type of financing for the counterparties.

Accepted Answer

The due diligence process typically occurs before the granting of any type of financing to ensure the counterparties are creditworthy and to assess the risks involved.

Question 8

Restricted investment accounts are account portfolios where the account holders fully authorize the Islamic bank to invest their funds in profitable business ventures.

Accepted Answer

Restricted investment accounts are where the account holders specify certain restrictions on how their funds are to be invested by the Islamic bank, unlike unrestricted investment accounts where the bank has full discretion.

Question 9

The adaptation of industry standards from whatever model that are not contrary to the Sharī'ah remains the driving force that makes Islamic finance Sharī'ah-compliant and at the same time conventionally competitive.

Accepted Answer

Islamic finance integrates industry standards from conventional models that are not in conflict with Sharī'ah principles, ensuring both compliance with Islamic law and competitiveness in the broader financial market. This adaptation allows Islamic finance to operate effectively within global financial systems while adhering to its religious and ethical mandates.

Question 10

One of the IFSB guiding principles for the management of credit risk for Islamic banks and financial institutions stipulates that the "IIFS shall have in place a general Sharī'ah-compliant credit risk mitigating technique appropriate for all Islamic financing instruments".

Accepted Answer

The answer of One of the IFSB guiding principles for...

Question 11

The creditworthiness of the counterparties as well as the Sharī'ah compliance of newly proposed business projects should be properly reviewed and established once the credit has been approved to respective party.

Accepted Answer

The creditworthiness of the counterparties and the Sharī'ah compliance of newly proposed business projects should be reviewed and established before the credit is approved, not after, to ensure that the risks are assessed and managed appropriately.

Question 12

While crafting its guidelines, IFSB considered every technique or mechanism that originates from the conventional banking industry to be non-Sharī'ah compliant.

Accepted Answer

The Islamic Financial Services Board (IFSB) does not automatically consider every technique or mechanism from the conventional banking industry as non-Sharī'ah compliant. Instead, it evaluates them based on their adherence to Islamic finance principles.

Question 13

Each Islamic financial instrument must have its unique Sharī'ah-compliant credit risk mitigating technique.

Accepted Answer

Each Islamic financial instrument must adhere to Sharia principles, which include specific risk mitigation techniques to ensure compliance with Islamic law.

Question 14

Failure to repay the debt within the time stipulated in the contract and in line with the terms of the contract constitutes a liquidity risk for the bank.

Accepted Answer

Failure to repay the debt within the time stipulated in the contract constitutes a credit risk for the bank, not a liquidity risk. Liquidity risk involves the bank not having enough liquid assets to meet its obligations.

Question 15

IFSB guiding principles on equity investment risk require the IIFS to define and establish the exit strategies in respect of their equity investment activities, subject to the approval of the institution's Sharī'ah board.

Accepted Answer

The IFSB (Islamic Financial Services Board) guiding principles indeed require Islamic Financial Institutions (IIFS) to define and establish exit strategies for their equity investment activities, ensuring these strategies are approved by the institution's Sharī'ah board to comply with Islamic finance principles.

Question 16

The risk exposure in Ijārah contracts is more than in ijārah muntahia bittamlik.

Accepted Answer

In Ijārah contracts, the lessor (owner) retains the ownership and thus bears the significant risks related to asset ownership, whereas in Ijārah Muntahia Bittamlik (lease ending in ownership), the risk gradually transfers to the lessee as they approach ownership, typically reducing the lessor's risk exposure over time.

Question 17

Equity investment in unlisted companies refers to the acquisition of equity or ownership. participation in a joint venture company or a start-up.

Accepted Answer

Equity investment in unlisted companies involves purchasing shares or ownership stakes in companies that are not listed on a public stock exchange, which includes joint ventures, startups, and other private entities.

Question 18

Counterparties are retailers/consumers, corporate, or sovereign clients of the bank who obtain credit facilities based on agreed terms and conditions.

Accepted Answer

Counterparties can indeed be retailers/consumers, corporate entities, or sovereign clients who engage with banks to obtain credit facilities under specific terms and conditions. These parties enter into financial agreements with the bank, making them counterparties to the transaction.

Question 19

Due diligence review includes the ascertainment of the eligible counterparties of the IIFS through a comprehensive assessment of their individual risk profiles.

Accepted Answer

Due diligence review in the context of Islamic International Financial Institutions (IIFS) involves a thorough assessment of potential counterparties, including evaluating their risk profiles, to ensure they meet the eligibility criteria and align with the institution's risk management policies.

Question 20

The potential default of a bank's customer to meet his or her obligations on agreed terms constitute a credit risk for a bank.

Accepted Answer

Credit risk refers to the risk that a borrower will default on any type of debt by failing to make required payments, which directly impacts a bank when its customers cannot meet their financial obligations on agreed terms.

Quiz 10: Risk Management in Islamic Finance