Question 1

All of the following are fundamentals of Islamic investing EXCEPT:

Accepted Answer

Islamic investing principles allow for risk but emphasize risk sharing and prohibit investments that are overly speculative or uncertain, which is different from stating there is "no risk" in investments.

Question 2

Each and every member of the Sharī'ah board should be compensated in the same manner to avoid conflict of interest.

Accepted Answer

The statement suggests that compensating all members of the Sharī'ah board equally is intended to prevent conflicts of interest.

Question 3

In recent times, some murabahah- and arbun-based solutions have been applied to mitigate risk exposure in currency, equity and commodity funds.

Accepted Answer

Murabahah and arbun are Islamic finance mechanisms that have been adapted for use in various financial products, including currency, equity, and commodity funds, to comply with Sharia law and mitigate risk exposure. Murabahah involves a cost-plus sale, while arbun is a non-refundable down payment towards the purchase of a good, both allowing for risk management in accordance with Islamic finance principles.

Question 4

Islamic Venture Capital Funds and equity funds are the most prominent investment techniques in Islamic investment.

Accepted Answer

Islamic investment primarily focuses on a wider range of Sharia-compliant techniques, including but not limited to Murabaha (cost-plus finance), Mudarabah (profit-sharing), and Ijara (leasing), alongside Islamic Venture Capital and equity funds.

Question 5

Franchising is not recommended between Islamic funds and other Islamic financial institutions.

Accepted Answer

Franchising can be a viable strategy between Islamic funds and other Islamic financial institutions, as long as the practices adhere to Shariah principles, ensuring all transactions and operations are compliant with Islamic law.

Question 6

The Sharī'ah advisory board must guide potential investors to the best product according to the prevailing market indices.

Accepted Answer

The primary role of the Sharī'ah advisory board is to ensure that the financial products and activities of an institution comply with Islamic law (Sharī'ah), not to guide investors to the best product according to prevailing market indices.

Question 7

An effective investment strategy for Islamic fund managers is to diversify their portfolio in terms of industrial sectors or geographical concentrations.

Accepted Answer

Diversification helps in spreading risk and can align with Islamic finance principles by investing in various halal (permissible) sectors or regions, thus potentially reducing the impact of negative performance in any single area.

Question 8

Any prospective new product should be cross-checked for Sharī'ah compliance in the first instance by the product development manager and then followed by the board of directors.

Accepted Answer

The initial cross-check for Sharī'ah compliance of a new product should be conducted by a Sharī'ah compliance officer or a Sharī'ah advisory board, not by the product development manager or the board of directors.

Question 9

In addition to the regular disclosure of financial reporting and other management information, Islamic funds require the disclosure of Sharī'ah compliance information.

Accepted Answer

Islamic funds must disclose Sharī'ah compliance information to ensure that their operations and investments adhere to Islamic law, in addition to the regular financial and management disclosures required of all funds.

Question 10

Whether an institution has a board or a single supervisor is its own choice.

Accepted Answer

The governance structure of an institution, including whether it has a board or a single supervisor, is typically determined by its own bylaws, regulations, or governing documents, subject to any applicable laws or regulations.

Question 11

AAOIFI requires a minimum of FIVE members for the Sharī'ah supervisory board.

Accepted Answer

AAOIFI standards recommend a minimum of three members for the Sharī'ah supervisory board.

Question 12

Liquidity risk for investment funds arises from price volatility of the securities under investment.

Accepted Answer

Liquidity risk for investment funds arises from the inability to quickly buy or sell investments in the market without significantly affecting the investment's price, not directly from the price volatility of the securities.

Question 13

Islamic fund managers essentially replicate some of the basic risk management strategies applied in conventional investment funds.

Accepted Answer

Islamic fund managers, while adhering to Shariah principles, employ various risk management strategies similar to those used in conventional funds, such as diversification and asset allocation, to mitigate risk and optimize returns.

Question 14

Islamic investment funds may enter into joint venture agreements with other Islamic banks or conventional banks to create newer exposure to prospective investors in other geographical locations.

Accepted Answer

Islamic investment funds can enter into joint venture agreements with both Islamic and conventional banks, provided the ventures adhere to Shariah principles, allowing them to expand their reach and offer investment opportunities in new geographical areas.

Question 15

Basically, there are no additional risk management issues associated with the Islamic funds and their products.

Accepted Answer

Islamic funds and their products must comply with Shariah law, which introduces unique risk management issues, such as ensuring investments are halal and adhering to specific financial transaction principles.

Question 16

One important liquidity issue that Islamic fund managers face is the investment exit strategy.

Accepted Answer

Islamic fund managers often face liquidity issues due to the limited availability of Shariah-compliant financial instruments and markets, making it challenging to devise effective investment exit strategies.

Question 17

All of the following statements about the attitude of Islam towards income and wealth are true EXCEPT:

Accepted Answer

Islam teaches that human beings are stewards (khalifah) of the earth's resources, not the absolute owners, and must utilize these resources according to the principles of stewardship and responsibility outlined in Islamic teachings.

Question 18

Due to the surplus of liquidity in the Islamic fund market, Islamic Fund managers are protected against the possibility of higher cash out-flow during the downward markets when individual investors may wish to liquidate their position.

Accepted Answer

Islamic fund managers, like all fund managers, face the risk of higher cash outflows during market downturns as investors may seek to liquidate their positions, regardless of the liquidity levels in the market.

Question 19

The conception of fund of funds may be a less efficient technique for Islamic funds due to the number of Islamic funds as well as the higher commissions and fees involved.

Accepted Answer

Fund of funds (FoF) involves investing in a portfolio of other investment funds rather than directly in stocks, bonds, or other securities. This can be less efficient for Islamic funds due to the limited number of Islamic funds available, which may restrict diversification options. Additionally, the layered structure of FoFs can lead to higher commissions and fees, as investors may have to pay fees for both the FoF and the underlying funds, potentially reducing the overall return on investment.

Question 20

Islamic fund management, as an infant industry, is going through a transitional phase in terms of its functional structure, marketing, and distribution systems.

Accepted Answer

Islamic fund management is relatively new compared to conventional finance, and it is evolving to establish its own systems and practices that comply with Islamic principles.

Quiz 6: Islamic Asset and Fund Management