CIFE Islamic Capital Markets 2 — Questions and Answers
Question 1: What is the IFSB (Islamic Financial Services Board) and what is its role?
- A commercial Islamic bank
- An international standard-setting body that issues regulatory and supervisory standards for Islamic banking, capital markets, and insurance (Takaful) (Correct answer)
- A Sharia advisory firm
- A rating agency for Islamic banks
Correct answer: An international standard-setting body that issues regulatory and supervisory standards for Islamic banking, capital markets, and insurance (Takaful)
The IFSB is an international standard-setting body that develops prudential regulatory and supervisory standards for the Islamic financial services industry across banking, capital markets, and insurance sectors.
Question 2: What is the Islamic liquidity management challenge and how is it addressed?
- Islamic banks have no liquidity issues
- Limited Sharia-compliant short-term instruments are addressed through Islamic money market instruments, government Islamic securities, and the IILM (International Islamic Liquidity Management Corporation) (Correct answer)
- Conventional money market instruments are used
- Islamic banks hold 100% cash reserves
Correct answer: Limited Sharia-compliant short-term instruments are addressed through Islamic money market instruments, government Islamic securities, and the IILM (International Islamic Liquidity Management Corporation)
Islamic banks face limited short-term investment options since conventional money market instruments involve interest. Solutions include Islamic interbank instruments, government Sukuk, and the IILM which issues short-term Sukuk.
Question 3: What is the Dow Jones Islamic Market Index (DJIMI)?
- An index of all companies in the UAE
- A global equity index that screens and includes only companies meeting Sharia-compliant criteria based on business activities and financial ratios (Correct answer)
- An index created by the Dubai Financial Market
- An index of Islamic banks only
Correct answer: A global equity index that screens and includes only companies meeting Sharia-compliant criteria based on business activities and financial ratios
The DJIMI is a widely-used global equity benchmark that applies Sharia screening criteria (business activity and financial ratio tests) to include only Sharia-compliant stocks from major global markets.
Question 4: What is the concept of Islamic REITs and how are they structured?
- REITs cannot be Islamic
- Real estate investment trusts that invest only in Sharia-compliant properties, exclude haram tenants, and use Islamic financing, distributing rental income as dividends (Correct answer)
- They invest in any property type
- Islamic REITs do not exist in the UAE
Correct answer: Real estate investment trusts that invest only in Sharia-compliant properties, exclude haram tenants, and use Islamic financing, distributing rental income as dividends
Islamic REITs invest in Sharia-compliant properties (excluding hotels serving alcohol, conventional banks), use Islamic financing, screen tenants for compliance, and distribute halal rental income to unit holders.
Question 5: What is the role of credit rating agencies in Islamic finance?
- They rate Islamic products the same as conventional ones
- They assess creditworthiness of Sukuk issuers and Islamic financial institutions, with additional consideration of Sharia governance and compliance risk (Correct answer)
- Rating agencies are not relevant to Islamic finance
- Only Islamic rating agencies can rate Islamic products
Correct answer: They assess creditworthiness of Sukuk issuers and Islamic financial institutions, with additional consideration of Sharia governance and compliance risk
Credit rating agencies evaluate Sukuk and Islamic financial institutions using modified methodologies that consider Sharia governance quality, compliance risk, structural features of Islamic instruments, and traditional credit factors.
Question 6: What is the concept of Islamic private equity and venture capital?
- Private equity is incompatible with Islamic finance
- Musharaka and Mudaraba-based investment in private companies with Sharia screening, halal business focus, and shared profit-and-loss arrangements (Correct answer)
- Islamic PE only invests in banks
- No such concept exists
Correct answer: Musharaka and Mudaraba-based investment in private companies with Sharia screening, halal business focus, and shared profit-and-loss arrangements
Islamic private equity uses Musharaka and Mudaraba structures to invest in Sharia-compliant private businesses, with profit-and-loss sharing, ethical screening, and often including active management involvement.
CIFE Islamic Capital Markets 2
What is the IFSB (Islamic Financial Services Board) and what is its role?