CIFE Islamic Finance Principles & Shariah 1 — Questions and Answers
Question 1: What is 'Riba' and why is it prohibited in Islamic finance?
- Riba means interest or usury; it is prohibited because it is considered exploitative and unjust as it guarantees a return without sharing risk (Correct answer)
- Riba means profit sharing; it is encouraged in Islamic finance
- Riba means charitable donation; it is optional in Islam
- Riba means currency exchange; it is banned only in GCC countries
Correct answer: Riba means interest or usury; it is prohibited because it is considered exploitative and unjust as it guarantees a return without sharing risk
Riba refers to any unjustified increase in money or goods through lending; the Quran and Sunnah prohibit it because it creates wealth without productive effort or risk-sharing, causing economic injustice.
Question 2: What is 'Gharar' in Islamic finance?
- Excessive uncertainty or ambiguity in a contract that makes its outcome unknowable, rendering the contract invalid (Correct answer)
- A type of profit-sharing agreement
- A form of Islamic insurance
- A contract for leasing assets
Correct answer: Excessive uncertainty or ambiguity in a contract that makes its outcome unknowable, rendering the contract invalid
Gharar refers to unacceptable contractual uncertainty regarding the subject matter, price, or delivery conditions; contracts with excessive Gharar are prohibited as they lead to disputes and injustice.
Question 3: Which Islamic principle requires that financial transactions be linked to real productive economic activity?
- Asset-backing and prohibition of speculation (Maysir) (Correct answer)
- Mudarabah profit distribution
- Zakat obligation
- Qard Hasan lending
Correct answer: Asset-backing and prohibition of speculation (Maysir)
Islamic finance requires all financial transactions to be backed by real assets or services, ensuring money flows to genuine economic activity rather than pure financial speculation (Maysir).
Question 4: What is the role of a Shariah Supervisory Board (SSB) in an Islamic financial institution?
- To review, approve, and continuously monitor all financial products and transactions to ensure Shariah compliance (Correct answer)
- To set profit rates for Islamic banks
- To regulate interest rates on deposits
- To manage the institution's investment portfolio
Correct answer: To review, approve, and continuously monitor all financial products and transactions to ensure Shariah compliance
An SSB is an independent body of qualified Islamic scholars that certifies new products, issues fatwas, and audits ongoing operations to ensure all activities comply with Shariah principles.
Question 5: Which Islamic principle underpins the concept of risk and profit sharing between parties in a financial transaction?
- Al-Ghunm bil Ghurm (entitlement to profit is commensurate with bearing of risk) (Correct answer)
- Israf (extravagance)
- Tawakkul (reliance on God)
- Ijab wa Qabul (offer and acceptance)
Correct answer: Al-Ghunm bil Ghurm (entitlement to profit is commensurate with bearing of risk)
Al-Ghunm bil Ghurm establishes that profit entitlement is only legitimate when it is accompanied by genuine risk; this principle justifies returns on Shariah-compliant investments.
Question 6: What does 'Halal' mean in the context of Islamic finance product screening?
- Permissible activities and sectors; investments must avoid alcohol, pork, gambling, conventional banking, weapons, and other prohibited industries (Correct answer)
- Highly profitable
- Government-approved investment
- Listed on a GCC stock exchange
Correct answer: Permissible activities and sectors; investments must avoid alcohol, pork, gambling, conventional banking, weapons, and other prohibited industries
Halal screening ensures Islamic financial products invest only in activities and sectors permitted under Shariah law, excluding industries such as alcohol, pork products, gambling, and conventional finance.
CIFE Islamic Finance Principles & Shariah 1
What is 'Riba' and why is it prohibited in Islamic finance?