CIFE Principles of Islamic Finance 2 — Questions and Answers
Question 1: What is the role of the Sharia Supervisory Board (SSB) in Islamic financial institutions?
- To manage day-to-day banking operations
- To ensure all products, services, and operations comply with Islamic law and issue fatwas on financial matters (Correct answer)
- To set interest rates
- To approve loan applications
Correct answer: To ensure all products, services, and operations comply with Islamic law and issue fatwas on financial matters
The SSB is an independent body of qualified Islamic scholars that reviews and approves financial products, monitors operations for Sharia compliance, and issues fatwas (religious rulings) on financial matters.
Question 2: What is the concept of Maqasid al-Sharia (objectives of Islamic law) in relation to finance?
- Maximizing shareholder returns
- Protecting five essential values: faith, life, intellect, lineage, and wealth, to ensure social welfare and justice (Correct answer)
- Following conventional banking practices
- Minimizing risk in all transactions
Correct answer: Protecting five essential values: faith, life, intellect, lineage, and wealth, to ensure social welfare and justice
Maqasid al-Sharia guides Islamic finance toward broader social objectives — protecting religion, life, intellect, lineage, and wealth — ensuring that financial activities promote overall social welfare and justice.
Question 3: What distinguishes a Sharia-compliant stock screening process?
- Only screening for financial performance
- Screening for both business activity compliance (sector screening) and financial ratio compliance (quantitative screening) (Correct answer)
- No screening is required for stocks
- Only checking if the company is listed on an Islamic exchange
Correct answer: Screening for both business activity compliance (sector screening) and financial ratio compliance (quantitative screening)
Sharia stock screening involves two stages: qualitative screening (excluding haram business activities) and quantitative screening (ensuring financial ratios for debt, interest income, and liquid assets meet Sharia thresholds).
Question 4: What is the concept of Zakat in Islamic finance and how does it relate to financial institutions?
- A voluntary charity with no institutional obligation
- A mandatory wealth tax (typically 2.5% of eligible wealth) that Islamic financial institutions must calculate and facilitate for customers (Correct answer)
- A transaction fee charged by Islamic banks
- A profit-sharing arrangement
Correct answer: A mandatory wealth tax (typically 2.5% of eligible wealth) that Islamic financial institutions must calculate and facilitate for customers
Zakat is a mandatory Islamic obligation (one of the five pillars) requiring payment of 2.5% of eligible wealth annually. Islamic financial institutions must calculate zakat on their own wealth and help customers fulfill this obligation.
Question 5: What is the difference between Halal and Haram in the context of Islamic financial products?
- They are interchangeable terms
- Halal means permissible under Sharia law while Haram means prohibited; products must be Halal to be offered by Islamic financial institutions (Correct answer)
- Halal refers to products and Haram refers to services
- Both terms relate to pricing strategies
Correct answer: Halal means permissible under Sharia law while Haram means prohibited; products must be Halal to be offered by Islamic financial institutions
Halal refers to actions, transactions, and products that are permissible under Islamic law, while Haram refers to those that are forbidden. Islamic financial institutions can only offer Halal-certified products and services.
Question 6: What is the concept of Wa'd (promise) in Islamic finance?
- A binding bilateral contract
- A unilateral promise or undertaking by one party that can be made binding, used in structuring Islamic financial products (Correct answer)
- A guarantee of returns
- A type of insurance policy
Correct answer: A unilateral promise or undertaking by one party that can be made binding, used in structuring Islamic financial products
Wa'd is a unilateral promise by one party to do something in the future. While bilateral promises (muwa'adah) are debated, unilateral wa'd can be made binding and is used in structuring products like Islamic FX forwards.
CIFE Principles of Islamic Finance 2
What is the role of the Sharia Supervisory Board (SSB) in Islamic financial institutions?