CIFE Principles of Islamic Finance — Questions and Answers
Question 1: What is the fundamental prohibition that distinguishes Islamic finance from conventional finance?
- Trading in stocks
- Riba (interest/usury) in all its forms (Correct answer)
- Profit-making in general
- Lending money
Correct answer: Riba (interest/usury) in all its forms
The prohibition of riba (interest/usury) is the cornerstone of Islamic finance. Any predetermined, guaranteed return on a loan or investment regardless of performance is considered riba and is strictly forbidden in Sharia.
Question 2: What does the concept of Gharar refer to in Islamic finance?
- Guaranteed profit
- Excessive uncertainty, ambiguity, or deception in contracts (Correct answer)
- Charitable giving
- Asset-backed financing
Correct answer: Excessive uncertainty, ambiguity, or deception in contracts
Gharar refers to excessive uncertainty, ambiguity, or deception in the terms of a contract that could lead to unjust outcomes for one party. Contracts with major gharar are invalid in Islamic law.
Question 3: What is the principle of profit-and-loss sharing (PLS) in Islamic finance?
- Only profits are shared; losses are borne by the bank
- Both profits and losses are shared between parties based on pre-agreed ratios, linking returns to real economic activity (Correct answer)
- Losses are always divided equally
- PLS means fixed returns for investors
Correct answer: Both profits and losses are shared between parties based on pre-agreed ratios, linking returns to real economic activity
The PLS principle requires that financial transactions involve sharing both profits and losses based on pre-agreed ratios, ensuring returns are linked to actual economic outcomes rather than predetermined interest.
Question 4: What is Maysir and why is it prohibited in Islamic finance?
- A type of Islamic contract
- Gambling or speculation where gain depends entirely on chance rather than productive effort (Correct answer)
- A form of charitable contribution
- A profit-sharing arrangement
Correct answer: Gambling or speculation where gain depends entirely on chance rather than productive effort
Maysir refers to gambling or excessive speculation where gains depend purely on chance. It is prohibited because it creates wealth without productive economic activity and can lead to unjust enrichment.
Question 5: What does the concept of asset-backing mean in Islamic finance?
- All assets must be owned by the bank
- Every financial transaction must be linked to a tangible, identifiable real asset or economic activity (Correct answer)
- Assets are only used as collateral
- Digital assets are excluded from Islamic finance
Correct answer: Every financial transaction must be linked to a tangible, identifiable real asset or economic activity
Islamic finance requires that transactions be backed by real, tangible assets or genuine economic activities, preventing the creation of money from money without underlying productive economic value.
Question 6: What are the prohibited (haram) industries that Islamic financial institutions cannot invest in?
- Only alcohol-related industries
- Alcohol, gambling, pork products, conventional financial services (interest-based), weapons, tobacco, and adult entertainment (Correct answer)
- There are no industry restrictions
- Only industries harmful to the environment
Correct answer: Alcohol, gambling, pork products, conventional financial services (interest-based), weapons, tobacco, and adult entertainment
Islamic finance prohibits investment in industries dealing with alcohol, gambling, pork, conventional interest-based finance, weapons of mass destruction, tobacco, and adult entertainment, among other haram activities.
CIFE Principles of Islamic Finance
What is the fundamental prohibition that distinguishes Islamic finance from conventional finance?