CIFE Principles of Islamic Finance

Question 1

What is the fundamental prohibition that distinguishes Islamic finance from conventional finance?

Accepted Answer

Riba (interest/usury) in all its forms

Answer

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?

Accepted Answer

Excessive uncertainty, ambiguity, or deception in contracts

Answer

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?

Accepted Answer

Both profits and losses are shared between parties based on pre-agreed ratios, linking returns to real economic activity

Answer

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?

Accepted Answer

Gambling or speculation where gain depends entirely on chance rather than productive effort

Answer

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?

Accepted Answer

Every financial transaction must be linked to a tangible, identifiable real asset or economic activity

Answer

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.

CIFE Islamic Finance Practice Test

CIFE Islamic Finance Practice Test

CIFE Principles of Islamic Finance