Islamic Finance Regulations Flashcards

What is the concept of Mudaraba in Islamic banking?

Answer: A profit-sharing partnership where one party provides capital and the other provides expertise and management

Mudaraba is a profit-sharing contract where the Rab-ul-Maal (capital provider) supplies funds and the Mudarib (entrepreneur) contributes expertise; profits are shared at an agreed ratio while losses fall on the capital provider.

Under Sharia law, which concept refers to excessive uncertainty or ambiguity in a contract and is prohibited in Islamic finance?

Answer: Gharar (excessive uncertainty)

Gharar refers to excessive uncertainty, ambiguity, or deception in contractual terms; it is prohibited because it can lead to unjust enrichment and disputes between contracting parties.

Which Islamic finance contract involves the bank purchasing an asset and leasing it to the client for agreed periodic rental payments?

Answer: Ijara

Ijara is an Islamic leasing contract where the financier purchases and owns the asset, then leases it to the client for rental payments, with an option for ownership transfer at the end of the term.

What is Musharaka in Islamic banking?

Answer: A joint venture or partnership where all parties contribute capital and share profits and losses proportionally

Musharaka is an Islamic partnership or joint venture where all parties contribute capital, participate in management, and share profits and losses according to agreed proportions.

Under UAE Islamic banking regulations, how must an Internal Sharia Supervision Committee (ISSC) handle income identified as non-Sharia-compliant?

Answer: Donate it to charitable or social welfare causes

Non-Sharia-compliant income must be purified by donating it to charitable causes, as Islamic principles prohibit retaining income earned through impermissible means.

What is a Wakala contract in the context of UAE Islamic finance?

Answer: An agency contract where one party acts on behalf of another for a predetermined fee

Wakala is an agency contract where the Wakil (agent) is authorized to perform a specific financial task on behalf of the principal (Muwakkil) in exchange for an agreed fee.

Which Islamic finance contract is specifically designed for financing construction or manufacturing projects where delivery occurs in the future?

Answer: Istisna, a manufacturing or construction contract with installment payments

Istisna is an Islamic manufacturing or construction contract where the financier pays for the production of a specified asset, with delivery deferred until completion and payments made in stages.