CME-1 Capital Market Examination Level 1 — Questions and Answers

Question 1: What is a 'wakala' structure in Islamic finance?

A charitable endowment
An agency agreement where one party (agent/wakeel) acts on behalf of another (principal) for a fee, used in sukuk and fund management (Correct answer)
A profit-sharing arrangement
A deferred payment sale

Correct answer: An agency agreement where one party (agent/wakeel) acts on behalf of another (principal) for a fee, used in sukuk and fund management

Wakala is an Islamic agency contract where the wakeel (agent) manages assets or funds on behalf of the principal for an agreed management fee, used in sukuk structuring and investment management.

Question 2: What is 'riba' and why is it prohibited in Islamic finance?

A type of equity instrument
A form of market manipulation
Interest or any predetermined return on a loan, prohibited as it is considered exploitative and unjust in Islamic law (Correct answer)
A government guarantee

Correct answer: Interest or any predetermined return on a loan, prohibited as it is considered exploitative and unjust in Islamic law

Riba refers to interest or any unjust increase in exchange, prohibited in Islamic law because it creates guaranteed returns for the lender without sharing in genuine economic risk.

Question 3: What is the CMA's stance on Shariah compliance screening for investment funds marketed as 'Islamic'?

No regulation of Islamic fund claims
Only SAMA regulates Islamic funds
Funds marketed as Shariah-compliant must have a Shariah supervisory board and invest only in CMA-approved Shariah-compliant securities (Correct answer)
Islamic funds are exempt from CMA regulation

Correct answer: Funds marketed as Shariah-compliant must have a Shariah supervisory board and invest only in CMA-approved Shariah-compliant securities

The CMA requires that funds claiming Shariah compliance must have oversight from qualified Shariah scholars and must restrict investments to permissible securities per their Shariah mandate.

Question 4: What is SAIBOR and how does it relate to fixed-income instruments in Saudi Arabia?

A stock market index
The Saudi arbitration board for disputes
The Saudi Arabian Interbank Offered Rate used as a benchmark for floating-rate instruments (Correct answer)
A type of government bond

Correct answer: The Saudi Arabian Interbank Offered Rate used as a benchmark for floating-rate instruments

SAIBOR (Saudi Arabian Interbank Offered Rate) is the benchmark interest rate at which Saudi banks lend to each other. It serves as a reference rate for floating-rate bonds, Sukuk, and other financial instruments.

Question 5: What is the function of the CMA's 'Market Surveillance' department?

Approving new listings
Managing the Saudi Exchange IT systems
Conducting investor education
Monitoring trading activity to detect manipulation, insider dealing, and market abuse (Correct answer)

Correct answer: Monitoring trading activity to detect manipulation, insider dealing, and market abuse

The Market Surveillance function monitors real-time and historical trading data to identify patterns indicative of manipulation, insider trading, or other market abuse.

Question 6: What is a Real Estate Investment Trust (REIT) in Saudi Arabia?

A bank mortgage product
A private real estate development company
A government housing program
A publicly traded closed-end fund that invests in income-generating real estate (Correct answer)

Correct answer: A publicly traded closed-end fund that invests in income-generating real estate

Saudi REITs are closed-end investment funds listed on Tadawul that invest at least 75% of assets in income-generating real estate. They must distribute at least 90% of net income as dividends to unitholders annually.

Question 7: What role does the company secretary play in Saudi corporate governance?

Replacing the CEO when absent
Managing the company's finances
Facilitating board meetings, maintaining records, and ensuring compliance with governance requirements (Correct answer)
Only managing shareholder communications

Correct answer: Facilitating board meetings, maintaining records, and ensuring compliance with governance requirements

The company secretary is responsible for recording and maintaining meeting minutes, ensuring regulatory compliance, managing board communications, maintaining corporate records, and facilitating shareholder meetings.

Question 8: What is 'murabaha' in Islamic finance?

A cost-plus-profit sale where the seller discloses the cost and an agreed profit margin to the buyer (Correct answer)
A donation structure
A profit-sharing partnership
An Islamic lease

Correct answer: A cost-plus-profit sale where the seller discloses the cost and an agreed profit margin to the buyer

Murabaha is a sale where the seller discloses the original cost and adds an agreed profit margin; widely used in trade finance and asset financing as a Shariah-compliant alternative to loans.

Question 9: Which index tracks the performance of the 30 largest and most liquid stocks on Tadawul?

Tadawul All Share Index (TASI)
MSCI Saudi Arabia Index
FTSE Saudi Arabia Index
MT30 Index (Correct answer)

Correct answer: MT30 Index

The MT30 Index (Market Tracker 30) tracks the top 30 most traded and largest stocks on Tadawul. TASI, while important, tracks all listed stocks rather than a select group of blue-chip companies.

Question 10: How does a 'diminishing musharaka' work in property financing?

The bank reduces fees over time
The bank and customer co-own the property; the customer gradually buys out the bank's share while paying rent on the bank's portion (Correct answer)
It is a bond structure
The customer reduces payments annually

Correct answer: The bank and customer co-own the property; the customer gradually buys out the bank's share while paying rent on the bank's portion

In diminishing musharaka, the bank and customer jointly own an asset; over time the customer purchases the bank's share in installments, and rent on the bank's remaining share decreases accordingly.

Question 11: What is a 'repurchase agreement' (repo) in the Saudi money market?

A type of sukuk
A short-term borrowing arrangement where securities are sold with an agreement to repurchase them at a higher price on a later date (Correct answer)
An interbank deposit
A share buyback from the market

Correct answer: A short-term borrowing arrangement where securities are sold with an agreement to repurchase them at a higher price on a later date

A repo involves selling securities to a counterparty with a contractual obligation to repurchase them at a set price on a future date, effectively functioning as a secured short-term loan.

Question 12: What is a 'beneficial owner' under Saudi AML regulations?

The person whose name is on the account
The fund manager of an investment fund
The natural person who ultimately owns or controls a customer or on whose behalf a transaction is conducted (Correct answer)
The bank branch manager

Correct answer: The natural person who ultimately owns or controls a customer or on whose behalf a transaction is conducted

The beneficial owner is the natural person who ultimately owns or controls a legal entity customer, or the person on whose behalf a transaction is being conducted. Identifying beneficial owners helps prevent use of shell companies for money laundering.

Question 13: What is a 'benchmark' in the context of Saudi equity portfolio management?

A standard index (e.g., TASI) used to measure portfolio performance against the market (Correct answer)
The minimum return guarantee
The CMA's required return
The risk-free rate only

Correct answer: A standard index (e.g., TASI) used to measure portfolio performance against the market

A benchmark is a reference index (such as the Tadawul All Share Index, TASI) against which portfolio returns and risk are measured for performance evaluation.

Question 14: What is 'istisna' and in what context is it used in Islamic project finance?

An Islamic equity swap
An Islamic bond type
A spot commodity trade
A manufacturing or construction contract where payment is made in advance or installments for a specified asset to be built and delivered, used in real estate and infrastructure (Correct answer)

Correct answer: A manufacturing or construction contract where payment is made in advance or installments for a specified asset to be built and delivered, used in real estate and infrastructure

Istisna is a contract for the manufacture or construction of a specified asset; payment can be in installments and delivery at completion, making it ideal for project finance and real estate development.

Question 15: Under the Saudi Capital Market Law, which activity requires a license from the CMA?

Dealing in securities as a business (Correct answer)
Opening a bank savings account
Trading foreign currencies at airports
Purchasing government bonds for personal investment

Correct answer: Dealing in securities as a business

Dealing in securities as a business activity requires authorization from the CMA. The Capital Market Law mandates that any person carrying out securities business must be licensed by the CMA.

Question 16: What distinguishes 'preferred shares' from ordinary shares in Saudi Arabia?

Preferred shares are CMA-issued instruments
No meaningful distinction
Preferred shares typically have priority on dividends and/or assets in liquidation but may have restricted or no voting rights (Correct answer)
Preferred shares are only for foreign investors

Correct answer: Preferred shares typically have priority on dividends and/or assets in liquidation but may have restricted or no voting rights

Preferred shares confer dividend priority and/or liquidation preference over ordinary shareholders, but often come with limited or no voting rights.

Question 17: What is a 'takaful' product in Islamic finance?

A profit-sharing deposit
An Islamic cooperative insurance model based on mutual contribution and solidarity rather than conventional risk transfer (Correct answer)
A conventional insurance policy
A sovereign sukuk

Correct answer: An Islamic cooperative insurance model based on mutual contribution and solidarity rather than conventional risk transfer

Takaful is an Islamic insurance model where participants contribute to a mutual fund; claims are paid from the fund and any surplus may be returned to participants, avoiding conventional insurance's riba and gharar.

Question 18: What role does the National Debt Management Center (NDMC) play in Saudi Arabia?

Managing the Kingdom's debt portfolio and executing borrowing strategy (Correct answer)
Operating the stock exchange
Regulating commercial banks
Setting SAIBOR rates

Correct answer: Managing the Kingdom's debt portfolio and executing borrowing strategy

The NDMC is responsible for managing the government's debt activities, including planning and executing local and international borrowing programs, managing the government's debt portfolio, and developing the Saudi debt market.

Question 19: What is an 'investment fund' under CMA Investment Funds Regulations?

A collective investment scheme pooling investor money to invest in a portfolio managed by a licensed fund manager (Correct answer)
A unit of sukuk
A fixed-term bank deposit
A government savings account

Correct answer: A collective investment scheme pooling investor money to invest in a portfolio managed by a licensed fund manager

Investment funds pool money from multiple investors to invest in diversified portfolios managed by CMA-licensed fund managers, allowing access to professional management.

Question 20: Under Saudi corporate governance, what disclosure obligations apply to board members regarding conflicts of interest?

No disclosure is required
Only the chairman must disclose conflicts
Disclosure is only required for amounts above SAR 1 million
Board members must disclose any direct or indirect interest in transactions with the company (Correct answer)

Correct answer: Board members must disclose any direct or indirect interest in transactions with the company

Board members must disclose any direct or indirect interest in contracts or transactions with the company. The interested director must not participate in voting on such matters, and these transactions require shareholder approval.

Question 21: What is the obligation of a licensed person who discovers that one of its employees has engaged in insider trading?

Dismiss the employee quietly
Notify SAMA only
Handle it internally without reporting
Report the violation to the CMA and cooperate fully with any resulting investigation (Correct answer)

Correct answer: Report the violation to the CMA and cooperate fully with any resulting investigation

Licensed firms are obligated to report discovered violations by employees to the CMA and must not conceal or suppress evidence of misconduct under CMA rules.

Question 22: What is the primary regulation governing investment funds in Saudi Arabia?

Zakat and Income Tax Law
Companies Law
Investment Funds Regulations issued by the CMA (Correct answer)
Banking Control Law

Correct answer: Investment Funds Regulations issued by the CMA

The Investment Funds Regulations (IFR) issued by the CMA govern the establishment, management, and operation of investment funds in Saudi Arabia. These regulations cover both public and private funds.

Question 23: What distinguishes 'ijara sukuk' from 'murabaha sukuk'?

No meaningful difference
Ijara sukuk are only for government issuers
Ijara sukuk are lease-based with periodic rental payments; murabaha sukuk are cost-plus sale based with a lump-sum return (Correct answer)
Murabaha sukuk are equity instruments

Correct answer: Ijara sukuk are lease-based with periodic rental payments; murabaha sukuk are cost-plus sale based with a lump-sum return

Ijara sukuk generate returns from periodic lease rentals on underlying assets; murabaha sukuk generate returns from the profit margin in a cost-plus sale, typically resulting in a bullet payment.

Question 24: What is the purpose of the 'Shariah fatwa' in structuring Islamic capital market products?

A government bond guarantee
A rating agency opinion
A formal religious ruling from qualified scholars certifying that a financial product's structure complies with Islamic law (Correct answer)
A CMA compliance certificate

Correct answer: A formal religious ruling from qualified scholars certifying that a financial product's structure complies with Islamic law

A Shariah fatwa is a formal legal opinion from qualified Islamic scholars confirming that a product's structure, contracts, and intended use comply with Islamic jurisprudence.

Question 25: If the offeror revises (increases) the offer price during the offer period, who benefits from the higher price?

Only institutional shareholders holding more than 1% of the target
Only shareholders who accept after the revision is announced
All shareholders who accept the offer, including those who already tendered at the lower price (Correct answer)
Only shareholders who reject the original price and then re-tender their shares

Correct answer: All shareholders who accept the offer, including those who already tendered at the lower price

When the offer price is revised upward, all accepting shareholders—including those who tendered before the revision—receive the improved price under CMA's equal treatment principle.

Question 26: What is 'musharaka' in Islamic finance?

A lease agreement
A joint venture or partnership where all parties contribute capital and share profit and loss proportionally (Correct answer)
A deferred sale
A pure loan structure

Correct answer: A joint venture or partnership where all parties contribute capital and share profit and loss proportionally

Musharaka is a partnership where all partners contribute capital, share in profits according to agreed ratios, and bear losses proportional to their capital contribution.

Question 27: What happens to a conditional tender offer if the minimum acceptance condition is not met by the closing date?

The offer converts into a partial offer for the shares that were tendered
The offer lapses and all tendered shares are returned to their owners (Correct answer)
The offer automatically extends for another 28-day period
The CMA requires the offeror to complete the purchase regardless

Correct answer: The offer lapses and all tendered shares are returned to their owners

If a conditional tender offer fails to achieve its minimum acceptance threshold by the closing date, the offer lapses and all shares tendered by shareholders are returned to them.

Question 28: What is the minimum subscription amount for a private placement fund in Saudi Arabia?

No minimum if investor qualifies
SAR 1,000
SAR 10,000
SAR 50,000 (Correct answer)

Correct answer: SAR 50,000

Private placement funds in Saudi Arabia typically require a minimum subscription of SAR 50,000 or its equivalent. Investors must also meet the CMA's definition of a sophisticated or qualified investor.

Question 29: What is an 'Exchange Traded Fund' (ETF) listed on the Saudi Exchange?

A private equity fund
An open-ended fund whose units trade on the exchange like shares, tracking an index or basket of assets (Correct answer)
A money market fund
A closed-end fund requiring CMA approval for each trade

Correct answer: An open-ended fund whose units trade on the exchange like shares, tracking an index or basket of assets

ETFs are open-ended investment funds listed on the Saudi Exchange that track an index or asset basket, offering intraday tradability and typically lower fees than active funds.

Question 30: What is the concept of 'zakat' and its relevance to Saudi capital market participants?

A voluntary charitable donation
An obligatory annual wealth tax under Islamic law payable on qualifying assets above the nisab threshold, relevant to company and investor obligations (Correct answer)
A government bond payment
A general sales tax

Correct answer: An obligatory annual wealth tax under Islamic law payable on qualifying assets above the nisab threshold, relevant to company and investor obligations

Zakat is an obligatory annual levy at 2.5% on qualifying net wealth above the nisab. Saudi listed companies may have zakat obligations, and compliance is overseen by the Zakat, Tax, and Customs Authority.

CME-1 Capital Market Examination Level 1

The CME-1 is Saudi Arabia's mandatory licensing exam for capital market professionals, administered by the Financial Academy on behalf of the Capital Market Authority (CMA), covering securities regulations, market conduct rules, AML compliance, and investment instruments.

Questions

35 min

Time Limit

70%

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