CME-1 Islamic Finance & CMA Regulations 2 — Questions and Answers
Question 1: What is 'gharar' and why is it prohibited in Islamic finance?
- A form of profit-sharing
- Excessive uncertainty or ambiguity in a contract's terms that could lead to dispute, prohibited as it is unjust (Correct answer)
- A bond structure
- A type of Islamic equity
Correct answer: Excessive uncertainty or ambiguity in a contract's terms that could lead to dispute, prohibited as it is unjust
Gharar refers to contracts with excessive ambiguity, uncertainty, or speculative elements in key terms (price, subject matter, timing), making them potentially unjust or exploitative.
Question 2: What is 'maysir' and how does it relate to Islamic capital market regulations?
- A type of Shariah audit
- Gambling or speculative activity, prohibited under Islamic law; regulators apply this to exclude highly speculative derivative structures (Correct answer)
- An investment grade rating
- An Islamic partnership
Correct answer: Gambling or speculative activity, prohibited under Islamic law; regulators apply this to exclude highly speculative derivative structures
Maysir refers to gambling or pure speculation where one party gains at another's expense without legitimate economic activity, which Islamic finance principles prohibit.
Question 3: What role does AAOIFI play in Islamic capital markets?
- Issues CMA licenses
- Sets Shariah and accounting standards for Islamic financial institutions adopted widely including in Saudi Arabia (Correct answer)
- Manages the Saudi Exchange
- Sets monetary policy
Correct answer: Sets Shariah and accounting standards for Islamic financial institutions adopted widely including in Saudi Arabia
AAOIFI (Accounting and Auditing Organisation for Islamic Financial Institutions) issues internationally recognised Shariah standards, accounting standards, and governance standards for Islamic finance.
Question 4: What is a 'takaful' product in Islamic finance?
- A conventional insurance policy
- An Islamic cooperative insurance model based on mutual contribution and solidarity rather than conventional risk transfer (Correct answer)
- A sovereign sukuk
- A profit-sharing deposit
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 5: 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)
- The customer reduces payments annually
- It is a bond structure
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 6: What is the CMA's stance on Shariah compliance screening for investment funds marketed as 'Islamic'?
- No regulation of Islamic fund claims
- 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
- Only SAMA regulates Islamic funds
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.
CME-1 Islamic Finance & CMA Regulations 2
What is 'gharar' and why is it prohibited in Islamic finance?