CME-1 Islamic Finance & CMA Regulations 1 — Questions and Answers
Question 1: What is 'riba' and why is it prohibited in Islamic finance?
- A type of equity instrument
- Interest or any predetermined return on a loan, prohibited as it is considered exploitative and unjust in Islamic law (Correct answer)
- A form of market manipulation
- 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 2: What does 'Shariah compliance' mean for a Saudi capital market product?
- Approved by the Saudi government
- Structured to comply with Islamic law principles: no riba, gharar, maysir, and backed by permissible activities (Correct answer)
- Listed on the Saudi Exchange
- Denominated in Saudi Riyals
Correct answer: Structured to comply with Islamic law principles: no riba, gharar, maysir, and backed by permissible activities
Shariah compliance requires that financial products avoid interest (riba), excessive uncertainty (gharar), gambling (maysir), and must be backed by permissible (halal) underlying assets or activities.
Question 3: What is a 'Shariah Supervisory Board' in the context of Islamic financial institutions?
- A government regulatory body
- An independent body of Islamic scholars that reviews and certifies a firm's products and activities as Shariah-compliant (Correct answer)
- A CMA inspection team
- An internal audit committee
Correct answer: An independent body of Islamic scholars that reviews and certifies a firm's products and activities as Shariah-compliant
A Shariah Supervisory Board consists of qualified Islamic scholars who provide fatwas (religious rulings) certifying that products, contracts, and activities comply with Islamic law.
Question 4: What is 'murabaha' in Islamic finance?
- A profit-sharing partnership
- A cost-plus-profit sale where the seller discloses the cost and an agreed profit margin to the buyer (Correct answer)
- An Islamic lease
- A donation structure
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 5: What is 'musharaka' in Islamic finance?
- A pure loan structure
- A joint venture or partnership where all parties contribute capital and share profit and loss proportionally (Correct answer)
- A lease agreement
- A deferred sale
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 6: What is 'mudaraba' in Islamic finance?
- A secured loan
- A profit-sharing arrangement where one party provides capital (rabb ul mal) and another provides labour/management (mudarib), sharing profit but with losses borne by the capital provider (Correct answer)
- A commodity swap
- An Islamic forward contract
Correct answer: A profit-sharing arrangement where one party provides capital (rabb ul mal) and another provides labour/management (mudarib), sharing profit but with losses borne by the capital provider
Mudaraba is a trust-based arrangement: the capital provider funds the venture, the manager operates it, profits are shared per agreement, and financial losses fall on the capital provider only.
CME-1 Islamic Finance & CMA Regulations 1
What is 'riba' and why is it prohibited in Islamic finance?