chapter 4 ; FEATURES OF ISLAMIC BANKING AND FINANCE

what is a musharaka contract?

- all partners may provide capital and expertise or capital only - profits are shared in accordance with the pre-agreed ratio which reflects the input of the partners - losses are distributed in the proportions of capital provided.

what are the different commercial banking products and services?

- deposit/investment products for sourcing of funds >wadiah-based deposits > mudarabah-based deposits/investments >qard hassan-based deposits - financing products for the mobilisation of funds > asset financing based on murabaha > pesonal loans using murbaha?tawarruq > ijarah home financing > project financing using istisna > islamic credit card based on ujra > salam for agricultural financing - other products > wakala letter of credit > rahn > hawala

what are the differences between Shariah-compliant investing and its counterparts?

- mainly related to industries that are repugnant towards Shariah and cannot be invested in. - accountability toward God and society

whom do IFIs have a social responsibility?

- stakeholders - society - assist anyone in hardship or financial crisis - to eradicate poverty - redistribute wealth to the poor

what is a mudaraba contract?

-a party provides the capital while the business is managed by the other party -the profits are shared in accordance with a pre-agreed ratio - losses are distributed in the proportions of capital

what is the similarity between SRI and Shairah-compliant investing?

-both are driven by faith-based objectives -have to make their investment judgements within the gambit of responsible behaviour and accountability.

define an islamic bank

a company or corporation licensed by the relevant authority to carry out banking activities or businesses according to the rules, principles and objectives of Shariah

what can be done so that participatory financing is permissible without compromising the achievement of socio-economic goals?

a number of debt-based modes of investment and financing are permitted that are linked to trade in real goods and services without being subjected to interest.

what is a wakala contract?

agency agreement in which the agent agrees to undertake a service on behalf of the principal typically used in asset management

what is the philosophical background of Islamic banking and finance?

all property belongs to Allah

what are the key nominate contracts used in Islamic financial services?

amanah, wadia, qard al-hassan, mudaraba, musharaka, murabaha, ijara, salam, istisna, bai bi al-thaman al-ajil, wakala, wa'd, bai al-inah, tawarruq

what are the two preferred transaction types?

asset-backed financing and participation finance

what is a qard al- hassan contract?

benevolent loan need to be repaid without interest

how do Islamic bank assist those who are in hardship or financial crisis?

by being lenient in their approach to debt recovery and apply compassion, forgiveness and simplification to the debt recovery process or consider writing off the debt if the debt cannot be recovered.

how is the Islamic socio-economic objectives; eradication of poverty, equitable distribution of income and wealth and sufficient opportunities for employment best achieved?

by the implementation of risk and return sharing instruments along with qard al-hassan

what are the basic observations and criticisms against Islamic Banking Practices?

creation of credit, minor role of loans and advances, social responsibility and profit maximization.

what do advocates of credit creation argue?

credit creation leads to reaping unjustified profits that go towards enriching a limited part of the population.

what is a Wadia contract?

deposit transactions bank keeps funds safe on behalf of the client typically applied to current accounts bank need to get permission from the client to apply funds to its business

why are conventional insurance considered non-compliant to the Shariah principles?

due to its features that promote uncertainty and investment in interest-bearing assets

why in Islamic banking the role of loans and advances is limited and minor?

due to the fact that generating a return on loans and advances is not permitted

( T/F ) money has intrinsic value

false

( T/F ) money is commodity that generates profit

false

( T/F) Shariah principles do not adhere to Islamic banks from generating wealth

false

( T/F ) Islamic banks should be only be profit-driven

false. they should also play a role in promoting of Islamic norms and values to achieve the economic objectives prescribed by Shariah

what is an ujra contract?

fee paid for a service

what islamic nominate contract is sukuk widely based on?

ijara

what is shariah-compliant shares?

shares that satisfy certain shariah conditions based on specific shariah-screening filters - have specific index that only include shariah- compliant shares

what are partners that only provide capital called?

sleeping partners

what are some financial products offered by Islamic banks?

sukuk islamic investment funds shariah-compliant shares

how are sukuk similar to equity instruments?

sukuk reflect ownership of real assets and do not guarantee recovery of initial investment.

what is one modification that can be made to credit creation to meet Islamic requirements?

the use of participatory financing which assists in a more equitable distribution of wealth.

why is it not prohibited for Islamic banks to generate wealth and what are the conditions?

they are established to maximise profit, income and revenue for the shareholders the conditions: it is achieved in accordance with the principles of Islamic law

what is the role of Islamic banks?

they are instrumental in achieving a just, fair and balanced society.

what do IFIs have a larger emphasis on compared to conventional financial institutions?

they have a larger emphasis on social responsibility

what is the downside of a debt-based transaction?

they may lead to the creation of default on debt repayments.

what is needed for an institution to be Shariah-compliant?

they need to have controls and procedures in place that ensure compliance with the principles of Shariah which includes; appointing of a Shariah Supervisory Board ( SSB ), moral filter

how do conventional banks meet the needs of the general public?

through savings and loan accounts-based products

what is the purpose of prohibitions and other rules and regulations?

to protect the interests and benefits of all parties involved in market transactions and promote social harmony.

what is the salam contract?

trade transaction where the payment is provided against future delivery of a specific asset. typically applied to short-term production finance

What is the Murabaha contract?

trade transactions in which goods are sold against a potentially deferred payment

( T/F ) IFIs are faith driven

true

( T/F ) man's ownership is limited and not absolute

true

( T/F ) money has no self-replicating properties

true

( T/F ) money is a unit of measurement

true

( T/F ) periodical payments of sukuk cease upon expiration like a bond and unlike equity

true

( T/F ) the same product can be structured using different contracts

true

(T/F) Money is a medium of exchange and store of value

true

what has SRI majorly driven by?

universally accepted values and sustainable development and faith-driven objectives

what do Islamic banks work within on the basis of profit maximisation?

within the framework of the moral objectives of society

how is redistribution of wealth from rich to poor achieved?

zakat assignment of social and economic responsibilities

what are the main similarities between Islamic and conventional banking systems?

1- both are commercial institutions that offer deposit/investment schemes to customers 2- current accounts offer; safekeeping; convenience of payments; no return or profit; principal is guaranteed; cheques, credit and debit cards provided 3- no fixed-term maturity is needed for a savings-type products 4- term deposits typically apply a minimum cancellation period 5- apply interbank facilities for liquidity management

what does the Islamic finance industry have in common with conventional finance?

Islamic banks fulfil the role of intermediary between depositors and users of funds however they need to abide by the principles outlines in Shariah

what do some observers say about IFIs having a larger emphasis on social responsibility?

Islamic banks should operate as a cooperative society and a social service organization

what basis do Islamic banks work on as a result of the requirement of finance an asset or provide a service?

Islamic banks work on the basis of trading, lease, investment, and fee-based contracts.

what does not achieve the same impact as implementing of risk and return sharing instruments along with qard al-Hassan in achieving the Islamic socio-economic objectives?

instruments such as murabaha and ijara this is because charging of interest is highly inequitable since the provider of capital funds is assured a fixed return, while all the risk is borne by the user of these capital funds

what is the philosophy behind the principles of SRI/sustainable/impact investing?

investment decisions is based on the financial aspects, incorporated with ethics, values and societal concerns.

how does the nature of the relationship between the Islamic bank and its client differ from conventional finance?

it depends on the nature of the underlying contract

why do people do not object credit creation in Islamic banks?

it ensures that the benefits from banking operations are equitably distributed.

why is interest prohibited?

it has the potential to create injustice

what is sukuk?

it is a shariah-compliant version of conventional bonds( issuer sells to investors a certificate of ownership of a tangible asset or a particular project.

what is an Amanah contract?

it is a trust transaction bank keeps funds safe on behalf of the client typically applied to current accounts bank need to get permission from the client to apply funds to its business

why are the results of Islamic banking operations not necessarily the same in terms of profitability?

it is due to the fact that Islamic banking is based on different principles

what is bai bi al-thaman al-ajil contract?

it is murabaha-type transaction used in Asian countries.

why is participatory financing preferred by scholars?

it is preferred by scholars due to its risk and reward and sharing nature

what does the creation of credit lead to?

it leads to instability of prices

what does participation finance refer to?

it refers to financing via risk-sharing partnership in the form of mudaraba or musharaka.

what is interest deemed to lead to?

lead to disinterest and an unwillingness to be responsible for losses and gains

what is the ijara contract?

lease transaction either a finance lease or operating lease

what is an istisna contract?

long-term project finance in which payment towards he construction of the asset is provided in stages during the project

what is islamic investment funds/

means a joint pool in which investors contribute their money for the purpose of investment to earn profits that are compliant to shariah

what is a tawarruq contract?

murahaba-type transaction in which an unrelated commodity is used to provide financing

( T/F ) is participatory financing is suitable to meet every financial requirement?

no

is generating a return on loans and advances is considered to be a profitable activity?

no

what is implied by the prohibition of riba?

no possibility of purely making money with money

how do islamic banks meet the demands of their customers?

personal loans, house loans, lease-purchasing loans, and automobile loans

what is a Wa'd contract?

promise in which a party promises to undertake something in the future typically used in forward exchange transactions and profits rate swaps

what is a bai al-inah contract?

sale and buy-back transaction in which the same good is sod between two parties with the payment of the buy-back being delayed. sale and buy-back are undertaken back-to-backR