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IBSL Diploma in Banking and Finance (DBF) Exam study materials
IBSL Diploma in Banking and Finance (DBF) Exam study resources

IBSL Diploma in Banking and Finance (DBF) Exam practice questions

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Question 1Principles and Practices of Banking

What is the primary objective of a central bank in most jurisdictions?

  1. To underwrite corporate share issues for clients
  2. To provide retail loans directly to households
  3. To maintain price and financial stability Correct answer.
  4. To maximise profits for its private shareholders

Explanation

A central bank conducts monetary policy and safeguards the stability of the financial system. It is a public policy institution rather than a profit-maximising commercial lender. Retail and underwriting activities are undertaken by commercial and investment banks.

Question 2Principles and Practices of Banking

Which type of bank account is designed for frequent transactions and permits unlimited withdrawals, usually without interest?

  1. Current account Correct answer.
  2. Recurring deposit account
  3. Fixed deposit account
  4. Savings account

Explanation

A current account is a demand deposit account intended for business and frequent transaction use. It normally allows unlimited withdrawals and pays little or no interest. Term and savings products carry withdrawal restrictions.

Question 3Principles and Practices of Banking

In banking, what does the abbreviation KYC denote?

  1. Know Your Credit
  2. Know Your Customer Correct answer.
  3. Key Yield Certificate
  4. Keep Your Cash

Explanation

KYC stands for Know Your Customer. It refers to the identification and due diligence procedures banks use to verify customers and understand their expected activity. These procedures support anti-money-laundering and counter-terrorist-financing controls.

Question 4Principles and Practices of Banking

Which instrument is an unconditional written order addressed by a customer to a bank, requiring payment on demand?

  1. A share certificate
  2. A fixed deposit receipt
  3. A letter of credit
  4. A cheque Correct answer.

Explanation

A cheque is a bill of exchange drawn on a banker and payable on demand. It contains an unconditional order by the drawer directing the bank to pay a specified sum. The other instruments serve different legal and commercial purposes.

Question 5Principles and Practices of Banking

The cash reserve ratio requires banks to:

  1. keep a proportion of assets in government securities
  2. maintain a minimum ratio of capital to risk-weighted assets as defined
  3. lend a fixed share of deposits to priority sectors
  4. hold a set share of deposits as cash with the central bank Correct answer.

Explanation

The cash reserve ratio is a monetary policy instrument that requires banks to keep a specified proportion of deposits as balances with the central bank. It influences liquidity and credit creation. Capital adequacy and liquid asset requirements are separate prudential rules.

Question 6Principles and Practices of Banking

A loan is generally classified as non-performing when principal or interest is overdue for more than:

  1. 90 days Correct answer.
  2. 180 days
  3. 60 days
  4. 30 days

Explanation

The widely used prudential benchmark treats a loan as non-performing once principal or interest is past due for more than 90 days. This threshold reflects sustained delinquency rather than a short payment delay. Individual regulators may apply stricter criteria for specific exposures.

Question 7Principles and Practices of Banking

Which body is responsible for licensing and supervising commercial banks in Sri Lanka?

  1. Colombo Stock Exchange
  2. Central Bank of Sri Lanka Correct answer.
  3. Department of Inland Revenue
  4. Securities and Exchange Commission

Explanation

The Central Bank of Sri Lanka is the banking regulator and supervisor, acting under the banking legislation. It licenses banks and monitors their safety and soundness. The other institutions handle securities regulation, trading, or tax administration.

Question 8Principles and Practices of Banking

A debit card differs from a credit card mainly because a debit card:

  1. is issued only to large corporate customers
  2. debits the holder's account at settlement Correct answer.
  3. carries no personal identification number for the holder
  4. allows the holder to repay the balance over instalments

Explanation

A debit card draws directly on the holder's deposit account, so funds are deducted at or shortly after the transaction. A credit card creates a revolving loan that the holder repays later. Debit cards are issued to a wide range of personal and business customers.

Question 9Principles and Practices of Banking

In a repurchase (repo) transaction, a bank typically:

  1. buys securities outright from the market and holds them without resale
  2. sells securities with an agreement to repurchase them later Correct answer.
  3. issues new ordinary shares to the public in order to raise capital
  4. exchanges fixed-rate loans for floating-rate loans with another bank

Explanation

A repo is a collateralised short-term borrowing in which securities are sold now and repurchased later at a specified price. The difference between the sale and repurchase prices represents the interest cost. Outright purchases, equity issuance, and loan swaps are different transactions.

Question 10Principles and Practices of Banking

The risk of loss resulting from inadequate internal processes, people, systems, or external events is known as:

  1. Liquidity funding risk
  2. Credit risk
  3. Operational risk Correct answer.
  4. Market risk

Explanation

Operational risk covers failures in internal procedures, staff, technology, and external events such as fraud or natural disasters. Credit risk concerns borrower default, while market risk arises from price movements. Liquidity funding risk is the inability to meet obligations as they fall due.

Question 11Principles and Practices of Banking

Under Basel III, the minimum Common Equity Tier 1 (CET1) capital ratio, excluding buffers, is:

  1. 8.0%
  2. 4.5% Correct answer.
  3. 4.0%
  4. 2.0%

Explanation

Basel III sets the minimum CET1 ratio at 4.5% of risk-weighted assets before add-on buffers are considered. The Tier 1 minimum is 6.0%, and the total capital minimum is 8.0%. The buffer requirements are additional to these minima.

Question 12Principles and Practices of Banking

If the reserve ratio is 10% and banks hold no excess reserves, the simple money multiplier is:

  1. 8
  2. 2
  3. 5
  4. 10 Correct answer.

Explanation

The simple money multiplier equals one divided by the reserve ratio. With a 10% reserve ratio, the multiplier is 1 divided by 0.10, which equals 10. Excess reserves and currency leakage would reduce the actual multiplier.

Question 13Principles and Practices of Banking

When a cheque is crossed generally with two parallel lines, the collecting bank must:

  1. pay cash across the counter to the bearer on demand
  2. obtain prior approval from the central bank for payment
  3. endorse the cheque in favour of a third party
  4. credit the amount to a bank account Correct answer.

Explanation

A general crossing directs that the cheque be paid only through the banking system, normally by credit to an account. It is a protective mechanism against encashment by an unknown bearer. Cash payment over the counter defeats the purpose of crossing.

Question 14Principles and Practices of Banking

A documentary letter of credit is best described as:

  1. an insurance policy covering losses during shipment of goods
  2. a bank's undertaking to pay against compliant documents Correct answer.
  3. a loan granted by the exporter to the importer for the shipment
  4. a guarantee of the quality of the goods shipped to the buyer

Explanation

A documentary letter of credit is a bank's conditional undertaking to pay the beneficiary when stipulated documents are presented and comply with the credit terms. Banks deal in documents rather than in the goods themselves. It reduces payment risk in international trade.

Question 15Principles and Practices of Banking

Basis risk in banking refers to the risk that:

  1. a bank cannot meet depositors' withdrawal requests on time
  2. a borrower defaults on a loan repayment
  3. asset and liability rates move by different amounts Correct answer.
  4. a bank's core computer system fails

Explanation

Basis risk arises when the interest rates on assets and liabilities are linked to different benchmarks and do not move together. The resulting mismatch can compress margins even when overall rate changes are anticipated. It is a component of interest rate risk.

Question 16Principles and Practices of Banking

A banker's right to retain a customer's securities until a debt is repaid is known as:

  1. Set-off
  2. Novation
  3. Lien Correct answer.
  4. Subrogation

Explanation

A lien is a right to retain property belonging to another until a debt or obligation is discharged. A banker's lien may apply to securities and documents held for the customer, subject to the terms of the relationship. Set-off, novation, and subrogation have different legal meanings.

Question 17Principles and Practices of Banking

A court garnishee order served on a bank requires the bank to:

  1. close the customer's account permanently without notice
  2. transfer the customer's account to another bank branch
  3. disclose all customer transactions to the general public
  4. freeze and remit funds to satisfy a judgment debt Correct answer.

Explanation

A garnishee order attaches money held by the bank for the judgment debtor. The bank must freeze the relevant balance and remit it to satisfy the judgment debt, subject to the order's terms. It does not authorise account closure or public disclosure.

Question 18Principles and Practices of Banking

Financial inclusion primarily means:

  1. eliminating interest charges on all consumer loans
  2. access to affordable financial services for all segments Correct answer.
  3. nationalising all private commercial banks operating in the country
  4. making credit available only to large corporate borrowers

Explanation

Financial inclusion refers to ensuring that individuals and businesses can access useful and affordable financial services, such as accounts, credit, savings, and payments. It focuses on underserved segments rather than on excluding or nationalising institutions. Interest pricing is a separate policy question.

Question 19Principles and Practices of Banking

Securitisation involves:

  1. converting short-term deposits into long-term loans for borrowers
  2. pooling loans and issuing securities backed by cash flows Correct answer.
  3. transferring government debt holdings to the central bank
  4. issuing new equity shares to existing shareholders at a discount

Explanation

Securitisation pools assets such as loans and issues marketable securities whose payments depend on the pooled cash flows. It converts illiquid assets into tradable instruments. Deposit transformation, equity issuance, and central bank debt transfers are different operations.

Question 20Principles and Practices of Banking

A Sri Lankan bank's nostro account is:

  1. an account maintained with a foreign correspondent bank Correct answer.
  2. a suspense account for unclaimed deposit balances
  3. a loan account used for defaulting borrowers
  4. an account held by a foreign bank with the local bank branch

Explanation

A nostro account is a bank's own account held with a foreign correspondent bank, usually in the foreign currency of that country. It is used to settle international payments and maintain foreign currency balances. A foreign bank's account with the local bank would be a vostro account.

Question 21Principles and Practices of Banking

A positive duration gap in a bank's balance sheet implies that:

  1. a rise in interest rates tends to reduce equity value Correct answer.
  2. a rise in interest rates tends to increase the market value of equity
  3. the bank's assets are all short-term and rate-insensitive
  4. the bank has no exposure to interest rate changes at all

Explanation

Duration gap measures the sensitivity of asset value to interest rate changes relative to liabilities. When the duration gap is positive, assets are more rate-sensitive than liabilities, so rising rates reduce the net value of equity. A negative gap would produce the opposite effect.

Question 22Principles and Practices of Banking

Under Basel III, the Liquidity Coverage Ratio requires a bank to hold sufficient high-quality liquid assets to cover net cash outflows over a:

  1. 7 calendar days
  2. 30 calendar days Correct answer.
  3. one calendar year
  4. 90 calendar days

Explanation

The Liquidity Coverage Ratio is designed to ensure that a bank can survive a 30-calendar-day stress scenario. It compares high-quality liquid assets with projected net cash outflows under stress. Longer horizons are addressed by other liquidity metrics such as the net stable funding ratio.

Question 23Principles and Practices of Banking

In banking, moral hazard is best illustrated by:

  1. depositors rushing to withdraw funds during a market rumour
  2. a bank holding capital well above the regulatory minimum
  3. a borrower takes more risk because the lender bears losses Correct answer.
  4. a bank failing to screen prospective borrowers before lending

Explanation

Moral hazard arises when one party changes its behaviour because another party bears the consequences of risk. A borrower may take excessive risk knowing that the lender absorbs losses. Weak screening is an example of adverse selection or poor underwriting rather than moral hazard itself.

Question 24Principles and Practices of Banking

The capital conservation buffer under Basel III is set at:

  1. 0.5% of risk-weighted assets
  2. 1.0% of risk-weighted assets
  3. 1.5% of risk-weighted assets
  4. 2.5% of risk-weighted assets Correct answer.

Explanation

Basel III requires a capital conservation buffer of 2.5% of risk-weighted assets, made up of Common Equity Tier 1. It sits above the minimum capital requirements and restricts distributions when the buffer is depleted. The countercyclical buffer is a separate add-on.

Question 25Principles and Practices of Banking

A countercyclical capital buffer is best classified as:

  1. a macroprudential tool that raises capital requirements in booms Correct answer.
  2. a fiscal instrument that imposes additional taxes on bank profits
  3. a monetary policy tool used to set the central bank policy interest rate
  4. a liquidity rule that limits maturity transformation in banks

Explanation

The countercyclical capital buffer is a macroprudential instrument that builds capital during periods of strong credit growth and releases it during downturns. It aims to lean against the financial cycle and strengthen resilience. It is not a policy rate, tax, or liquidity rule.

Question 26Principles and Practices of Banking

Which feature distinguishes a current account from a savings account?

  1. They are repayable only after seven days' notice
  2. They pay a higher rate of interest than fixed deposits
  3. They offer cheque drawing facilities and normally pay no interest Correct answer.
  4. They may be opened only by corporate customers

Explanation

A current account is a demand deposit account operated mainly for business payments; it carries cheque drawing facilities and, in normal practice, does not earn interest. Savings accounts, by contrast, earn interest and generally restrict withdrawals.

Question 27Principles and Practices of Banking

A promissory note involves which parties?

  1. Two: the drawer and the drawee
  2. Three: drawer, drawee and payee
  3. Three: maker, endorser and acceptor
  4. Two: the maker and the payee Correct answer.

Explanation

A promissory note contains an unconditional promise by the maker to pay a sum certain to the payee, so only two parties are needed. A bill of exchange, by contrast, is an order addressed by a drawer to a drawee.

Question 28Principles and Practices of Banking

A cheque is returned to the collecting bank with the reason 'refer to drawer'. This normally means that:

  1. The cheque has become stale after six months
  2. The cheque requires the drawer's prior confirmation
  3. The drawer's signature differs from the specimen held
  4. There are insufficient funds in the drawer's account Correct answer.

Explanation

'Refer to drawer' is the standard return reason used when the paying bank declines to pay, most commonly because the balance is insufficient or the account is not in funds. Signature discrepancies and staleness are returned under different reason codes.

Question 29Principles and Practices of Banking

At which stage of money laundering are criminal proceeds reintroduced into the economy as apparently legitimate assets?

  1. Integration Correct answer.
  2. Layering
  3. Placement
  4. Structuring

Explanation

Money laundering proceeds through placement, layering and integration; the final stage gives the funds an apparently legitimate origin. Structuring is a technique for evading reporting thresholds, not a stage of laundering.

Question 30Principles and Practices of Banking

A bank lends Rs. 15 million against a property valued at Rs. 20 million. The loan-to-value ratio is:

  1. 25 per cent
  2. 15 per cent
  3. 133 per cent
  4. 75 per cent Correct answer.

Explanation

The loan-to-value ratio divides the loan amount by the value of the security: 15 million divided by 20 million equals 0.75, or 75 per cent. It measures the proportion of the asset's value financed by the bank.

Question 31Principles and Practices of Banking

Where the payee of a cheque signs on the reverse without naming an endorsee, the endorsement is:

  1. Conditional, taking effect only on a stated event
  2. Special, transferring the cheque to a named person
  3. Restrictive, stopping further negotiation
  4. In blank, making the instrument payable to bearer Correct answer.

Explanation

An endorsement consisting only of the signatory's signature is an endorsement in blank, and the instrument then becomes payable to bearer. A special endorsement names the person to whom the instrument is payable.

Question 32Principles and Practices of Banking

A bank holds rate-sensitive assets of Rs. 800 million and rate-sensitive liabilities of Rs. 600 million over the next twelve months. Net interest income will most likely:

  1. Fall if interest rates rise
  2. Be unaffected by any change in rates
  3. Rise if interest rates rise Correct answer.
  4. Rise if interest rates fall

Explanation

A positive rate-sensitive gap means more assets than liabilities reprice within the period, so higher rates raise interest income faster than interest expense. A negative gap produces the opposite outcome.

Question 33Principles and Practices of Banking

A bank issues an unconditional on-demand performance guarantee. The bank's payment obligation is:

  1. Cancelled automatically if the contractor disputes the beneficiary's claim
  2. Reduced proportionately whenever the underlying contract is varied
  3. Payable on first written demand, independently of the underlying contract Correct answer.
  4. Contingent on the beneficiary first obtaining a court judgment against the contractor

Explanation

An unconditional demand guarantee is autonomous: the bank pays against a complying written demand without investigating the underlying commercial contract. Disputes between the parties are settled separately and do not suspend the bank's obligation.

Question 34Principles and Practices of Banking

In a real time gross settlement system, interbank payments are:

  1. Settled only between banks belonging to the same group
  2. Provisional until the beneficiary bank confirms receipt
  3. Settled individually and irrevocably throughout the business day Correct answer.
  4. Netted and settled once at the end of the business day

Explanation

Real time gross settlement settles each payment separately and immediately in central bank money, and settlement is final and irrevocable. Deferred net settlement systems net obligations and settle at fixed intervals instead.

Question 35Principles and Practices of Banking

When the central bank raises the statutory reserve ratio, the most likely effect is that banks':

  1. Ability to create credit is reduced Correct answer.
  2. Demand for interbank liquidity falls
  3. Capital adequacy ratio rises immediately
  4. Lending capacity expands because reserves earn interest

Explanation

A higher reserve ratio immobilises a larger share of deposits at the central bank, leaving a smaller base for lending and deposit creation. The restraining direction of this effect is what makes the reserve ratio a monetary policy tool.

Question 36Principles and Practices of Banking

Under Basel III, the minimum leverage ratio is:

  1. 3 per cent Correct answer.
  2. 1.5 per cent
  3. 8 per cent
  4. 4.5 per cent

Explanation

The Basel III leverage ratio requires Tier 1 capital of at least 3 per cent of total exposure, including off-balance-sheet items. It acts as a backstop to the risk-weighted capital framework.

Question 37Principles and Practices of Banking

A bank may disclose a customer's account information without the customer's consent when:

  1. The branch manager believes the information is newsworthy
  2. A rival bank requests it for a credit assessment
  3. Disclosure is compelled by a court order or by statute Correct answer.
  4. The customer's employer asks for salary verification

Explanation

The banker's duty of secrecy is not absolute: disclosure is permitted or required where the law compels it, for example under a court order or statutory obligation. Other disclosures generally require the customer's consent.

Question 38Principles and Practices of Banking

Under IFRS 9, provisions for credit losses on loans are measured as:

  1. A management estimate with no allowance for forecast data
  2. Losses recognised only after a default event has occurred
  3. An annual amount fixed by the tax authority for the portfolio
  4. Expected credit losses based on forward-looking information Correct answer.

Explanation

IFRS 9 uses an expected credit loss model, requiring recognition of lifetime or twelve-month expected losses using forward-looking information rather than waiting for default. This makes provisioning more timely and forward-looking than an incurred loss model.

Question 39Principles and Practices of Banking

After a bank files a suspicious transaction report, an officer informs the customer that the account has been reported to the authorities. This conduct is best described as:

  1. Good practice under customer due diligence procedures
  2. Tipping off, which is prohibited because it may prejudice any investigation Correct answer.
  3. Acceptable, because the customer owns the account information
  4. A breach of the duty of confidentiality owed to shareholders

Explanation

Tipping off is the disclosure to the subject of a report that a suspicious transaction report has been made. It is prohibited because it can alert the customer and frustrate investigation or freeze action by the authorities.

Question 40Principles and Practices of Banking

Which party best qualifies as a holder in due course of a cheque?

  1. An endorsee who accepts the cheque after its due date having been told of a competing claim
  2. A person who receives the cheque as a gift long after it became overdue and after learning of an earlier fraud
  3. A person who finds a bearer cheque on the street and keeps it
  4. A person who takes the cheque for value, in good faith, before maturity and without notice of any defect in title Correct answer.

Explanation

A holder in due course takes a negotiable instrument for value, in good faith, before maturity and without notice of any defect in the transferor's title. Such a holder takes free of many prior defences.

Question 41Financial Accounting and Reporting

A company reports total assets of $500,000 and total liabilities of $200,000. Under the accounting equation, what is the amount of equity?

  1. $700,000
  2. $300,000 Correct answer.
  3. $500,000
  4. $200,000

Explanation

The accounting equation states that assets equal liabilities plus equity. Rearranging it gives equity = assets − liabilities. Equity is therefore $500,000 − $200,000 = $300,000.

Question 42Financial Accounting and Reporting

A business buys equipment for $20,000 on 60 days' credit. Which entry correctly records this transaction?

  1. Debit equipment $20,000; credit cash $20,000
  2. Debit equipment $20,000; credit trade payables $20,000 Correct answer.
  3. Debit cash $20,000; credit equipment $20,000
  4. Debit trade payables $20,000; credit equipment $20,000

Explanation

Buying equipment increases an asset, and assets are increased by a debit. Because payment is deferred, a liability to the supplier arises, and liabilities are increased by a credit.

Question 43Financial Accounting and Reporting

What does a trial balance primarily confirm?

  1. That no transactions have been omitted from the ledger
  2. That the financial statements show a profit for the period
  3. That total debits equal total credits in the ledger Correct answer.
  4. That every transaction has been recorded in the correct accounting period

Explanation

A trial balance lists ledger balances and tests whether the arithmetical total of debits equals the total of credits. It is a check on double-entry bookkeeping accuracy only. It cannot confirm completeness, correct accounting period or profitability.

Question 44Financial Accounting and Reporting

Under the accruals basis, when is an expense recognised in the financial statements?

  1. When the cash is paid to the supplier
  2. When management approves the expenditure
  3. In the period the benefit is consumed Correct answer.
  4. When the supplier's invoice is received

Explanation

The accruals (matching) basis recognises expenses in the period in which the related economic benefit is consumed, regardless of the timing of cash flows. Receipt of an invoice or approval of a payment are administrative events, not recognition triggers.

Question 45Financial Accounting and Reporting

What does the going concern assumption mean when preparing financial statements?

  1. The business expects to be wound up within a year
  2. All assets are stated at current market values
  3. Revenue and expenses are matched each period
  4. The business will continue in operation Correct answer.

Explanation

Going concern means the financial statements are prepared on the basis that the entity will continue in operation for the foreseeable future. Consequently assets are not measured at break-up values. Where this assumption is not appropriate, a different basis must be disclosed.

Question 46Financial Accounting and Reporting

A retailer has revenue of $800,000 and cost of sales of $500,000. What is its gross profit?

  1. $300,000 Correct answer.
  2. $500,000
  3. $1,300,000
  4. $800,000

Explanation

Gross profit is revenue less cost of sales. In this case $800,000 − $500,000 = $300,000. It measures the profit earned before operating and other expenses are deducted.

Question 47Financial Accounting and Reporting

An entity has current assets of $240,000 and current liabilities of $120,000. What is its current ratio?

  1. 0.5:1
  2. 3:1
  3. 2:1 Correct answer.
  4. 1.5:1

Explanation

The current ratio is current assets divided by current liabilities. Here $240,000 ÷ $120,000 = 2.0, expressed as 2:1. It indicates the entity holds two dollars of short-term resources for every dollar of short-term obligations.

Question 48Financial Accounting and Reporting

Which of the following is capital expenditure?

  1. Installing a new production line Correct answer.
  2. Replacing a worn component with an identical part
  3. Repainting the office building every three years
  4. Paying the annual insurance premium on machinery

Explanation

Capital expenditure is incurred to acquire or enhance a non-current asset and bring it into working condition, so it is capitalised. Installing a new production line adds economic capacity and is therefore capital expenditure. Repairs, maintenance and running costs are revenue expenditure.

Question 49Financial Accounting and Reporting

A machine costs $100,000, has an estimated residual value of $10,000 and a useful life of five years. Using straight-line depreciation, what is the annual charge?

  1. $20,000
  2. $18,000 Correct answer.
  3. $10,000
  4. $22,000

Explanation

Straight-line depreciation spreads the depreciable amount, being cost less residual value, evenly over the useful life. Depreciable amount is $90,000, divided by five years gives $18,000 per year.

Question 50Financial Accounting and Reporting

Trade receivables are $200,000. An allowance of 5% is required, and an allowance of $6,000 already exists. What is the charge to profit or loss?

  1. $4,000 Correct answer.
  2. $6,000
  3. $10,000
  4. $14,000

Explanation

The required allowance is 5% of $200,000, which is $10,000. Because $6,000 is already provided, only the increase of $4,000 is charged to profit or loss. The existing balance is credited against the expense rather than ignored.