IBSL Diploma in Islamic Banking Exam cheat sheet

Four core prohibitions in commercial transactions: riba (a predetermined increase on a loan or debt), gharar (excessive uncertainty), maysir/qimar (gambling and pure speculation), and any dealing in haram subject matter.

Riba is classified as riba al-nasi'ah (an increase charged for deferring settlement of a debt) and riba al-fadl (unequal, non-hand-to-hand exchange of the six ribawi commodities: gold, silver, wheat, barley, dates and salt).

Institutional milestones: Mit Ghamr savings bank, Egypt (1963); Islamic Development Bank, Jeddah (1975); Dubai Islamic Bank (1975); Faisal Islamic Bank of Egypt (1977); Bank Islam Malaysia Berhad (1983).

Standard setters: AAOIFI (Bahrain, 1991 - Sharia, accounting, auditing and governance standards); IFSB (Kuala Lumpur, 2002 - prudential and supervisory standards); IIFM (Bahrain, 2001 - market documentation); CIBAFI (Bahrain, 2001 - industry advocacy).

Multilateral and juristic bodies: IsDB (Jeddah, 1975), OIC Fiqh Academy (Jeddah, 1981), IILM (Kuala Lumpur, 2010, short-term liquidity instruments), plus national Sharia boards and the Malaysian Sharia Advisory Council.

Maqasid al-Sharia - protection of religion, life, intellect, offspring and wealth - explains the emphasis on real economic activity, risk sharing and public benefit (maslaha) rather than pure financial engineering.

Contract maxims relied on by Sharia boards: al-kharaj bil-daman (return follows liability), al-ghunm bil ghurm (profit accompanies risk), la darar wa la dirar (no harm, no reciprocating harm), and substance-over-label interpretation.

Ethical values: amanah (trust), sidq (truthfulness), 'adl (justice), full disclosure of terms, and prohibition of ihtikar (hoarding), najash (bidding up to harm another) and taking wealth unjustly (akl al-mal bil-batil).

Outlook themes: fintech and digital onboarding, green and social sukuk, cross-border standardisation, shortage of qualified Sharia and accounting talent, and convergence of Islamic windows into full-fledged subsidiaries.

Sources hierarchy: primary - Quran and Sunnah; secondary - ijma' (consensus of mujtahids) and qiyas (analogy on a shared effective cause, 'illah); supplementary - istihsan, maslaha mursala, urf (custom), istishab and sadd al-dhara'i.

Elements of a valid contract ('aqd): parties with legal capacity, offer (ijab) and acceptance (qabul) in the same session, and a subject matter and price that are known, existent, owned, deliverable and halal.

Prohibited conditions and combinations: two sales in one transaction, a sale combined with a loan (bay' wa salaf), sale of what the seller does not own, and a condition that adds an unlawful benefit to a lender.

Gharar is tolerated only where minor and unavoidable; gharar fahish in price, quantity, specification or delivery time renders the contract void.

Ownership and risk rule: the financier must acquire the asset, bear ownership risk (daman) and possess it (qabd) before selling, leasing or subleasing it to the customer.

Capacity (ahliyyah) has two levels: ahliyyah al-wujub (eligibility to hold rights) and ahliyyah al-ada' (capacity to execute); minors and the mentally incapacitated lack the latter, so guardians act for them.

Nominate-contract discipline: murabaha, ijara, salam, istisna', musharaka and mudaraba each have their own conditions under AAOIFI Sharia Standards, and features of different contracts may not be freely mixed.

Rahn (pledge), kafala (guarantee), hawala (assignment of debt), wakala (agency), ju'ala (reward for a result) and qard hasan (benevolent loan) are permissible ancillary contracts used to structure products.

Liability side: current accounts are qard or wadiah yad damanah (repayable in full, no profit); savings and term accounts are unrestricted or restricted profit-sharing investment accounts (mudaraba) with no capital or return guarantee.

Restricted PSIA: funds are invested only in a specified pool, asset or project, with the bank acting as agent (wakila bil-istithmar); these accounts sit outside the bank's general investment pool.

Asset-side structures: murabaha (cost-plus deferred sale), ijara and ijara muntahia bittamleek, musharaka and musharaka mutanaqisa, mudaraba, salam, istisna' and parallel istisna', and wakala bil-istithmar.

In murabaha the bank must own the asset and bear ownership risk before reselling; organized tawarruq (commodity murabaha) is accepted in the GCC and Malaysia but rejected or restricted by some Sharia boards, so jurisdiction rules govern.

Trade finance toolkit: import murabaha and wakala letters of credit, kafala for shipping and performance guarantees, hawala for remittances, salam for agricultural and commodity purchase, istisna' for project and manufacturing finance, and export finance via murabaha or musharaka.

Fee-based services are structured as wakala, ju'ala, hawala, kafala and wadiah safe custody; a fee may be charged for a genuine service but never simply for advancing money.

Treasury operations: interbank placement through commodity murabaha or Islamic mudaraba deposits, spot FX permitted with immediate exchange, and forward cover achieved through wa'd (binding promise) and arboun structures rather than interest-based forwards.

Profit to investment accounts is allocated using the agreed profit-sharing ratio applied to realised pool profit; losses fall on account holders unless the bank was negligent, breached the mandate or violated Sharia.

Qard hasan is repayable only in the same amount; any increase is riba, and late-payment penalties (gharamah) are donated to charity rather than recognised as income.

Takaful is mutual protection built on tabarru' (donation), ta'awun (cooperation) and participant-owned risk funds; conventional insurance is criticised for gharar in the contract, maysir in the risk exchange and riba in its investments.

Operating models: pure mudaraba (operator shares in fund profit), pure wakala (fixed agency fee, sometimes plus performance fee), wakala-mudaraba hybrid, and the waqf model where contributions vest in a waqf and the operator is a paid agent or trustee.

Fund separation: the participants' risk fund is distinct from the shareholders' fund, and any shareholders' liability to cover a deficit is limited by the constitutional documents and the regulator.

Family takaful splits each contribution into a tabarru' portion for protection and an investment portion accumulated in the participant's individual account, managed on mudaraba or wakala.

Underwriting surplus belongs to participants, is distributed under a disclosed policy, and is accounted for under AAOIFI FAS 13; it is not shareholder profit.

A deficit in the risk fund is covered by an interest-free loan (qard hasan) from the shareholders' fund, recoverable from future surplus; regulators may also require an equalisation or prudential reserve.

Retakaful must be placed with a Sharia-compliant retakaful operator, or with a conventional reinsurer only where the Sharia board approves, with purification of impermissible elements.

Standards: IFSB-14 (risk management for takaful), IFSB-8 (governance for takaful undertakings), AAOIFI FAS 12 (presentation), FAS 13 (surplus or deficit allocation) and FAS 19 (contributions).

AAOIFI Sharia Standard 17 definition: sukuk are certificates of equal value representing undivided ownership in tangible assets, usufruct, services, or a project or mudaraba capital, issued to fund acquisition or development.

Structures: ijara (most used and tradable), manfa'a (usufruct), murabaha (debt-based), musharaka, mudaraba, wakala, salam, istisna' and hybrid combinations.

Ijara sukuk mechanics: the originator sells assets to an SPV, the SPV issues sukuk and leases the assets back; rentals fund periodic distributions, and a purchase undertaking repays principal at maturity.

Tradability rule: certificates representing money or debt may be traded only at face value under bay' al-dayn restrictions, so murabaha sukuk are typically held to maturity while ijara and equity-based sukuk trade in the secondary market.

Sharia conditions: underlying assets must be halal, owned and identified; proceeds may not finance prohibited activity; a capital guarantee by the originator, other than for negligence or breach, is not permitted.

Asset-based versus asset-backed: most outstanding sukuk are asset-based, so investors hold a contractual claim and no direct recourse to the assets on originator default; asset-backed sukuk transfer genuine asset risk.

Benchmarking: rentals or profit distributions may reference an interest-rate benchmark as a pricing reference without the transaction becoming an interest-bearing loan.

Market infrastructure: IIFM master agreements standardise documentation, and IILM issues short-term sukuk to provide Islamic banks with high-quality Sharia-compliant liquid assets.

Structure: the fund pools investor money, the manager acts as mudarib (profit share) or wakil (fee), investors are capital providers, and the prospectus must disclose the profit-sharing ratio, fees and Sharia policy.

Screening sequence: sector exclusion first (conventional finance, alcohol, gambling, tobacco, weapons, pork), then financial ratio tests, then purification of non-compliant income.

Typical ratio screens, which differ by index provider: interest-bearing debt to total assets below one third, and interest income to revenue below 5%, measured on trailing or average market capitalisation.

Purification (tazkiyah): the non-compliant portion of dividends or gains is donated to charity using a method fixed in the fund's Sharia policy.

Fund types: Sharia equity funds, sukuk funds, Islamic money market funds (commodity murabaha), real estate funds, private equity, exchange-traded funds and wakala investment funds.

Commonly prohibited techniques: short selling, interest-based margin trading and conventional derivatives held for speculation; permitted hedging is confined to genuine risk mitigation under Sharia standards.

Wealth management adds discretionary portfolio mandates, robo-advisory with Sharia filters, zakat computation and takaful-linked savings to the core fund offering.

Governance: each fund relies on a Sharia board (its own, or the manager's board), undergoes an annual Sharia audit, and discloses its screening and purification methodology.

Frameworks: IFSB-3 (guiding principles on corporate governance for institutions offering only Islamic financial services) and AAOIFI GS 6 (governance principles for Islamic financial institutions), with IFSB-10 covering Sharia governance within that framework.

Distinctive feature: unrestricted investment account holders supply most of the funding but have no voting rights, so the board and the Sharia board owe them a fiduciary duty alongside shareholders.

Expected disclosures: bases of profit allocation, movements in the profit equalisation and investment risk reserves (AAOIFI FAS 5 and FAS 6), related-party transactions and the annual Sharia report.

Governance organs: shareholders' meeting, board with independent directors, audit and risk committees, Sharia Supervisory Board, internal Sharia review, external auditor and the regulator.

Conflicts of interest arise when allocating expenses, provisions and profit between shareholders and investment account holders; allocation policies must be pre-approved and disclosed.

Fit-and-proper tests apply to directors and Sharia board members: competence in fiqh muamalat and finance, integrity, and independence from executive management.

Restricted investment account holders resemble secured fund providers and receive different disclosure and governance treatment from unrestricted account holders.

Zakat and corporate social responsibility disclosures are expected parts of an Islamic bank's annual report and support its ethical mandate.

AAOIFI FAS 1 governs general presentation: the balance sheet separates assets, liabilities, equity of investment account holders (a quasi-equity category) and shareholders' equity.

Key standards by contract: FAS 2 murabaha (largely superseded in application by FAS 28, Murabaha and Other Deferred Payment Sales), FAS 3 mudaraba, FAS 4 musharaka, FAS 7 salam, FAS 8 ijara, FAS 10 istisna', FAS 25 investments in sukuk and shares, FAS 30 impairment and credit losses.

Profit distribution sequence: determine pool profit, deduct the profit equalisation reserve from gross profit, apply the agreed profit-sharing ratio using weighted average balances, then deduct the investment risk reserve from the account holders' share.

Weighted average balance = sum of (daily balance × days held) ÷ days in the period; each account's allocation = its weighted balance ÷ total weighted balances.

PER is taken before the split between account holders and shareholders; IRR is taken only from the account holders' share after the split; both require Sharia board approval and disclosure under FAS 5 and FAS 6.

Provisions for assets financed from an investment pool are charged to that pool in proportion to its funding, not wholly to shareholders (FAS 11).

Zakat under FAS 9 is disclosed for the bank's own funds and, where law mandates, on behalf of shareholders (for example in Saudi Arabia and Sudan).

National variation: Bahrain, Oman, Jordan, Sudan and Qatar require AAOIFI, while Malaysia and several other jurisdictions apply MFRS/IFRS with regulator adjustments, so the presentation of investment accounts differs.

IFSB-1 risk categories: credit risk, equity investment risk, market risk, liquidity risk, rate of return risk, displaced commercial risk, operational risk, Sharia non-compliance risk and fiduciary risk.

Where credit risk sits by contract: murabaha and deferred sales create receivable risk; salam and istisna' create delivery and performance risk; ijara creates rental and residual asset risk; musharaka and mudaraba create equity investment risk.

Sharia-compliant security: rahn (mortgage or collateral), kafala (personal or corporate guarantee), hamish jiddiyyah (security deposit before purchase), urboun (earnest money) and takaful cover on the financed asset.

Default treatment: a late-payment penalty (gharamah) is donated to charity, the outstanding debt cannot be increased (that would be riba), and rescheduling may not add a fee to the principal.

Rate of return risk concerns returns paid to account holders relative to market rates; displaced commercial risk is the bank waiving its own profit share to keep those returns competitive, funded from the PER or shareholder profit.

Liquidity tools without interest: commodity murabaha placements, short-term sukuk including IILM issuance, central bank qard hasan facilities, and asset-backed interbank mudaraba deposits.

Equity investment risk requires separate appraisal of the project, exit strategy, valuation method and impairment policy because the bank shares losses as a partner.

Pool-level asset-liability management: each investment pool has its own assets, liabilities and reserves, and cross-subsidy between pools is restricted by Sharia and prudential rules.

Two supervision layers: a prudential regulator (central bank or dedicated authority) and Sharia oversight, either institutional through a Sharia Supervisory Board or centralised through a national Sharia board (Pakistan, Malaysia, UAE, Bahrain).

IFSB capital adequacy (IFSB-2, revised by IFSB-15): eligible capital divided by credit, market and operational risk-weighted assets, plus the alpha proportion of risk from assets funded by unrestricted investment accounts; beta reduces risk weights for account-funded assets.

IFSB-17 (core principles for Islamic finance regulation) and IFSB-16 (supervisory review process) guide supervisory practice, while IFSB-12 addresses liquidity risk with adapted LCR and NSFR measures.

IFSB-4 sets disclosure requirements to promote market discipline; AAOIFI financial statements and the Sharia report supplement the regulatory returns.

Licensing models: full-fledged Islamic bank, Islamic subsidiary, Islamic window with ring-fenced funds, and Islamic branch of a conventional bank; conversion requires regulator approval and systems change.

Ring-fencing rules prevent commingling of investment account pool assets with shareholders' funds and require separate books and disclosure for each pool.

Deposit protection and lender-of-last-resort support must be structured on Sharia-compliant terms such as qard hasan, sukuk purchase or mudaraba placement.

AAOIFI adoption is mandatory in Bahrain, Oman, Sudan, Jordan, Qatar (partly) and Nigeria, while other jurisdictions reference the standards voluntarily.

The Sharia Supervisory Board is appointed by shareholders, usually has at least three members specialised in fiqh muamalat, and its fatwas and rulings are binding on the institution.

Independence expectations from AAOIFI GS 1 and GS 5 and IFSB-10: competence, confidentiality, no dual role as a director of the same bank, access to records and management, and removal only by shareholders' resolution.

Ex-ante control: new products, contracts, marketing material, fee structures and legal documentation must be approved by the Sharia board before launch.

Ex-post control: internal Sharia review and Sharia audit test executed transactions against rulings, with findings reported to the Sharia board, audit committee and board.

Sharia non-compliance risk: income from a breached transaction is purified by donation to charity, and repeated breaches require a corrective plan and may attract regulatory action.

The annual Sharia report in the financial statements states whether operations complied with fatwas and is signed by the Sharia board (AAOIFI GS 1).

A central Sharia board at regulator level, such as Malaysia's Sharia Advisory Council or Pakistan's SBP Sharia board, issues binding resolutions that override institutional fatwas and harmonise the market.

Sharia governance requires both a Sharia compliance function embedded in business lines and an independent Sharia audit function reporting to the Sharia board.

New product development sequence: concept note, Sharia analysis and structuring, Sharia board or central board approval, legal documentation, IT and systems build, controlled pilot, then post-implementation Sharia audit.

Islamic branding pillars: verified Sharia compliance, clear halal and haram boundaries, and ethical and social responsibility claims; the brand must be backed by substance because customers and regulators verify it.

Positioning differs by market: in Muslim-majority countries Islamic banks compete with cheaper conventional products, while in minority markets the brand targets ethical, diaspora and values-based demand.

Islamic microfinance structures: murabaha for stock and equipment, salam for agriculture, qard hasan for emergencies, group kafala for collateral-free lending and wakala for agency services.

SME finance toolkit: musharaka mutanaqisa for premises and equipment, ijara for machinery, murabaha for working capital and istisna' for construction or manufacturing orders.

Islamic social finance: zakat (2.5% of zakatable wealth held for one lunar year, with nisab based on 85 g of gold or 595 g of silver), waqf including cash waqf, sadaqah, qard hasan and social or SDG sukuk.

Zakat and waqf institutions can act as a funding or guarantee layer for microfinance, lowering credit risk while keeping the finance free of interest.

Key compliance concerns in social finance: measuring social impact, governing charitable funds separately, and never using zakat funds for commercial profit.