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Question 1Fundamentals of Islamic Finance

In Islamic commercial law, what does the prohibition of riba primarily forbid?

  1. Charging a fee for a genuine advisory service
  2. Sharing profits according to a pre-agreed ratio
  3. Any guaranteed increase or excess charged for the mere deferment of a loan or exchange Correct answer.
  4. Earning a profit margin on goods sold at a markup

Explanation

Riba refers to an unjustified excess in loan or exchange transactions, most notably any guaranteed increase tied purely to time. Profit earned through genuine trade or risk-sharing is not riba because it is linked to real economic activity and liability.

Question 2Fundamentals of Islamic Finance

Which contract is best described as a sale in which the seller discloses the cost price and adds an agreed profit margin?

  1. Wakala
  2. Ijarah
  3. Murabaha Correct answer.
  4. Salam

Explanation

Murabaha is a cost-plus sale where the seller reveals the acquisition cost and adds a disclosed profit. The buyer knows the markup, and payment may be deferred, which is why it is widely used in Islamic trade finance.

Question 3Fundamentals of Islamic Finance

A bank and a client each contribute capital to a venture and agree to share profits by a fixed ratio while sharing losses in proportion to capital. Which contract is this?

  1. Qard hasan
  2. Musharaka Correct answer.
  3. Mudaraba
  4. Murabaha

Explanation

Musharaka is a partnership in which all partners contribute capital and share profits by agreement. Losses are borne strictly in proportion to each partner's capital contribution, which distinguishes it from a pure capital-provider arrangement.

Question 4Fundamentals of Islamic Finance

In a mudaraba arrangement, who bears the financial loss if the venture fails without misconduct by the manager?

  1. The capital provider alone Correct answer.
  2. Both parties equally
  3. The manager alone
  4. The party with the larger profit share

Explanation

The mudarib contributes effort and management while the rabb al-mal contributes capital. Because the manager risks only time and effort, any ordinary business loss falls on the capital provider, unless the manager was negligent or breached the agreed terms.

Question 5Fundamentals of Islamic Finance

Which statement correctly distinguishes ijarah from a conventional finance lease in Islamic finance?

  1. The lease must transfer ownership automatically at the end of the term
  2. Rent may be increased automatically for late payment as a penalty retained by the lessor
  3. The lessee must own the asset from the start of the lease term
  4. The lessor must own the asset and bear ownership-related risks such as destruction and major maintenance Correct answer.

Explanation

Ijarah requires the lessor to retain ownership and the obligations that go with it, including major maintenance and risk of destruction, while earning rent for usufruct. This ownership-risk element is what keeps the return linked to a real asset rather than pure money.

Question 6Fundamentals of Islamic Finance

What is the defining feature of a salam sale?

  1. The goods are delivered immediately and the price is paid in instalments
  2. The full price is paid at contract while the specified goods are delivered at a later date Correct answer.
  3. Both price and goods are deferred to a future date
  4. The seller pledges to sell only after acquiring the goods

Explanation

Salam is a forward sale in which the buyer pays the entire price in advance for precisely specified fungible goods delivered at a stated future date. Advance payment protects the seller's working capital while the specification protects the buyer.

Question 7Fundamentals of Islamic Finance

A manufacturer needs raw materials now but the supplier wants payment later. Which contract allows payment to be deferred while the goods are delivered immediately?

  1. Istisna Correct answer.
  2. Ijarah
  3. Murabaha
  4. Salam

Explanation

Istisna is used for manufacturing or construction where the price can be paid in instalments or on delivery while the seller produces the specified item. It fits situations where the subject matter does not yet exist and is made to order.

Question 8Fundamentals of Islamic Finance

In a sukuk al-ijarah structure, what do investors primarily own?

  1. A proportionate beneficial interest in the leased asset and its rental income Correct answer.
  2. A call option on the underlying asset
  3. A debt obligation owed by the originator at face value
  4. Equity shares carrying voting control of the originator

Explanation

Sukuk represent ownership of tangible assets or usufruct, and in ijarah sukuk the holders own a proportionate interest in the leased asset and receive rental distributions. This asset linkage is what distinguishes sukuk from interest-bearing bonds.

Question 9Fundamentals of Islamic Finance

Which of the following is the standard ruling on charging a penalty for late payment of an Islamic finance debt?

  1. The penalty may be added to the principal and compounded
  2. The penalty is prohibited entirely under all circumstances
  3. The penalty may be kept by the financier as additional profit
  4. The penalty may be imposed but must be donated to charity rather than kept as income Correct answer.

Explanation

Most Sharia standards allow a late-payment charge as a deterrent, but the amount must go to charity so it does not become riba-like income for the financier. Compounding the charge or treating it as profit would reintroduce the prohibited increase.

Question 10Fundamentals of Islamic Finance

What is the Sharia basis for the permissibility of a murabaha sale with a disclosed profit margin?

  1. The profit is compensation for the time value of money alone
  2. The profit is a fee for processing documentation
  3. The profit is permitted because the buyer consents to the amount
  4. The profit is linked to a genuine sale of an owned asset carrying commercial risk Correct answer.

Explanation

Classical jurists permit a sale at cost plus profit because the seller owns the goods and bears risk before selling them. The return is attached to a real transaction rather than to the mere passage of time.

Question 11Fundamentals of Islamic Finance

Which contract is a unilateral promise used to secure a purchase in a murabaha-to-the-purchase-orderer arrangement?

  1. Kafala
  2. Rahn
  3. Wakala
  4. Wa'd Correct answer.

Explanation

Wa'd is a unilateral promise, and in purchase-orderer murabaha the client promises to buy the asset once the bank acquires it. The promise creates a moral commitment and is used to manage the bank's risk of the client walking away.

Question 12Fundamentals of Islamic Finance

What role does a rahn serve in an Islamic financing transaction?

  1. It acts as a charitable donation by the debtor
  2. It sets the profit-sharing ratio between the parties
  3. It transfers ownership of the asset to the financier immediately
  4. It provides collateral that the financier may hold or enforce in case of default Correct answer.

Explanation

Rahn is a pledge of an asset as security for a debt, allowing the creditor to recourse to it if the obligation is not met. Ownership stays with the pledgor, so the arrangement secures rather than transfers the asset.

Question 13Fundamentals of Islamic Finance

Which statement best describes takaful compared with conventional insurance?

  1. The scheme invests only in conventional interest-bearing bonds
  2. Participants contribute to a pooled fund and mutually share defined risks under a cooperative structure Correct answer.
  3. Premiums are treated as a loan repayable to the participant
  4. The operator guarantees all payouts and keeps any underwriting surplus

Explanation

Takaful is built on mutual cooperation, with participants donating or contributing to a shared risk pool. The operator manages the pool for a fee, and the structure avoids the gharar and riba features that make conventional insurance contracts problematic.

Question 14Fundamentals of Islamic Finance

What is the essential requirement for the subject matter of a sale under the principle of gharar avoidance?

  1. The object may be any future thing as long as the price is fixed
  2. The object must be intangible to avoid speculation
  3. The object may remain unspecified if both parties trust each other
  4. The object must be precisely identifiable and within the seller's ability to deliver Correct answer.

Explanation

Gharar refers to excessive uncertainty, and a valid sale requires the object to be known and deliverable. If the subject matter or price is too ambiguous, the contract becomes invalid because the parties cannot know what they are exchanging.

Question 15Fundamentals of Islamic Finance

A client wants working capital but has no goods for the bank to buy and resell. Which structure most directly fits a capital-plus-effort arrangement?

  1. Mudaraba Correct answer.
  2. Murabaha
  3. Istisna
  4. Ijarah

Explanation

Mudaraba allows the bank to supply capital while the entrepreneur supplies management and effort, sharing profits by agreement. It suits working capital needs where no specific asset exists for a sale or lease.

Question 16Fundamentals of Islamic Finance

Which statement correctly describes the concept of qard hasan?

  1. It is a penalty for late payment
  2. It is a benevolent interest-free loan repaid in the same amount Correct answer.
  3. It is a loan with a small administrative surcharge kept by the lender
  4. It is a profit-sharing investment account

Explanation

Qard hasan is a gratuitous loan in which the borrower returns only the principal, with no contractual increase. Any charge that becomes income for the lender would convert it into riba.

Question 17Fundamentals of Islamic Finance

In a diminishing musharaka home financing arrangement, how does the client eventually acquire full ownership?

  1. The financier sells the property at market value at the end of the term
  2. The client gradually buys the financier's share through a series of purchase payments alongside rent Correct answer.
  3. The client refinances the balance with an interest-bearing loan
  4. The client receives the financier's share as a gift at maturity by contractual obligation

Explanation

Diminishing musharaka combines partnership ownership with a gradual buyout, so the client's share rises over time as the financier's share falls. Rent is paid for the portion still owned by the financier, which keeps the return tied to actual ownership.

Question 18Fundamentals of Islamic Finance

Which of the following best explains why trading in debt at a discount is generally prohibited in Islamic finance?

  1. It amounts to selling a monetary claim for less money, which is riba Correct answer.
  2. It transfers risk to a third party
  3. It involves an excessive profit margin
  4. It requires the buyer to own the underlying asset

Explanation

Debt represents a monetary obligation, and exchanging it for a lesser amount of money is treated as riba because money is exchanged for money unequally or with delay. This is why Islamic banks generally hold debts to maturity or use asset-based alternatives.

Question 19Fundamentals of Islamic Finance

A sukuk issue is described as asset-based rather than asset-backed. What does this distinction imply for investors?

  1. Investors have recourse to the originator and do not own the assets outright in a default Correct answer.
  2. Investors are guaranteed a fixed return regardless of asset performance
  3. Investors hold equity shares with voting rights in the originator
  4. Investors own the assets fully and have no recourse to the originator

Explanation

In asset-based sukuk the underlying assets are often sold to a special purpose vehicle and leased back, and investors rely on the originator's credit rather than on a true sale of assets. In a default, their recovery depends on the originator rather than on owning the assets.

Question 20Fundamentals of Islamic Finance

Which condition is essential for the validity of a wakala bil-istithmar (investment agency) arrangement?

  1. The agent must share any loss equally with the principal
  2. The principal must bear no risk of loss whatsoever
  3. The agent must guarantee a minimum return to the principal
  4. The agent's fee must be fixed and the investment must comply with Sharia criteria agreed in advance Correct answer.

Explanation

In wakala the agent acts for a fixed fee, and the investment mandate must set out Sharia-compliant criteria in advance. The agent does not guarantee returns, and the principal retains the investment risk unless the agent is negligent.

Question 21Fundamentals of Islamic Finance

Which of the following is a valid example of a Sharia-compliant hedging alternative for currency exposure?

  1. A binding mutual promise to exchange currencies at a future date based on a genuine need Correct answer.
  2. An interest rate swap referencing a conventional benchmark
  3. A speculative option purchased purely for gain
  4. A forward foreign exchange contract settled net in cash

Explanation

Some Sharia standards permit a promise-based currency exchange where there is a genuine commercial need to hedge, structured to avoid speculation and riba. Conventional forwards, options and swaps typically fail because they involve uncertainty, speculation or interest.

Question 22Fundamentals of Islamic Finance

What is the primary function of a Sharia supervisory board in an Islamic financial institution?

  1. It audits the institution's financial statements under accounting standards
  2. It reviews and approves products and transactions for Sharia compliance Correct answer.
  3. It manages the institution's liquidity portfolio
  4. It sets the institution's commercial pricing policy

Explanation

The Sharia supervisory board issues rulings and reviews products and transactions to ensure they conform to Islamic commercial law. Its role is religious and legal oversight, not commercial management or financial auditing.

Question 23Fundamentals of Islamic Finance

A bank buys an asset for 100 and sells it to a client for 110 payable in one year. Which element makes this transaction Sharia-compliant rather than a loan?

  1. The client provided collateral for the deferred amount
  2. The bank owned the asset and bore ownership risk before selling it Correct answer.
  3. The markup was disclosed to the client
  4. The bank documented the transaction in a written contract

Explanation

The permissibility of the markup depends on the bank actually acquiring ownership and bearing the risk of the asset before on-selling it. Documentation, collateral and disclosure are supporting features but do not by themselves remove the riba concern.

Question 24Fundamentals of Islamic Finance

Which statement about the profit-sharing ratio in a mudaraba is correct?

  1. It must equal the ratio of capital contributed
  2. It must be a fixed lump sum payable to the manager
  3. It may be left undetermined until profits arise
  4. It must be agreed as a proportion of profit, not a fixed amount or a share of capital Correct answer.

Explanation

The mudaraba ratio must be expressed as a percentage of the actual profit so that the manager's reward varies with performance. Fixing a lump sum or tying the ratio to capital would undermine the profit-and-loss sharing character of the contract.

Question 25Fundamentals of Islamic Finance

Which of the following best describes the role of 'urbun in Islamic finance?

  1. A down payment that is forfeited if the buyer fails to complete the purchase Correct answer.
  2. A guarantee provided by a third party
  3. A fee paid to the agent for managing an investment
  4. A penalty charged for late payment of an instalment

Explanation

Urbun is a non-refundable down payment given as part of the price, which the seller may keep if the buyer withdraws. Jurists differ on its permissibility, but its defining feature is the partial payment at risk.

Question 26Fundamentals of Islamic Finance

In Islamic finance, what does the term 'riba' specifically refer to?

  1. A fee charged for the safe custody of client assets
  2. A penalty imposed for late payment that is donated to charity
  3. A profit margin agreed upon in a murabaha sale
  4. A predetermined and guaranteed increase charged for the mere extension of time on a loan Correct answer.

Explanation

Riba is the Arabic term for an unjustified increase, and in Islamic finance it most commonly refers to interest charged on a loan merely for the passage of time. This is prohibited because it is an increase without any corresponding risk-sharing or productive activity. Other charges, such as custody fees or a disclosed murabaha profit, are not riba because they correspond to a real service or a sale transaction.

Question 27Fundamentals of Islamic Finance

A client wants to buy a car but lacks cash, and the bank agrees to purchase the car and sell it to the client at a cost-plus-profit price payable in installments. Which contract is this?

  1. Musharaka
  2. Murabaha Correct answer.
  3. Salam
  4. Ijarah

Explanation

Murabaha is a sale contract in which the seller discloses the cost of the asset and adds a known profit margin, with payment often deferred in installments. The bank purchases the car and resells it to the client at cost plus profit, which matches the scenario. Ijarah is a lease, musharaka is a partnership, and salam is a forward sale with prepayment, so none of these fit.

Question 28Fundamentals of Islamic Finance

In a mudaraba contract, how are profits and losses shared between the rabb al-mal (capital provider) and the mudarib (entrepreneur)?

  1. Profits are shared equally, and financial losses are shared equally between both parties.
  2. Profits are shared according to a pre-agreed ratio, and financial losses are borne solely by the mudarib.
  3. Profits are shared according to a pre-agreed ratio, while financial losses are borne solely by the capital provider, unless the mudarib was negligent or breached the contract. Correct answer.
  4. The mudarib is entitled to a fixed salary plus a share of profits, and bears no financial loss under any circumstances.

Explanation

In a mudaraba, the capital provider supplies the funds and the mudarib supplies the effort and management. Profit is distributed according to a ratio agreed at the outset, but financial loss falls on the capital provider because the mudarib loses only their effort, unless the mudarib was negligent or breached the terms. This allocation reflects the principle that the party bearing the financial risk is entitled to the return.

Question 29Fundamentals of Islamic Finance

Which statement best describes the role of a waqf in the context of takaful?

  1. It is the initial capital provided by shareholders that is never used to pay claims.
  2. It is a penalty charged to participants who fail to pay their contributions on time.
  3. It is the share of profit paid to the takaful operator as a performance fee.
  4. It is the endowment fund to which participants contribute, and from which claims are paid and any surplus may be distributed. Correct answer.

Explanation

In many takaful models, participants' contributions are placed into a fund structured as a waqf, a charitable endowment, which is used to pay claims and may distribute any surplus back to participants. This structure helps separate the participants' risk pool from the operator's funds. It is not a penalty, an operator fee, or shareholder capital.

Question 30Fundamentals of Islamic Finance

A sukuk al-murabaha issue is often described as asset-based rather than asset-backed. What is the main practical consequence for investors?

  1. Investors have recourse to the originator's creditworthiness rather than owning the underlying assets, so their return depends primarily on the originator's ability to pay. Correct answer.
  2. Investors acquire direct ownership of the underlying tangible assets and can foreclose on them if the originator defaults.
  3. Investors become shareholders of the originator and receive dividends based on its profits.
  4. Investors are guaranteed a fixed return equal to the murabaha profit margin regardless of the originator's performance.

Explanation

In an asset-based sukuk, the underlying assets are not truly sold to investors with recourse; instead, the structure relies on the originator's payment obligation. As a result, investors are exposed mainly to the originator's credit risk, similar to a conventional bond, rather than to the performance of the assets themselves. This contrasts with asset-backed sukuk, where investors have a real ownership interest and recourse to the assets.

Question 31Islamic Banking Operations

In Islamic banking, which contract is used for a cost-plus sale in which the bank discloses its acquisition cost and adds an agreed profit margin?

  1. Wakala
  2. Ijarah
  3. Mudaraba
  4. Murabaha Correct answer.

Explanation

Murabaha is a sale contract in which the institution discloses the cost of the asset to the customer and sells it at cost plus a disclosed profit amount. The customer typically pays in instalments, and the profit is fixed at inception rather than floating.

Question 32Islamic Banking Operations

Which statement correctly describes the capital contribution in a musharaka arrangement?

  1. Only the bank contributes capital while the client supplies labour alone.
  2. All partners contribute capital and share profit according to an agreed ratio. Correct answer.
  3. Profit is guaranteed to the bank regardless of the venture's results.
  4. The client repays capital plus a fixed interest charge at maturity.

Explanation

Musharaka is a joint partnership in which all partners contribute capital and share profits by agreed proportions, while losses are shared in proportion to capital. A guaranteed return to any partner would undermine the profit-and-loss sharing nature of the contract.

Question 33Islamic Banking Operations

A customer needs a vehicle for five years and the bank will retain ownership, with the customer paying monthly rentals and an option to purchase at the end. Which structure fits best?

  1. Salam
  2. Istisna
  3. Qard hasan
  4. Ijarah muntahia bittamleek Correct answer.

Explanation

Ijarah muntahia bittamleek is a lease ending in ownership, matching a use-and-eventually-own need with periodic rentals. The bank keeps ownership during the term and transfers it at the end through sale or gift.

Question 34Islamic Banking Operations

Which type of riba is illustrated when a lender stipulates an additional payment in exchange for granting more time to repay a debt?

  1. Gharar
  2. Riba al-nasi'ah Correct answer.
  3. Riba al-fadl
  4. Riba al-bay'

Explanation

Riba al-nasi'ah is the increase charged for deferment of payment, classically the extra amount demanded in return for extending the repayment period. It is the prohibited increment tied to time on a loan.

Question 35Islamic Banking Operations

What is the essential feature of a takaful arrangement compared with a conventional insurance policy?

  1. The operator guarantees a fixed maturity payout to every participant.
  2. The operator bears all risk and retains any surplus for its shareholders.
  3. Participants contribute to a pooled fund on the basis of mutual assistance. Correct answer.
  4. Premiums are invested exclusively in fixed-income government bonds.

Explanation

Takaful is built on mutual assistance, with participants donating contributions to a shared fund used to indemnify members who suffer defined losses. Surplus and risk are handled within that cooperative framework rather than through a guaranteed return.

Question 36Islamic Banking Operations

In a salam contract, what is the defining obligation on the buyer at the time the contract is concluded?

  1. Payment of a small earnest money deposit only.
  2. A promise to pay in instalments after delivery.
  3. Payment of the full price immediately upon contracting. Correct answer.
  4. Delivery of the subject matter on the same day.

Explanation

Salam requires the full price to be paid in advance at the time of contracting, with the described commodity delivered at a future date. This advance payment is what distinguishes salam from an ordinary deferred sale.

Question 37Islamic Banking Operations

Which of the following best describes the role of the Shariah supervisory board in an Islamic bank?

  1. It reviews and approves products and contracts for Shariah compliance. Correct answer.
  2. It audits the bank's financial statements under accounting standards.
  3. It sets the bank's commercial pricing strategy for retail products.
  4. It manages the bank's liquidity portfolio on a daily basis.

Explanation

A Shariah supervisory board is an independent body of scholars that reviews contracts, products, and operations for compliance with Shariah rules and issues rulings. It does not perform commercial or financial audit functions.

Question 38Islamic Banking Operations

A bank buys goods from a supplier and sells them to a customer for immediate payment at a price lower than its acquisition cost, with the customer settling later. Which issue arises under a murabaha structure?

  1. The transaction is valid because the discount is disclosed to the customer.
  2. The transaction is valid because the bank took ownership of the goods.
  3. The transaction is valid because the customer initiated the request.
  4. Selling below cost for deferred payment resembles a riba-bearing loan. Correct answer.

Explanation

In murabaha the sale price must exceed the cost, since a deferred price lower than the cost effectively converts the arrangement into a loan with an increase charged for time. Such a structure is treated as a riba device and is not permissible.

Question 39Islamic Banking Operations

In a diminishing musharaka home financing arrangement, how does the customer's ownership share change over time?

  1. It stays constant while the bank collects a fixed management fee.
  2. It decreases while the bank's share increases until the bank owns the property.
  3. It is transferred in a single step only at the end of the tenure.
  4. It increases as the customer buys out the bank's share in instalments. Correct answer.

Explanation

In diminishing musharaka the customer gradually purchases the bank's equity share, so the customer's ownership rises while the bank's declines. Rent paid to the bank decreases accordingly as its share shrinks.

Question 40Islamic Banking Operations

A mudaraba venture reports a loss after the mudarib acted within the agreed mandate. How is the loss allocated?

  1. The loss is carried forward and deducted from future profits only.
  2. The loss is shared equally between the two parties.
  3. The mudarib bears the entire loss from its own funds.
  4. The loss falls on the capital provider, and the mudarib loses its effort. Correct answer.

Explanation

In mudaraba the capital provider bears financial loss while the mudarib loses the time and effort invested, provided the mudarib did not breach the mandate or act negligently. Profit is shared by agreed ratio, but loss is not shared equally.

Question 41Islamic Banking Operations

Which combination of conditions must be satisfied for a valid salam sale of a described agricultural commodity?

  1. The seller may choose the delivery date at its own discretion.
  2. The commodity is identified as a specific existing lot in a warehouse.
  3. The price, quantity, quality, and delivery date are precisely specified. Correct answer.
  4. The buyer pays a deposit and settles the balance on delivery.

Explanation

Salam requires the price to be paid in full at contract and the subject matter to be described with sufficient precision, including quantity, quality, and a definite delivery date. These specifications remove excessive uncertainty from the deferred obligation.

Question 42Islamic Banking Operations

In an istisna contract for constructing a factory, which feature distinguishes it from salam?

  1. The subject matter must already exist and be owned by the seller.
  2. The delivery date must always be fixed and binding on the manufacturer.
  3. The subject matter is manufactured to specification and the price may be paid in stages. Correct answer.
  4. The price must be paid in full at the time of contracting.

Explanation

Istisna covers goods to be manufactured or constructed to agreed specifications, and it permits payment to be made in stages linked to progress rather than requiring full advance payment. This flexibility distinguishes it from salam.

Question 43Islamic Banking Operations

A bank provides working capital by purchasing a customer's inventory and reselling it to the customer at a markup payable on demand. Which contract is being described?

  1. Salam
  2. Murabaha to the purchase orderer Correct answer.
  3. Tawarruq
  4. Ijarah

Explanation

When the customer promises to purchase an asset that the bank acquires from a supplier and sells at cost plus markup, the arrangement is a murabaha to the purchase orderer. It is commonly used for working capital and asset acquisition.

Question 44Islamic Banking Operations

Which statement about gharar in a sale contract is correct?

  1. Gharar applies only to insurance contracts and never to sales.
  2. Gharar is permitted if both parties sign a written waiver.
  3. Excessive uncertainty about the subject matter, price, or delivery may invalidate the contract. Correct answer.
  4. Any minor uncertainty about the exact weight of a bulk commodity voids the sale.

Explanation

Gharar refers to excessive uncertainty that could lead to dispute, such as unclear subject matter, price, or delivery terms, and it may render a sale invalid. Minor or unavoidable uncertainty is generally tolerated.

Question 45Islamic Banking Operations

A customer deposits funds in an Islamic bank's investment account. Which statement accurately reflects the typical risk-return profile?

  1. The bank guarantees the principal but shares only in profits.
  2. The depositor shares in profits by an agreed ratio and bears loss unless the bank is negligent. Correct answer.
  3. The bank guarantees the principal and a fixed annual return.
  4. The depositor receives a return benchmarked to the interbank rate as a contractual right.

Explanation

Investment account holders under mudaraba share profits by an agreed ratio and bear the risk of loss on the invested capital, absent misconduct by the bank. Guaranteeing principal or a fixed return would reintroduce riba.

Question 46Islamic Banking Operations

Why does a sukuk al-ijarah structure typically involve a special purpose vehicle?

  1. To convert the lease into an interest-bearing loan for accounting purposes.
  2. To issue certificates representing ownership of the leased asset and distribute rentals. Correct answer.
  3. To insulate the issuer from Shariah review of the underlying assets.
  4. To guarantee certificate holders a fixed return regardless of the asset.

Explanation

In sukuk al-ijarah an SPV holds title to the leased asset and issues certificates that represent undivided ownership, passing through rental income to holders. This structure ties returns to real asset ownership rather than a debt obligation.

Question 47Islamic Banking Operations

Which practice is most clearly inconsistent with the prohibition of riba in an Islamic banking transaction?

  1. Charging a fixed late payment penalty donated to charity.
  2. Requiring a guarantor for a financing facility.
  3. Charging compound interest on an overdue instalment. Correct answer.
  4. Taking security over the financed asset.

Explanation

Charging compound interest on an overdue amount is a direct application of riba, since it increases the debt in return for time. Penalties donated to charity and security arrangements are not treated as riba.

Question 48Islamic Banking Operations

In a wakala investment arrangement, what is the bank's typical entitlement?

  1. Ownership of the invested assets and all returns.
  2. A share of any profit as an agreed agency fee or incentive. Correct answer.
  3. A guarantee from the customer covering any investment loss.
  4. A fixed interest amount payable regardless of performance.

Explanation

In wakala the bank acts as agent for the investor and is typically paid an agreed fee or a share of realised profit as an incentive. It does not guarantee returns or take ownership of the invested assets.

Question 49Islamic Banking Operations

A customer wants cash liquidity but holds no asset. The bank sells an asset to the customer on deferred payment and the customer then sells it to a third party for cash. Which structure is described and what is its key condition?

  1. Salam, requiring the customer to pay the full price in advance.
  2. Ijarah, requiring the bank to retain ownership of the asset throughout.
  3. Tawarruq, requiring genuine sale and purchase without a prearranged buyback by the bank. Correct answer.
  4. Musharaka, requiring the bank and customer to share profits equally.

Explanation

Tawarruq involves a deferred purchase followed by a cash sale to a third party, and its validity depends on genuine, independent sale transactions without an arranged repurchase by the financier. This avoids creating a mere cash advance with an increment.

Question 50Islamic Banking Operations

Which condition is essential for the validity of an ijarah contract concerning the leased asset?

  1. The lease term must be at least five years.
  2. The lessee must own the asset before the lease begins.
  3. The asset must be identified and capable of yielding the specified usufruct. Correct answer.
  4. The rental must be paid entirely in advance.

Explanation

Ijarah requires the leased asset to be identified and the usufruct to be defined and deliverable, since the object of the contract is the use of the asset. Ownership rests with the lessor, and neither a minimum term nor full advance rental is required.