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Chapter – 3FINANCIAL INSTRUMENTS OF ISLAMICBANKING AND FINANCETrue / False Questions Dual banking system is a banking system of a country or a territory that incorporates both conventional and Islamic financial systems. Answer: True Diff: 1 Page Ref: 79 LO: 1 ‘Sources and application of funds’ refer...

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Chapter – 3 FINANCIAL INSTRUMENTS OF ISLAMIC BANKING AND FINANCE True / False Questions 1. Dual banking system is a banking system of a country or a territory that incorporates both conventional and Islamic financial systems. Answer: True Diff: 1 Page Ref: 79 LO: 1 2. ‘Sources and application of funds’ refers just to the cash inflows in an Islamic bank or financial institution over a period of time. Answer: False Diff: 2 Page Ref: 79 LO: 1 3. Fees, commissions and fixed charges are not permitted for Islamic banking or finance services performed by either a corporate body or an individual. Answer: False Diff: 2 Page Ref: 79 LO: 1 4. All banks with dual banking arrangements manage their Islamic funds separately from conventional funds. Answer: False Diff: 3 Page Ref: 79 LO: 1 5. Islamic banks rely on transaction deposits and investment deposits funds which they use in their banking business. Answer: True Diff: 1 Page Ref: 79 LO: 1

5. Investment deposits are risk-free funds which does not yield any return. Answer: False Diff: 2 Page Ref: 79 LO: 1 6. Murabahah is the sale of a commodity at the cost price at which it was purchased plus an additional profit which has been mutually agreed by the parties. Answer: True Diff: 1 Page Ref: 82-83 LO: 2 7. It is not a condition for the validity of the murabahah contract that the buyer knows the original cost price of the commodity or the additional profit that has been added by the seller. Answer: False Diff: 2 Page Ref: 83 LO: 2 8. The modern practice of murabahah is restricted to Islamic banks and financial institutions where standard murabahah contracts are signed by the parties and conducted on deferred payment basis. Answer: True Diff: 2 Page Ref: 83 LO: 2 9. Istisna’ is a transaction on an already existed (manufactured) commodity. Answer: False Diff: 1 Page Ref: 85 LO: 2 10. The istisna’ (manufacturing contract) will only be complete when the bargain has been completed with clear stipulations of the price, quality, and specifications. Answer: True Diff: 2 Page Ref: 85 LO: 2 11. There is a direct justification for istisna’ contract in the Qur’an and Sunnah. Answer: False

Diff: 1 Page Ref: 86 LO: 2 12. A salam contract can be defined as a contract of sale where the seller agrees to supply specific goods to the buyer on a deferred basis in exchange of an advanced price fully paid on the spot. Answer: True Diff: 3 Page Ref: 88 LO: 2

13. Bay al-salam is specifically meant to facilitate the commercial activities of manufacturers, traders, and investors. Answer: False Diff: 2 Page Ref: 88 LO: 2 14. Bay al-dayn is sale and purchase transaction involving a quality debt. Answer: True Diff: 2 Page Ref: 89 LO: 2 15. Muslim jurists are unanimous on the permissibility of bay al-dayn. Answer: False Diff: 2 Page Ref: 89 LO: 2 16. Bay al-Inah (sell-and-buy-back transaction) remains very controversial in the global Islamic finance industry. Answer: True Diff: 2 Page Ref: 90 LO: 2 17. The Shafi’i School maintains that the motive is paramount in determining the validity of bay al-inah contracts. Answer: False Diff: 2 Page Ref: 91 LO: 2 18. The end product of tawriq is the issuance of sukuk or sanadat to the large number of investors. Answer: True Diff: 2

Page Ref: 92 LO: 2 19. Tawriq is the equivalent term for intermediation in Islamic commercial jurisprudence. Answer: False Diff: 3 Page Ref: 92 LO: 2 20. Bay’ al-sarf is a foreign exchange contract that involves the exchange of currencies which must be of the same kind. Answer: False Diff: 2 Page Ref: 95 LO: 2 21. The hadith "gold for gold, silver for silver, wheat for wheat, barley for barley, dates for dates... hand to hand...." implies that trade in currency is permissible in Islamic law. Answer: True Diff: 1 Page Ref: 95 LO: 2 22. Permissibility of tawarruq is based on the general principles of a typical contract of sale and the absence of any modicum of interest in this transaction. Answer: True Diff: 3 Page Ref: 96 LO:2 23. The exchange-based contracts involve hiring or employing another person or renting a premise for a specific purpose in line with the payment of certain wages, rental fee or commission. Answer: False Diff: 3 Page Ref: 99 LO: 3 24. In Islamic jurisprudence the term ‘ijarah’ has been used in two different ways: employing another person to do a particular job for a consideration known as wages, and transferring of usufruct in an asset for a consideration. Answer: True Diff: 1 Page Ref: 99 LO: 3 25. Ijarah means lease, while tamlik denotes ownership

Answer: True Diff: 1 Page Ref: 101 LO: 3 26. Ijarah thumma al-bay transactions are concluded under one contract. Answer: False Diff: 2 Page Ref: 101 LO: 3 27. The bank services utilised by customers should be paid for through the ujrah scheme. Answer: True Diff: 3 Page Ref: 103 LO: 3 28. Lease contract is considered an impractical mode of financing in modern Islamic banking and finance and does not represent a genuine alternative to the charging of interest. Answer: False Diff: 3 Page Ref: 100 LO: 3 29. As a financial instrument, the concept of ujrah has been used by a number of banks for Sharī‘ah-compliant credit card schemes. Answer: True Diff: 2 Page Ref: 102 LO: 3 30. The legality of the ju’alah contract is established in the Qur’an and Sunnah. Answer: True Diff: 1 Page Ref: 103 LO: 3 31. A Ju’alah contract may be useful in the recovery of overdue debts. Answer: True Diff: 2 Page Ref: 103 LO: 3 32. Both the mudarib and rab al-mal in the partnership contract are active partners in the day-to-day running of the business. Answer: False Diff: 2 Page Ref: 104

LO: 4 33. The parties to the mudarabah partnership contract share any losses of the business venture based on agreed percentage. Answer: False Diff: 2 Page Ref: 104 LO: 4 34. The legality of mudarabah contract is established in only the ijma (consensus of opinion of scholars). Answer: False. Diff: 3 Page Ref: 104 LO: 4 35. Unlike mudarabah, musharakah emphasises the practical participation of both parties in the partnership business. Answer: True Diff: 2 Page Ref: 105-106 LO: 4 36. In the event of losses under musharakah, the entrepreneur loses his/her labour and the financier loses the capital. Answer: False Diff: 2 Page Ref: 106 LO: 4 37. The amount of profit for each partner under musharakah must be determined in proportion to the capital invested by the partner. Answer: False Diff: 3 Page Ref: 106 LO: 4 38. Musharakah is considered as the most viable Islamic finance products in the modern banking business. Answer: True Diff: 2 Page Ref: 106 LO: 4 39. In diminishing musharakah, the bank is not allowed to sell its share at a price which is higher than its original value to make a profit. Answer: False

Diff: 3 Page Ref: 107 LO: 4 40. In the juristic sense, hawalah is a special type of security contract which simply means debt assignment. Answer: True Diff: 2 Page Ref: 109 LO: 5 41. Rahn contract involves positive steps towards securing a debt through some forms of mortgage. Answer: True Diff: 2 Page Ref: 111 LO: 5 42. The legality of rahn (mortgage) contract is implied in the Qur’an and Sunnah. Answer: False Diff: 3 Page Ref: 112 LO: 4 43. Muslims jurists have three different views regarding the legality of muqasah since its legality was not established in the Qur'an and/or Sunnah. Answer: True Diff: 2 Page Ref: 114 LO: 5 44. Kafalah means paying-off overdue obligations. Answer: False Diff: 1 Page Ref: 115 LO: 5 45. The two major types of kafalah (guarantee) in Islamic law are kafalah bi alnafs (physical guarantee) and kafalah al-manfa’a (usufruct). Answer: False Diff: 2 Page Ref: 116 LO: 5 46. The principal party in wakalah contract is the muwakkil while the agent is the wakil in an agency relationship. Answer: True Diff: 1 Page Ref: 117

LO: 5

47. Wakalah is a contract establishes an agency relationship between two parties for a specific purpose; therefore such authority must be specific. Answer: False Diff: 3 Page Ref: 116 LO: 5 48. Wakalah contract is normally considered as an accessory contract. Answer: True Diff: 1 Page Ref: 116 LO: 5 49. The legitimacy of the concept and practice of wakalah is established in the Qur’an and Sunnah. Answer: True Diff: 1 Page Ref: 116 LO: 5 50. There is no common consensus among Muslim jurists regarding the permissibility of a wadi‘ah contract. Answer: False Diff: 2 Page Ref: 118 LO: 5 51. Wadi‘ah is used in relation to both current accounts and saving accounts. Answer: True Diff: 2 Page Ref: 119 LO: 5 52. Wadi‘ah yad al-amanah (safe-keeping under a trust) is a trust safe-keeping which is considered a commercial act aimed at generating profit. Answer: False Diff: 2 Page Ref: 118 LO: 5 53. In Wadi‘ah yad al-amanah depositors keep their money with a bank, and this money is considered as the bank’s source of funds with which it carries out its business. Answer: False Diff: 2 Page Ref: 119

LO: 5 54. Wadi‘ah yad al-damanah refers to safe-keeping with the guarantee of funds or property deposited. Answer: True Diff: 1 Page Ref: 119 LO: 5 55. Any damage to the property under wadi‘ah yad al-amanah (safe-keeping under a trust) will attract liability accordingly. Answer: True Diff: 2 Page Ref: 119 LO: 5 56. In cash waqf, customers can donate cash as waqf to a specified account and the funds will be invested for a specific purpose. Answer: True Diff: 2 Page Ref: 119 LO: 5 57. Islamic bank will be inclined to use ibra' when it appears that the debtor is not able to redeem the debt. Answer: True Diff: 2 Page Ref: 119 LO: 5 58. Hibah is a process where a person dedicates his property to God for the benefit of a specific class of people in society or for the whole public. Answer: False Diff: 1 Page Ref: 120 LO: 5 59. Muslim jurists hold different opinions on the binding nature of wa'ad. Answer: True Diff: 2 Page Ref: 120 LO: 5 60. Tabarru’ is a unilateral contract where a reward or commission is promised for the accomplishment of a specific task. Answer: False Diff: 1 Page Ref: 120

LO: 5

61. Ownership in tabarru’ is transferred at the time of donation from the donor to the donated party. Answer: True Diff: 2 Page Ref: 120 LO: 5

Multiple Choices Questions

1. Islamic banks rely on the following two major sources of funds: a) transaction deposits and accounts receivables b) investment deposit and current accounts c) accounts payable and investment accounts d) transaction deposits and investment deposits Diff: 3 Page Ref: 79 LO: 1 2. Which of the following is not a source of fund for Islamic banks? a) current accounts b) saving account c) accounts receivables d) investment account Diff: 2 Page Ref: 80 LO: 1 3. Investment accounts operated by Islamic banks are based on the concept of: a) wadiah b) hibah c) mudarabah d) murabahah Diff: 2 Page Ref: 80 LO:1 4. The main channel(s) for the outflow of the funds of Islamic banks include:

a) b) c) d)

musharakah, murabahah and murabahah ijarah and istisna bay salam and bay mu’ajjal models all of the above

Diff: 2 Page Ref: 80 LO: 1 5. In _______________________ , the deposited funds yield some returns. a) current accounts b) savings accounts c) credit accounts d) investment accounts Diff: 1 Page Ref: 80 LO: 1 6. A murabahah transaction is deemed lawful if: a) both tangible and non-tangible goods subject to murabahah are lawful, real and have commercial value. b) the buyer is aware of the original cost price of the goods and any additional costs incurred in the process of procuring the goods. c) the margin of profit is mutually predetermined by the parties at the initial stage of the contract. d) all of the above Diff: 2 Page Ref: 83 LO: 2 7. Tangible and non-tangible goods subject to murabahah must be: a) lawful b) real c) have commercial value d) all of the above Diff: 2 Page Ref: 84 LO: 2 8. The istisna’ structure is most suited for following activities except: a) project finance b) construction c) commercial activities of farmers d) manufacture and design of machinery for specific purposes Diff: 3 Page Ref: 86

LO: 2 9. A Salam as an exchange-based contract signifies: a) manufacture sale b) forward sale c) mark-up d) sale of debt e) Diff: 2 Page Ref: 88 LO: 2 10. Bay al-inah as a financial instrument is used. a) only in Malaysia b) in Malaysia and Sudan c) in Arab Gulf States d) globally Diff: 1 Page Ref: 91 LO: 2 11. Bay Inah as an exchange-based contract signifies. a. sale of debt b. sale with immediate purchase c. securitisation d. cash financing Diff: 2 Page Ref: 90 LO: 2 12. _________ is the equivalent term for securitization in Islamic commercial jurisprudence. a) Tawarruq b) Tawriq c) Istisna d) None of the above Diff: 1 Page Ref: 92 LO: 2 13. Which one of the following is not a party to tawriq? a) originator or issuer of Sukuk and Special Purpose Vehicle (SPV) b) Islamic banks advisory board members c) investment banks and subscribers or investors d) None of the above Diff: 3

Page Ref: 93 LO: 2 14. The hybrid sale contract where a customer approaches a bank or financial institution to purchase a commodity with payment arranged on instalment basis and the customer in turn sells the commodity to a third party for cash is a) Tawarruq b) Sarf c) Tawriq d) murabaha Diff: 3 Page Ref: 96 LO: 2 15. Modern scholars believe that Tawarruq transactions are permissible subject to the following condition(s): a) the person needs the money to undertake long overdue vacation. b) there is no other permissible manner of obtaining halal cash financing, such as benevolent loans c) the contract may include modicum of riba. d) all of the above Diff: 3 Page Ref: 96 LO: 2 16. The service-based contracts include: a) ijarah muntahia bi al-tamlik (financial lease) b) ujrah (fees) c) ju’alah (commission) d) all of the above Diff: 2 Page Ref: 99 LO: 3 17. Being a) b) c) d)

service-based contracts, ijarah contracts signify: leasing leasing and subsequent purchase fees commission

Diff: 1 Page Ref: 99 LO: 3 18. The two main modern application of ijarah are: a) contract of lease ending with sale, and contract of sales with immediate purchase

b) contract of lease ending with ownership, and contract of sales with immediate purchase c) contract of lease ending with sale, and contract of lease ending with ownership d) none of the above Diff: 2 Page Ref: 100 LO: 3 19. Modern applications of forward lease include its use: a) in medical treatment, education, and tourism. b) by a number of banks for Sharī‘ah-compliant credit card schemes. c) as a contract of lease ending with ownership d) all of the above Diff: 2 Page Ref: 102 LO: 3 20. The following are partnership contracts which have been transformed into financial instruments EXCEPT: a) mudarabah b) musharakah c) bay al-salam d) musharakah mutanaqisah Diff: 3 Page Ref: 104 LO: 4 21. The two types of mudarabah are: a) short term and long term mudarabah b) restricted (muqayyad) and unrestricted (mutlaq) mudarabah c) personally oriented and business oriented mudarabah d) none of the above Diff: 2 Page Ref: 105 LO: 4 22. Mudarabah in Islamic banking and finance is being used in: a) venture capital b) project financing c) general and specific investment accounts d) all of the above Diff: 3 Page Ref: 105 LO: 4 23. Musharakah could be used effectively: a) for small and medium enterprise (SME) b) in the primary Islamic capital market

c) in unit trust d) a and b Diff: 3 Page Ref: 107 LO: 4 24. Musharakah mutanaqisah is a chain of three contracts where the first contract is: a) a contract of lease between the financier and the client under the joint ownership. b) a joint ownership between a client and an enterprise (financier). c) a contract with a third party to guarantee the proper implementation of the agreement d) where the client partner concludes another contract with the financing partner. Diff: 3 Page Ref: 107 LO: 4 25. Differences between musharakah and mudarabah contracts include all the following except: a) sources of financing the business b) rights of partners to participate in the management of the business c) legality of the contracts d) liability of the partners Diff: 2 Page Ref: 108 LO: 4 26. The supporting contracts in Islamic finance are sometimes called: a) profit and loss sharing contracts b) accessory contracts c) legal contracts d) wakalah contracts Diff: 2 Page Ref: 109 LO: 5 27. Which of the following is a correct statement that describes an essential element of hawalah: a) muhal: the transferor or debtor who assigns the debt b) muhil: the transferor or debtor who assigns the debt c) muhal ‘alayhi: the transferred debt which is assigned from one debtor to another d) al-Muhal bihi. the transferee of the assigned debt

Diff: 2 Page Ref: 109 LO: 5 28. The modern application of hawalah comprises: a) bills of exchange (suftajah) b) endorsement of a negotiable instrument c) transfer of money or remittance (al-sarf) d) all of the above Diff: 3 Page Ref: 111 LO: 5 29. ____________ contract is a voluntary charitable contract based on the concept of mutual assistance a) rahn b) hawalah c) maqassah d) musharakah Diff: 1 Page Ref: 112 LO: 5 30. ____________ is a debt settlement through a counter-transaction or offsetting. a) muqasah b) hawalah c) wakalad d) rahn Diff: 2 Page Ref: 113 LO: 5 31.

____________ is a form of mandatory offset that may be carried out without the permission of the parties. a) muqasah al-Qanuniyyah (Legal Set-off) b) muqasah al-Talabiyyah (Set-off on Demand) c) muqasah al-Ittifaqiyyah (Consensual Set-off) d) none of the above Diff: 3 Page Ref: 114 LO: 5

32.

Which type of debts amongst the following that cannot be offset? a) duyun al-naqd (currency debts) b) duyun al-‘ard (commodity debts) c) duyn al-daroorah (necessity debts)

d) manfa’a (usufruct) Diff: 3 Page Ref: 114 LO: 5 30. The following items are elements of Kafalah EXCEPT:

a) b) c) d)

makful ‘anhu (principal debtor or obligor or guaranteed) kafil (surety or guarantor); witness (s) sighah (expression)

Diff: 2 Page Ref: 116 LO: 5 31. The application of kafalah in modern Islamic financial institutions can be

seen in all the following EXCEPT: a) documentary credit system which is largely used in international trade. b) supporting guarantee contract for the major contracts in Islamic finance c) credit card transactions d) the primary Islamic capital market Diff: 3 Page Ref: 116 LO: 5 32. The modern application of Wakalah is seen in:

a) b) c) d)

modern Islamic banking, finance and takaful, corporate Wakalah, wakalah model of waqf all of the above Diff: 2 Page Ref: 117 LO: 5

33. -------------------- can be defined as the contract of entrusting one’s precious

property or money to the care of another, usually a trusted person or a secured corporate entity. a) rahn b) wadi‘ah c) kafalah d) ijarah Diff: 1 Page Ref: 118

LO: 5 37. Waqf, ibra’, hibah, wa’ad ,and tabarru’ contracts are considered: a) unilateral supporting contract b) profit and loss sharing contracts c) accessory contracts d) religious contracts Diff: 3 Page Ref: 119 LO: 5 38. the waiving of one’s financial right or ownership that is owed to him/her in totality or partially is known as: a) `tabarru’ (donation) b) ibra’ (foregoing of right) c) hibah (gift) d) wa’ad (promise) tabarru’ Diff: 3 Page Ref: 119 LO: 5 39. Rewarding customers who make their monthly payments according to the schedule without any default, through the crediting of a certain amount is an example of: a) hibah b) tabarru' c) qard al-hasan d) hibah Diff: 2 Page Ref: 120 LO: 5 40. A promise or undertaking by a party to carry out a unilateral contract is the description of: a) wakalah b) al-wa'ad c) a salam d) takaful Diff: 1 Page Ref: 120 LO: 5 41. The opinion that fulfilling wa’ad is obligatory and it is usually enforceable is backed- by:

a) some Maliki jurists, b) majority of the Maliki scholars c) Ibn Shubrimah d) Shafi’i school Diff: 3 Page Ref: 120 LO: 5 42. Which jurists uphold the view that fulfilling wa’ad is recommended in financial transactions? a) Shafi’i school, b) some Maliki jurists, c) Abu Han...