Islamic Banking Theory and Practice – Comprehensive Review

90 flashcards covering foundational concepts, regulatory framework, contracts, products, risk, instruments and historical development of the Islamic Banking Theory and Practice course.

What is the primary objective of an economic system?

To determine how scarce resources are allocated among production and consumption activities.

In a simple circular-flow model, which two economic units interact?

Households and firms.

What do households supply to firms in the circular-flow model?

Factors of production such as labour, management skills and natural resources.

What do firms supply to households in the circular-flow model?

Goods and services.

Define factor market.

A marketplace where services of factors of production (land, labour, capital) are bought and sold.

Define product market.

A marketplace in which final goods or services are offered for purchase by consumers, businesses and government.

Name the four economic units in an open circular-flow economy.

Households, firms, government and the rest of the world.

List three types of markets found in a financial system.

Factor market, product market and financial market.

Give the three main components of a financial system.

Financial assets/instruments, financial institutions and financial markets.

State two functions of a financial system’s ‘saving function’.

Channels individual savings and makes funds available for loans/financing purposes.

What does the ‘liquidity function’ of a financial system ensure?

That savers can convert investments into cash whenever needed.

Which Malaysian act currently governs Islamic banking?

The Islamic Financial Services Act 2013 (IFSA 2013).

What is the definition of Islamic banking business under IFSA 2013?

Accepting Islamic deposits or investment accounts and providing finance in compliance with Shariah.

State the two basic requirements an Islamic bank must meet (per Khan).

Operate strictly according to Shariah and fulfil all sound banking requirements.

List two goals of Islamic banks.

Offer Shariah-compliant financial services and support equitable economic development.

According to IFSA 2013, what is Shariah compliance for an institution?

Aims, operations and activities must always comply with Shariah and SAC rulings.

Name the five Maqasid al-Shariah objectives.

Protection of religion (din), life (nafs), intellect (aql), lineage (nasl) and wealth (mal).

What Quranic verse expressly permits trade but forbids riba?

Al-Baqarah 2:275 – “Allah permits trade and prohibits riba.”

Define gharar.

Uncertainty or ambiguity in the terms or subject matter of a contract.

Define maysir.

Gambling or games of chance that create zero-sum outcomes.

What is tawhid’s implication for economics?

All resources belong to Allah; humans are equal partners and must act as vicegerents.

In Islamic banking, what does ‘khilafah’ mean?

Humankind’s responsibility as Allah’s vicegerent to manage resources ethically.

List six operational principles of Islamic banking.

Valid contracts, prohibition of riba/gharar/maysir, asset-backed financing, risk-sharing, financing halal activities and payment of zakah.

What is meant by asset-backed financing in Islamic banking?

Financing is tied to real tangible assets that create genuine economic activity.

Name three deposit types commonly offered by Islamic banks.

Current account, savings account and investment account.

Which Shariah contracts underlie Islamic current and savings accounts?

Wadiah yad dhamanah or qard.

Differentiate between General Investment Account (GIA) and Special Investment Account (SIA).

GIA uses unrestricted mudarabah; SIA uses restricted (muqayyadah) mudarabah tied to specific investment portfolios.

What contract underpins a Commodity Murabahah Term Deposit (CMTD)?

Tawarruq (commodity murabahah) series of sales.

State the formula for calculating profit on a fixed-rate BBA home financing.

Selling Price = Financing Amount × Annuity Factor × Number of payments.

What major Shariah issue arises in conventional BBA structures?

Use of back-to-back sale (bay’ al-inah) resembling a loan rather than a genuine sale.

Name three contracts combined in Musharakah Mutanaqisah (MM) home financing.

Musharakah partnership, ijarah leasing and bai’ (sale) at the end.

In an MM structure, how is the bank’s rental share adjusted over time?

It decreases as the customer redeems the bank’s equity portions.

Which contract underlies Al-Ijarah Thumma Al-Bai’ (AITAB) vehicle financing?

Lease followed by a sale; initial ijarah then bai’ transfer of ownership.

What Shariah contracts govern Ar-Rahnu pawn-broking?

Qard (loan), wadiah yad dhamanah (safe-keeping) and ujrah (fee).

Explain ta‘widh.

Compensation for actual loss due to late payment on an Islamic financing facility.

Explain gharamah (in LPC context).

A penalty charged above taʿwidh that must be channelled to charity, not bank income.

State the maximum ta‘widh rate allowed by BNM for post-maturity defaults.

Up to the prevailing IIMM (Islamic Inter-bank Money Market) rate on outstanding balance.

What is wa‘d in Islamic finance?

A unilateral binding promise to perform a future action.

Give one application of wa‘d in Islamic banking.

Purchase undertaking in tawarruq personal financing or MM home financing.

Define ibra’.

A rebate or waiver of the bank’s right to claim part of the outstanding amount, e.g., on early settlement.

Which two Shariah contracts commonly fund project financing?

Mudarabah (profit-sharing) and Musharakah (profit-loss sharing).

Why do Islamic banks often favour debt-based over equity-based financing?

Risk aversion, regulatory capital considerations, ease of pricing and customer expectations.

List three main categories of Islamic trade-financing instruments.

Islamic letters of credit, Murabahah trust receipts and Islamic accepted bills.

What is the underlying contract in a Wakalah Letter of Credit?

The bank acts as agent, holding customer deposit under wadiah and issuing LC on customer’s behalf.

Describe a Murabahah Letter of Credit.

Bank purchases goods, then sells to customer on murabahah terms after LC documents are honoured.

What does Murabahah Trust Receipt (MTR) finance?

Payment of import documents by bank; customer takes possession of goods and pays on deferred terms.

How is the selling price in an MTR calculated?

Invoice value plus a profit margin for the deferred period (SP = FV (1+rt/36500)).

What secondary market instrument is created by securitising an MTR?

Islamic Accepted Bill (IAB).

Define Islamic Export Credit Refinancing (IECR).

BNM facility providing pre- and post-shipment Islamic financing to Malaysian exporters via participating banks.

Which Shariah contract underlies an Islamic Bank Guarantee?

Kafalah (contract of guarantee).

What are the three pillars of the Islamic Inter-bank Money Market (IIMM)?

Interbank placement (MII, tawarruq, wakalah), trading of short-term instruments and Islamic cheque clearing.

Explain Mudarabah Interbank Investment (MII).

Surplus bank places funds with deficit bank on mudarabah basis, sharing profits, bearing potential loss.

How is profit shared in MII?

According to a pre-agreed ratio, e.g., 70% investor, 30% investee.

What underlying commodity is used in Malaysia’s Suq al-Silah (CMP)?

Crude Palm Oil (CPO).

Name two short-term Islamic instruments issued by Bank Negara Malaysia.

Government Investment Issues (GII) and Bank Negara Negotiable Notes (BNNN).

Under which concept are current GII structured?

Bai‘ al-inah (after originally using qard-hasan).

What Shariah principle supports Islamic Negotiable Instruments of Deposit (INID)?

Mudarabah.

State the Shariah basis for Sell-and-Buy-Back Agreement (SBBA).

Back-to-back sale contracts (bai‘ al-inah) with deferred and spot legs.

What is tawarruq personal financing?

Customer buys commodity on deferred payment, immediately sells for cash, receiving financing without interest.

Why is organized tawarruq controversial among scholars?

Potential resemblance to riba, creation of debt larger than cash, and macro-economic harms (mafasid).

Calculate ta‘widh on RM5,000 in arrears for 30 days at 1 % p.a.

Taʿwidh = 5,000 × 1 % × 30 / 365 ≈ RM4.11.

What does ‘anisab’ mean in the context of shariah governance?

It is not a technical term here; likely distractor (answer: Not applicable – term not used in notes).

Which act provided for the first Malaysian Islamic bank in 1983?

Islamic Banking Act 1983 (now repealed by IFSA 2013).

Name Malaysia’s first full-fledged Islamic bank.

Bank Islam Malaysia Berhad (BIMB).

When was the dual-banking system introduced in Malaysia?

1993, via the Islamic Banking Scheme (IBS).

What is the role of the Shariah Advisory Council (SAC) at BNM?

To issue binding rulings on Shariah matters for Islamic financial institutions and advise BNM.

List three supporting concepts covered in Topic 7.

Waʿd (promise), muwaʿadah (bilateral promise) and ibraʿ (rebate).

Differentiate between wa‘d and muwa‘adah.

Waʿd is unilateral and binding on promisor; muwaʿadah is bilateral promise binding on both parties.

What constitutes ‘actual loss’ for claiming compensation under wa‘d breach?

Shortfall between outstanding principal/cost and recoverable asset value plus direct costs.

Give one Shariah-compliant alternative to conventional overdraft.

Cash-line facility structured via BBA or tawarruq.

What contract backs a Wakalah Investment Account?

Agency contract for investment (wakalah bi al-istithmar).

How is customer profit treated when actual profit < expected in wakalah IA?

Customer receives actual profit; the deficit is not covered by the bank unless due to negligence.

State two key risks unique to Islamic banks.

Shariah non-compliance risk and displaced commercial risk.

Define displaced commercial risk.

Risk that an Islamic bank forgoes part of its returns to match market rates and retain depositors.

What is the difference between primary and secondary Islamic money markets?

Primary involves initial issuance; secondary involves trading existing instruments like IAB, GII, BNNN.

Name two Gulf countries where Islamic banking began early.

Bahrain and UAE (Dubai Islamic Bank among first in 1970s).

Which Shariah standard-setting body issues guidelines like AAOIFI?

Accounting & Auditing Organization for Islamic Financial Institutions (AAOIFI).

What is the underlying principle of Islamic insurance (takaful)?

Mutual cooperation and shared responsibility (tabarruʿ and taʿawun).

Explain the term ‘fintech’ in Islamic finance context.

Use of technology (big data, blockchain, AI) to deliver Shariah-compliant financial services.

What is Labuan IOFC?

Labuan International Offshore Financial Centre – Malaysian offshore hub offering Islamic finance services.

Define sukuk.

Shariah-compliant certificates representing proportionate ownership in underlying assets or projects.

List any three non-bank Islamic financial intermediaries in Malaysia.

Takaful operators, provident/pension funds, Pilgrims Fund Board (Tabung Haji), unit trusts.

What Shariah contracts support Islamic credit cards?

Tawarruq (for financing), kafalah (guarantee) and ujrah (fee-based services).

Which Shariah principle ensures fairness in trade and prohibits exploitation?

La ghurm bi-ghunm (no gain without bearing risk).

What is the penalty for Shariah non-compliance under IFSA 2013?

Fine up to RM25 million or imprisonment up to 8 years or both.

How does Islamic finance treat money: commodity or medium of exchange?

It is a medium of exchange and measure of value, not a commodity to be traded for profit.

What are the two monetary policy tools mentioned under policy function?

Contractionary monetary policy and expansionary monetary policy.

State one key difference between Islamic and conventional deposit insurance.

Islamic schemes avoid riba and are structured on takaful or wakalah models.

Which contract is used for forward foreign-exchange hedging in Islamic finance?

Dual unilateral promises (muwaʿadah) with separate bayʿ al-sarf at maturity.

What is the principle behind Islamic late payment charge structure?

Compensate actual loss (taʿwidh) and channel any penalty (gharamah) to charity, avoiding riba.

Why must banks provide zakah on business?

As a Shariah obligation to purify wealth and redistribute resources.

Summarise the key distinction between mudarabah and musharakah.

Mudarabah: capital from one party, labour from another; loss borne by capital provider. Musharakah: capital & management shared, loss shared in proportion to capital.

Explain ‘discretionary ibra’ in variable-rate BBA.

Bank rebates difference between ceiling profit rate and effective rate whenever effective rate is lower.

What is the purpose of BNM’s Financial Sector Master Plan (FSMP)?

10-year roadmap (2001-2010) to strengthen and liberalise Malaysia’s Islamic banking and insurance sectors.