Answers in four or five lines: SECTION -1

Q1. How does the practice of Islamic banking operate on the on the assets side & liabilities side? ANS. 1: Islamic banking model is reflected through its balance sheet structure that is dominated by profit-loss-sharing (PLS) on both the asset and liability sides. In such arrangements, the depositors who share the risk with the bank on the liabilities side will naturally absorb any adverse outcomes on the asset side of the banks balance sheet. The value of the depositors funds represents the real assets value of the banks. on the liabilities side, Islamic banks tend to have a greater proportion of non-interest bearing deposits than conventional banks, reflecting in part their willingness to accept low-denomination deposits (which are unsuitable for more remunerative types of accounts). Also on the liabilities side, they offer "profit sharing investment accounts" (PSIA) in which returns to investors (similar to conventional depositors) are linked to the performance of the assets in which their funds have been invested. In theory (though hardly ever in practice) such returns could be zero or even negative. On the assets side, banks invest in a variety of acceptable structures, including sukuk (similar to, though not the same as, bonds), trade finance instruments, leases and long term instruments which are similar to conventional project financing structures. The underlying principles of all remunerated instruments are that the return to depositors or investors must reflect the actual returns realised by underlying assets (as opposed to receiving interest which is predetermined, as in conventional finance). Q2. Name and briefly describe the contracts in shariah. ANS. 2: Contract in shariah means a tie or knot binding two parties together. Contracts in Shariah : 1) Definitive and suspensive contracts when the offer and acceptance are clearly defined the contract is Definitive and when they are kept in suspense then the contract becomes suspensive ( invalid contract). 2) Obligatory & permissible Contracts which are binding i.e they cannot be revoked are obligatory and the contracts which can be revoked by one party or both the parties are permissible contracts. 3) Correct & corrupt contracts A contract is sahih when it is valid, effective and enforceable & a corrupt contract is one which is not valid. 4) Contracts of exchange & gratuities Contracts of exchange are those where the two parties interchange price at one hand and goods sold on the other hand and contracts of gratuities are those which are done for charity.

Q3. Why are Islamic investors unable to invest in hedge funds? ANS. 3: Islamic investors are unable to invest in hedge funds because of the following reasons : First and foremost majority of the hedge funds are not shariah compliant, there is a need for proper regulatory and compliance framework to be developed. It involves lot of speculation which is like gambling and makes it disqualified in the Islamic financial system. Risk: Hedge funds contain a large portion of risk, due to the applied instruments like short selling (Haraam) or leveraging. Investors have to bear the excessive risk-factor when investing in hedge funds. Regulation: Hedge fund industry is not very strictly regulated as there is no proper regulatory framework. Transparency: Hedge funds dont have much transparency in their porfolios and their operations. Hedge fund managers excessively use short selling ( Haraam) and lot of interest bearing instruments in their investment strategies Q4. Name the various types of zakah other than Zakah al fitr. ANS 4: Various types of zakah other than zakah al fitr are: 1. 2. 3. 4. 5. 6. Zakah on business Zakah on agriculture Zakah on savings Zakah on mining Zakah on livestock Zakah on wealth

Q5. Define Sukuk and name their types. ANS 5: An Islamic financial certificate, similar to a bond in Western finance, that complies with Sharia, Islamic religious law. Because the traditional Western interest paying bond structure is not permissible, the issuer of a sukuk sells an investor group the certificate, who then rents it back to the issuer for a predetermined rental fee. The issuer also makes a contractual promise to buy back the bonds at a future date at par value. Types of Sukuk : 1. 2. 3. 4. Murabahah Sukuk Modrabah Sukuk Istisna Sukuk Ijarah Sukuk

5. Salam Sukuk

SECTION 2 Q1. Name the asset based, equity based and loan based shariah contracts with reference to credit risk weighted treatment. ANS 1: Asset based, equity based and loan based shariah contracts with reference to credit risk weighted treatment are: 1. Asset based shariah contracts: Murabahah, Salam, Istisna and Ijarah. 2. Equity based shariah contracts: Musharikah and Mudarabah. 3. Loan based shariah contracts : Qard contracts/Benevolent loans

Q2. What is a SWF Sovereign wealth fund? ANS 2: A sovereign wealth fund (SWF) is a state-owned investment fund composed of financial assets such as stocks, bonds, property, precious metals or other financial instruments. Sovereign wealth funds invest globally. Most SWFs are funded by foreign exchange assets The accumulated funds may have their origin in, or may represent foreign currency deposits, gold, special drawing rights (SDRs) and International Monetary Fund (IMF) reserve positions held by central banks and monetary authorities, along with other national assets such as pension investments, oil funds, or other industrial and financial holdings. These are assets of the sovereign nations that are typically held in domestic and different reserve currencies (such as the dollar, euro, pound and yen). Such investment management entities may be set up as official investment companies, state pension funds, or sovereign oil funds, among others. Examples include ADIA, KIA & QIA. Q3. Name the various modes of Islamic financing techniques. ANS 3: The various modes of Islamic financing techniques are as follows : 1. 2. 3. 4. 5. 6. 7. 8. Murabaha Musharaka Mudarabah Ijarah Qard Hassan Direct investment Leasing Musaqat

Q4. Name the common practice of Islamic banks in mobilizing sources of funds. ANS 4: Common practice of Islamic banks in mobilizing sources of funds -1. Current account: Islamic banks accept deposits from customers on current accounts as conventional banks do. However, Islamic banks operate current accounts under AlWadia principle. Banks receive the deposits with the promise to repay them on demand by the customers. Banks use such funds with the permission of the customers and at the sole risk of the banks 2. Savings account: Islamic banks accept saving deposits from customers under AlWadia and AlMudaraba Shariah principles. In saving accounts under the Al-Wadia principle, the bank is given an authorization by depositors to use the fund at the banks own risk. Al-Wadia savings deposit is almost similar to a current Account or demand Deposit except that the bank guarantees its customer the full return of the deposited fund with any voluntary profit. 3. Term deposits: Islamic banks also source funds through term deposits just like the conventional banks do. However, Islamic bank apply Al-Mudaraba principle. 4. Investnment deposits : This accounts are maintained on the PLS basis, banks issue a certificate for investment deposit made. Investors dont receive any interest instead they are entitled for the share in the profits made bt the bank. 5. Savings bond: This is another type of savings scheme offered by Islamic banks to the savers. Islamic banks follow Al-Mudaraba principle in offering this product Q5. Name the requirements for insurable risk. ANS 5 : The requirements for insurable risk : The first requirement is the existence of a large number of units A second requirement is that loss should be accidental and unintentional. A third requirement is that the loss should be both determinable and measurable. The fourth requirement is that the loss should not be catastrophic. Another important requirement is that the chance of loss must be calculable. A final requirement is that the premium must be economically feasible. The insured must be able to pay the premium. SECTION 3

Q1. Quote any two fatwas regarding prohibition of interest from the compendium of fatwas. ANS 1: Two Fatwas regarding prohibition of interest by the Egyptian office of the Multi 1990 1989.A.D

1. Subject: Prohibition of bank interest. Question: Is the use of bank money permissible (Halal) or prohibited (Haram)? Is what is taken of it for trade considered Riba or not (i.e. are business loans taken from a bank at a fixed rate of interest considered to be Riba)? Fatwa: To take business loans from a bank at a fixed rate of interest, as is the custom now, is Riba which is altogether forbidden. Allah, the Almighty knows best. Source: Fatwas by the Egyptian office of the Mufti, supreme council for Islamic affairs; opinion given by sheikh bakri al sadafi, Egyptian Mufti, Muharram 1325 A.H. / 1907 A.D. 2. Subject: Prohibition of investing deposited money for a fixed interest. Question: A person asks about the Shariah ruling on depositing the legacy of his deceased sons two daughters in a bank for interest. Fatwas: Islamic law does not permit the investment of money in bank at a fixed rate of interest because an investment such as this constitutes Riba which is prohibited by the Shariah. Source: Fatwa by sheikh abdel majeed saleem, Mufti of Egypt, 1348 A.H. / 1930 A.D. Q2. Name a few steps to further strengthen risk management in Islamic banks. ANS 2: Below are the few steps to strengthen risk management in Islamic banks : 1. Accounting standard : Accounting framework and disclosure policies with regards to the Assets, liabilities and income statements of the bank needs to be in a proper manner so as to it is easy to understand and establish control points for risk mitigation. 2. Internal control systems: Many big corporations have failed because they dint have a proper internal control system in place to identify risks. An Islamic bank must ensure that it has a proper internal control system which can raise an alarm in case of emergencies and identify risks before its too late. 3. Risk Exposure: Banks need to release information on their risks and risk management policies. This should include all risks including Credit risk, liquidity risk and market risks. Hence, banks need to adopt proper policies to counter these risks and disclose them to the interested parties and also the way in which they handled it. 4. External Audits: External Audit brings more transparency in the risk mitigation process as the auditors are independent and cannot be influenced by the management. Also External Audit helps to know the real inside story of the bank and it ensures the compliance with international standards for good governance and better control. Q3. How is Murabahah applied in the letter of Credit (L/c) ? ANS 3: Following are the steps followed to apply the letter of credit in Murabahah :

1. The customer requests the bank to open a letter of credit to import goods from abroad through an application enclosing a pro forma invoice and providing all the necessary details. 2. After securing the needed guarantee and checking the application the bank opens a letter of credit and sends a copy to the correspondent bank abroad and the exporter. 3. The customer endorses a promise to buy the goods; the cost and delivery of goods are negotiated. 4. The exporter exports the goods and delivers the document to the correspondent bank, the shipment is being dispatched and the necessary documents are sent. 5. After the confirmation of the banks ownership of the goods, an agreement of sale is signed with the client.

Q4. How can Zakah be spent in a planned manner through a five year plan? ANS 4: Zakah institutions can prepare a five year plan highlighting the receipts and expenditure of the zakah, they can constitute the following: 1. Channels for expenditure on the poor and needy- Funds under this category should be spent on the welfare of the poor and needy. 2. Vocational training and rehabilitation Providing training to the youths to develop their skills so that they can earn their livelihood and support themselves in a better way, funds can also be utilized to buy tools and equipments for the needy. 3. Establishing simple cottage and agriculture industries for the benefit zakah recipients. 4. Medical treatment and healthcare Zakah funds can also be used to establish hospitals and clinics to treat the poor and needy for free or it can be used to support the poor patients getting treatment in hospitals. 5. Expenditure for the cause of AllahZakah funds can be distributed to the people who are fighting the holy wars and defending muslims. 6. Good loans Zakah funds can be used to help muslims who are in debt and are entitled to receive zakah under this category.

Q5. Name a few differences between conventional & Islamic credit cards. ANS 5: 1. One of the latest banking products offered by Islamic institutions, is the Islamic Credit Card. Using the principle of Al Bai Bithaman Ajil (deferred payment sale), the bank issue an interest-free and penalty free credit card. 2. As goods are purchased using this credit card, your bank will render the transaction on your behalf and simultaneously sell it back to the customer. 3. This credit is payable over a deferred period through installments within a certain time frame.

4. The main difference is that no interest is to be paid on the transactions done using this credit card.

SECTION 4 Q1. Quote any two ayaths from the holy Quran about Zakah. ANS 1: Two ayaths from the holy quran about the zakah : 1. Those who establish regular prayers a& give regular zakah and have ( in their hearts) the assurance of hereafter Quran 31: 4. 2. Those who believe and do deeds of righteousness, and establish regular prayers and regular charity ( Zakah) will have their reward with their lord; on them shall be no fear, nor they shall grieve 2:27

Q2. What is liquidity risk and how does it occur? ANS 2: Liquidity risk arises when there is an unexpected decline in a banks net cash flow and the bank is unable to raise resources at a reasonable cost by either selling its assets or borrowing through the issuance of new financial instruments. This makes bank unable to meet its financial obligations and miss good investment opportunities. Liquidity risk faced by Islamic banks is low because of the excess liquidity that these banks face du e to unfavourable investment climate. A proper Islamic inter-bank money market and instruments should be developed to manage this risk.

Q3.What are the functions and duties of a typical shariah board? ANS 3: One of the most distinguishing features in Islamic banking is the fact that they are always advised by experts in Islamic Shariah. Because the raison detre of Islamic banks is the desire to follow the injunctions of Shariah in finance and investment, it became essential to give assurances to the public, particularly savers, that the bank is getting professional advise in that mater. Furthermore, since it was difficult to find bankers who are also well versed in Shariah board, nevertheless. Some, may have only one advisor. Others may seek the advice of many, but only when the need arises. The majority, however do retain a Shariah council which meets occasionally and clear model transactions and contracts, and issue an annual statement attesting the adherence of the management to the advice and instructions of the Shariah board vis--vis the religious aspects of the business. Functions & Duties:

a. Provide opinion on matters referred to it from the management of the bank, relating to the activities of the bank and their compliance with Shariah requirements. b. Endorsing model contracts and standard agreements and assuring their compliance with Shariah. c. Over-seeing the activities of the bank in general and managements implementation of Shariah guidelines issued by the board, in particular. d. Issuing an annual declaration which accompanies the banks financial statement, recording the boards views on the compliance of the bank with the Shariah requirements, addressed to the equity owners of the bank and its clients.

Q4. How can a musharika contract be classified? ANS 4: Musharika contract can be classified as below: a) Permanent Musharakah : In this case, the bank participates in the equity of a company and receives an annual share of the profits on a pro rata basis. The period of termination of the contract is not specified. This financing technique is also referred to as continued Musharakah. b) Diminishing Musharakah : Digressive or diminishing Musharakah is a special form of Musharakah which ultimately culminates in the ownership of the asset or the project by the client. It operates in the following manner: The bank participates as a financial partner, in full or in part, in a project with a given income forecast. An agreement is signed by the partner and the bank through which the bank receives a share of the profits as a partner. However, the agreement also provides payment of a portion of the net income of the project as repayment of the principal financed by the bank. The partner is entitled to keep the rest. In this way, the banks share of the equity is progressively reduced and the partner eventually becomes the full owner. This method of diminishing partnership has been successfully applied by the Jordan Islamic bank mainly to finance real estate projects and the construction of commercial buildings and housing projects. These projects are financed by the bank, fully or partially, on the basis that the bank obtains a proportion of the net profits as a partner and receives another payment toward the final payment of the principal advanced. When the original amount is fully repaid, the ownership is fully transferred to the partner and the bank has no claim whatsoever. The Jordan Islamic Bank has financed the construction of a commercial market in Irbid, a community college in Jerash and a hospital in Zerqa using this method of financing.

Q5. How can we capitalize on the potential Takaful market in Europe? ANS 5: There are almost 32 million Muslims living in Europe (including 1.5 million in the United Kingdom). These Muslim communities provide an enormous untapped opportunity for takaful (Islamically valid insurance).

The takaful market is estimated to be worth US$2 billion in premium income and is rapidly growing industry in the Muslim world. Largely facilitated by Islamic retail banking. Globally, there are currently more than 60 companies that offer takaful life and non-life products, either as their sole range or as a takaful window alongside conventional policies. Malaysia and the Middle East (in particular Saudi Arabia, Iran and Bahrain) currently account for the largest share of the market. There are a number of organizations considering establishing takaful operations in the United Kingdom, and the legal and regulatory aspects discussed in this chapter would be relevant for them. The permissibility in Islamic jurisprudence of conventional insurance has been the subject of debates among Islamic jurists since insurance was first discussed by the Hanafi scholar Ibn Abidin. Under a conventional contract of insurance, an insurer agrees to cover the insured or his property in return for a premium against the occurrence of a risk leading to actual loss as described in the contract. The insurers objective is that aggregate income exceeds the value of any claims paid. From an Islamic point of view, this is problematic because any sum of money paid in excess of the amount of premiums that the insured has paid is regarded as riba (interest or usury). Gharar (uncertainty, risk or speculation) is the uncertain element that arises in respect of a promise to pay a sum of money upon the occurrence of unspecified events. SECTION 5

Q1. Prepare your own zakah calculation chart assuming that you are liable to pay zakah at least In five different head of accounts as detailed in the calculations chart. ANS 1: ZAKAH STATEMENT: Estimated Value Wt in gm 1 ZAKAT ON GOLD (2.5%) 24 Carat Gold/Jewelry 2 ZAKAT ON SILVER (2.5%) Include Household Silver Utensils, Artefacts, and Jewelery. 4 ZAKAT ON CASH IN HAND /BANK (2.5%) 4a Cash in Hand 0 Actual Value 50,000.00 1,250.00 0 0 20 3,000.00 60,000 1,500.00 Price/Gm Zakat Payable

PARTICULARS

4b Cash in Bank in Savings Accounts 4c Cash in Bank in Current Accounts

2,00,000.00 2,50,000.00 5,00,000.00 Actual Value 15,000.00 0 0 50000 0

5,000.00 6,250.00 12,500.00

4d Cash held in Fixed Deposits ZAKAT ON LOANS / INVESTMENTS/ FUNDS/ 5 SHARES, ETC (2.5%) 5a Loans Receivable from Friends and Relatives

375 0 0 1250 0 28125

5b Investment in Govt Bonds 5c 5g 5f Provident Fund Contribution to date. Investment in Private Chits, Funds, etc Other Sources of Wealth Total Zakah Payable Q2. Name the Islamic finance related risks. ANS 2: Islamic finance related risks are

1. Asset price risk This is related with exposure to price volatility of the underlying real assets inherent with some financing modes, which are in form of trading and real investments. 2. Asset transformation risk This arises because the risk associated with a financing structure transforms itself during the term of the financing. 3. Shariah risk The risk of non-compliance with the shariah rules can bring about loss of goodwill. 4. Fiduciary risk it can be caused by the breach of the contract by Islamc banks. 5. Equity Risk -- Banks which invest a lot in profit sharing business are exposed to equity risk if the business does not do well and the returns are not good.

Q3. What are the objectives of the monetary policy in an Islamic economy? ANS 3: Objectives of the monetary policy in an Islamic economy are as follows: 1. To promote a sustained and balanced economic growth in the country and to mobilize resources for economic development.

2. To maintain stability in the value of many so as to avoid excessive periodic fluctuations. 3. To maintain stability in the external value of the currency. 4. To promote an equitable distribution of income and wealth. It is pointed out that these general objectives of economic policy need not be any different in the Islamic economy. Q4. Name a few examples of Islamic hedging managed by reputed managers and brokerages. ANS 4: Below are few examples of Islamic hedge funds : 1. 2. 3. 4. 5. 6. Dubai Shariah Asset Managements Cayman Islands-domiciled DSAM Kauthar Gold Fund. US based Shariah capital hedge funds. HSBC managed Amanah. Emirates Islamic global balanced fund managed by Emirates fund managers. NBAD UAE Islamic fund managed by National bank of Abu Dhabi Arab Islamic gateway fund managed by Shuaa capital.

Q5. Name the Non profit and loss contracts to which Islamic banks are exposed and how? ANS 5: Islamic banks Non profit and loss contracts like salam and bai salam expose them to credit risk and commodity price risk as banks agree to buy the commodity on a future date against current payment and also hold the commodity in question until it can be converted into cash. SECTION 6 Q1. How is contract defined in shariah? How does an Islamic contract differ from a conventional contract? ANS 1: Contract in shariah means a tie or knot binding two parties together. It is a declaration of Offer and acceptance. Islamic contract is developed through the work of fuqaha based on the principle laid down by the Quran and the narrations from the prophet (PBUH). Conventional contracts are based on the basis of human judgement. Conventional contracts are derived from English and French laws and Islamic contracts are based on the Islamic sharia. Declaration of intention and consenting is an important part of Islamic contract.

Q2. Name the four asset categories preferred by portfolio managers under Islamic Asset management. ANS 2: Four asset categories preferred by portfolio managers under Islamic Asset management are: 1. Islamic Equity or halal stocks. 2. Suku or Islamic bonds.

3. Private equities. 4. Islamic mutual funds & hedge funds. 5. Takaful Q3. What measures are suggested to further accelerate the growth of takaful sector ? ANS 3: Following are the measures suggested to further accelerate the growth of takaful sector : 1. Establish an international takaful association to network, share, research more on this subject. 2. Creating awareness among the public about the benefits of Takaful over the conventional insurance. 3. Research and establish new investment models to facilitate takaful operators. 4. Help people in financial planning so as to promote savings and advice the use of takaful for achieving their financial goals. 5. Insurance regulators should establish benchmarks for the performance of takaful operators, so that there exists a fair competition in the market. Q4. What are the conditions to be fulfilled for zakah to be made compulsory? ANS 4: Zakah becomes obligatory when an individual freely owns and possesses a productive nisab (minimum) of property. The possession and ownership of productive assets or property, apparent or non-apparent, constitutes the extent and degree of wealth of an individual creating the obligation to pay Zakah. 1. Productivity 2. Possession and full ownership 3. The Nisab Conditions for Zakah 1. Reason and maturity 2. The state of being a Muslim 3. Dimar property 4. Property which lacks productivity, and basic essentials of life are exempt from Zakah 5. The property of minors and insane 6. Condition of completion of one year. Q5. How are the mobilized Investment funds invested through Islamic financing techniques by most Islamic banks? ANS 5: Funds are invested by Islamic banks through below financing techniques : 1. 2. 3. 4. Murabaha Musharaka Mudarabah Ijarah

5. 6. 7. 8.

Qard Hassan Direct investment Leasing Musaqat.