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 al-
nafs (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) musharakah, murabahah and murabahah
b) ijarah and istisna
c) bay salam and bay mu’ajjal models
d) 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 service-based contracts, ijarah contracts signify:

a) leasing
b) leasing and subsequent purchase
c) fees
d) 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) makful ‘anhu (principal debtor or obligor or guaranteed)
b) kafil (surety or guarantor);
c) witness (s)
d) 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) modern Islamic banking, finance and takaful,
b) corporate Wakalah,
c) wakalah model of waqf
d) 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 Hanifah
d) all of the above
Diff: 3
Page Ref: 120
LO :5

43. The concept of tabarru’ is applicable in:

a) takaful and waqf donations
b) takaful and zakah
c) waqf and zakah
d) all of the above
Diff: 2
Page Ref: 121
LO: 5
_______________________________________

Short answer questions

Question 1
Differentiate between transaction deposits and investment deposits.

 Transaction deposits: These are risk-free funds that do not yield any return,
such as current accounts based on the wadi’ah concept, whereby a sum of
money is deposited with the bank for safekeeping.
 Investment deposits: Investment deposits offer the benefit of making profit
or the risk of capital loss, depending on the amount realized by the bank in
its investments. For example, in an investment account where the depositor
concludes a mudarabah contract with the bank, they are entitled to some
form of return or loss based on the performance of the investment.
Page Ref: 79 LO: 1

Question 2
Discuss the specific conditions that must be met in a murabahah transaction.
1. Goods subject to murabahah. The goods subject to murabahah must be
lawful, real, and have commercial value. Both tangible and non-tangible
goods may be used as the subject matter of the transaction.
2. Original cost price of the goods and additional procurement costs.
Murabahah transactions are based on absolute trust, so the seller is required
to state the original cost price of the goods and any additional costs incurred
in the process of procuring the goods.
3. Margin of profit. The margin of profit must be mutually predetermined by
the parties at the initial stage of the contract. The exact price must be made
known to the buyer—any unspecified or hidden costs are not allowed in a
murabahah transaction.
Page Ref: 84 LO: 2
Question 3
Identify at least six conditions for the validity of a salam contract as generally
agreed upon by Muslim jurists.

The conditions for the validity of a salam contract as generally agreed upon by
Muslim jurists are:
1. It is not necessary that the goods sold exist at the time of concluding the
contract.
2. The purchase price must be paid in full by the buyer at the time of
concluding the contract.
3. The exact delivery date and the location for delivery should be specified in
the contract.
4. The actual specification of the goods including the quality, size, and
description must be specified and agreed upon in the contract.
5. The quantity of the goods (and the means of measurement) must be agreed
upon in absolute terms and should be carried out according to the customary
method of measurement.
6. The right to demand surety from the seller is vested in the buyer in order to
guarantee delivery of the goods.
7. Ownership of the goods and all the accompanying rights can only be
exercised by the buyer upon receipt of the goods.
8. The buyer may nullify the contract and exercise the performance bond if the
seller is unable to deliver the goods on the delivery date.
9. Delivery of the goods must be made practically regardless of the buyer’s
circumstances on the date of delivery.
10. The contract cannot be concluded on goods that can be delivered on the spot
because the salam contract is specifically meant for forward sales.
Page Ref: 87 LO: 2

Question 4
Contrast the position of the four major Muslim schools with regard to the sale
of debt.

 Shafi ’i school: Sale of debt is allowed to a third party only if the debt was
initially guaranteed and was sold in exchange for goods that must be
delivered immediately. When such a debt within the confines of this thin
line of permissibility is sold, it must be paid in cash or tangible assets as
agreed by the parties.

 Hanafi school: Sale of debt is not allowed in Islamic commercial

transactions.
A fundamental condition for the validity of a sale is the subject matter of the
contract, which must be known to the parties and, more importantly, be
tangible. The reasoning behind the position of this school relates to the
potential risks of a debt trading transaction on the debtor and the buyer.

 Maliki school: Sale of debt is allowed subject to certain significant

conditions. The conditions stipulated by this opinion are that:
 - payment must be expedited
- the debtor must be present at the place of sale and confirm the debt
- the debtor must be able to redeem the debt
- debts should be sold at par value
- the goods must be saleable before they are fully possessed

 Hanbali school: Some jurists in the Hanbali school divide the sale of debt
into two—confirmed and unconfirmed debts. Confirmed debts, which are
already ascertained and reasonably quantified, can be sold on the spot.
Unconfirmed debts, such as wages or fees for services during the course of
the performance of a service, are not tradable whether on the spot or on a
deferred basis.
Page Ref: 90 LO: 2

Question 5
Explain the position of modern jurists with regard debt trading.

Many modern scholars believe there is no room for profit in debt trading.
The International Islamic Fiqh Academy and the majority of contemporary scholars
consider the sale or purchase of debt securities at a price other than their nominal
value as impermissible in Islamic commercial transactions.
Hawalah or assignment of debt can be made instead of bay al-dayn. When a
relationship is established between the so-called purchaser of the debt and the
original debtor, a hawalah contract is established. This is permissible in the
Shari‘ah.
Page Ref: 90 LO: 2

Question 6
Describe the four most important parties involved in the process of Islamic
securitization.

The four most important parties in securitization are:

 Originator or issuer of sukuk. The whole process starts with the originator
or issuer of the sukuk, which is usually a large corporation, government, or
an entity that intends to raise funds for a particular financial purpose. The
originator sells its assets to the SPV in order to be able to use the funds.

 Special purpose vehicle. The SPV purchases the underlying asset from the
originator and thus commences the securitization process.

 Investment Banks. These are needed in the process of securitization for the
purpose of underwriting and bookmaking services to guarantee investors’
funds. Islamic banks or Islamic windows of multinational banks can
conveniently carry out this service for the purpose of guaranteeing such
funds.
  Subscribers or investors. These are the sukuk-holders, who may be
individuals, corporate entities such as Islamic banks, or other financial
institutions.
Other parties involved in the process of Islamic securitization include: obligor, the
lead manager, the cash administrator, legal and tax counsel, the servicer, the auditor,
the credit enhancement provider, the custodian (registration and transfer agents or
R&T agents), and the credit rating agency.
Page Ref: 93 LO: 2

Question 7
Define the term " ijarah' literally as well as in its Islamic jurisprudence
context.

The term ijarah literally means to give something in rent to another person.
The term has been used in two different ways in Islamic jurisprudence:
1. The first usage relates to hiring another person to do a particular thing. This
means employing a person for a particular job for a consideration known as
wages. In this contractual usage the employer is known as musta’jir while
the employee is called ajir.
2. The second usage of the term in Islamic jurisprudence relates to the transfer
of usufruct in an asset for a consideration. Here, the lessor who transfers the
usufruct rights is called mu’jir while the lessee is known as musta’jir. The
commission or rental fee payable to the lessor is known as ujrah. The
contract of transfer of usufruct for a consideration for a given period of time
is known in Islamic law as ijarah.
Page Ref: 99 LO: 3

Question 8
Discuss the two types of mudarabah transaction.
The two types of mudarabah transaction are:
1. A restricted mudarabah partnership is “a contract in which the capital
provider restricts the actions of the mudarib to a particular location or to a
particular type of investment as the capital provider considers appropriate,
but not in a manner that would unduly constrain the mudarib in his/her
operations.” In this type of mudarabah transaction, the powers of the
mudarib are restricted with regard to the kind of trade to be engaged in,
where it should be carried out, and the period for same. The rabb al-mal
may specify the type of business he/she wants the mudarib to invest his/her
funds in and the timeframe for the business.
2. In an unrestricted mudarabah transaction, the rabb al-mal does not specify
the type of business in which the mudarib can invest and no timeframe is
specified. The mudarib can use their discretion in respect of their experience
and expertise as an entrepreneur. Their authority is absolute and they can use
the capital in the manner they deem fit in accordance with the principles of
the Shari‘ah.
Page Ref: 105 LO: 4

Question 9:
State a Qur'anic Verse and a divine Hadith that demonstrate the legality of a
musharakah contract.

 Qur’an 5:2: “Help one another in virtues (righteousness and piety); but do
not help one another in sin and transgression.”

 Abu Hurairah narrated that the Prophet Muhammad related that Allah said:
“I am the third in a partnership of the two, but if one betrays the other, I will
withdraw from the partnership.”
Ref: 104 LO: 4

Question 10
Identify the essential elements of a hawalah contract.

The essential elements of a hawalah contract are as follows:

1. Muhal. The creditor or person to whom the transfer is made.
2. Muhil. The transferor or debtor who assigns the debt.
3. Muhal ‘alayhi. The transferee of the assigned debt.
4. Al-Muhal bihi. The transferred debt that is assigned from one debtor to
another.
5. The debt owed by the transferee to the principal debtor.
6. Form of contract. The contract is concluded by an offer from the principal
debtor and acceptance by the transferee and the creditor.
Page Ref: 109 LO: 5

Question 11
Discuss the three views on the legality of muqasah held by Muslim jurists.

Muslims jurists have deliberated on the extent of legality of muqasah and three
views have been expressed. Muqasah is an approved method of settlement of
identical debts between two parties:
 that does not necessarily fall under bay al-dayn in Islamic commercial
transactions.
 Muqasah is merely an exception to bay al-dayn (sale of debts), which is
permissible under certain conditions.
 Muqasah is a sale of debts by its real nature because its subject matter is
debt which is intangible. However, the practice of muqasah is firmly
established by a consensus of opinion among the scholars.

The most widely accepted view, which is also the position of AAOIFI, is that
muqasah is a permissible method for the settlement of identical debts between two
parties provided the contractual arrangement is not executed in a manner that
contradicts the fundamental principles of Islamic law such as riba and gharar.
Page Ref: 114 LO: 5

Question 12
List the five elements of kafalah.

The five elements of kafalah are:

• makful ‘anhu (principal debtor or obligor or guaranteed)
• kafil (surety or guarantor)
• makful lahu (creditor or obligee)
• makful bihi (object of guarantee)
• sighah (expression).
Page Ref: 116 LO: 5