Islamic Finance FIN546 Chapter 1

What is the main objective of Islamic finance?

• Maximizing profit at all costs
• Promoting fair financial practices based on Shariah
• Encouraging speculative investment
• Supporting only government-owned banks

Answer explanation

Islamic finance aims to promote financial transactions that align with ethical and Shariah principles.

Which of the following is strictly prohibited in Islamic finance?

• Murabaha
• Maysir
• Ijarah
• Musharakah

Answer explanation

Maysir (gambling) is prohibited as it leads to excessive uncertainty and potential harm.

Which term refers to the Islamic prohibition of interest (usury)?

• Gharar
• Maysir
• Riba
• Sukuk

Answer explanation

Riba (interest) is forbidden in Islamic finance as it exploits borrowers and leads to unjust financial gains.

Which source is the primary foundation of Islamic finance principles?

• The Holy Quran
• Modern banking regulations
• Government policies
• Stock market trends

Answer explanation

Islamic finance is primarily based on Shariah principles derived from the Quran and Sunnah.

What is the purpose of Maqasid al-Shari'ah in Islamic finance?

• To regulate the interest rates in banking

• To maximize government revenue

• To ensure financial transactions align with justice and fairness

• To increase foreign investment

Answer explanation

Maqasid al-Shariah ensures that financial transactions protect public welfare and promote justice.

How does Islamic finance differ from conventional finance?

• It allows for unlimited interest rates
• It operates based on ethical and Shariah-compliant principles
• It focuses solely on charity-based transactions
• It does not involve financial institutions

Answer explanation

Islamic finance prohibits unethical transactions and is based on risk-sharing principles.

Why is Maysir (gambling) prohibited in Islamic finance?

• It increases profits for investors
• It leads to excessive uncertainty and potential harm
• It ensures fair competition in financial markets
• It encourages fair trading practices

Answer explanation

Maysir leads to financial instability by introducing speculation and uncertainty.

A businessman wants to finance his new project using an Islamic financial instrument that avoids Riba and promotes profit-sharing. Which financing method should he choose?

• Conventional loan
• Musharakah
• Interest-based bonds
• Speculative investment

Answer explanation

Musharakah is a partnership-based financing model where profits and risks are shared.

A customer wants to buy a house using Islamic banking. Which contract should the bank offer?

• Murabaha (cost-plus financing)
• Riba-based mortgage
• Gharar contract
• Maysir investment

Answer explanation

Murabaha allows the bank to purchase the property and sell it to the customer at a profit, avoiding interest.

Analyze the differences between Riba and profit in Islamic finance. How do they impact economic stability?

• Riba encourages fair economic practices, while profit is unfair
• Riba is fixed and guaranteed, leading to exploitation, while profit is based on real economic activity
• Riba promotes economic growth, while profit discourages investments
• Riba and profit function similarly in financial transactions

Answer explanation

Riba creates an unfair system where lenders profit regardless of economic outcomes, while profit in Islamic finance comes from real transactions.