Islamic Banking Chapter 6

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Questions and Answers

What is the Shariah contract upon which the Cash-Line Financing Facility is based?

Commodity murabahah

How does the bank's commodity sale price relate to the financing limit?

It is the financing limit plus the Bank's profit

What is the purpose of the Cash-Line Financing Facility?

To provide business working capital

What is unique about the profit charging mechanism in the Cash-Line Financing Facility?

Profit is charged only over the utilised financing amount Signup and view all the answers

How does the bank's operation of the financing transaction relate to the customer's current account?

The operation is performed in the customer's current account with issuance of a cheque book Signup and view all the answers

What is the key difference between the Cash-Line Financing Facility and a conventional term loan?

The Cash-Line Financing Facility is based on a Shariah-compliant contract, whereas a conventional term loan is not Signup and view all the answers

What is the primary purpose of Islamic banking in terms of application of funds?

To provide financing to other customers (deficit unit) by using the funds collected as deposits. Signup and view all the answers

According to Section 2 of IFSA 2013, what type of financing does Islamic banking allow?

Equity or partnership financing, lease-based financing, sale-based financing, and others. Signup and view all the answers

How does Islamic term financing differ from conventional term loans?

Islamic term financing provides a Shariah-compliant financing option, whereas conventional term loans may not comply with Islamic principles. Signup and view all the answers

What is the Tawarruq contract in Islamic banking?

A type of Shariah-compliant financing contract, where the Islamic bank purchases an asset and sells it to the customer at a mark-up. Signup and view all the answers

What is the primary characteristic of Islamic term financing?

A financing provided by an Islamic bank with a term payment plan, which is normally extending beyond one year. Signup and view all the answers

What is the difference between Islamic banking and conventional banking in terms of application of funds?

Islamic banking uses Shariah-compliant financing structures, whereas conventional banking may involve interest-based transactions. Signup and view all the answers

What type of rates can be attached to Islamic Term Financing?

Fixed or Floating or a combination of both Fixed & Floating rates Signup and view all the answers

What type of financing does Islamic banking offer besides term financing?

Revolving financing facilities, trade finance facilities, and investment products. Signup and view all the answers

What is the purpose of collateral/security in Islamic Term Financing?

To secure the financing exposure of the bank Signup and view all the answers

What is the role of the Islamic bank in a Musharakah Mutanaqisah contract?

The Islamic bank partners with the customer to finance a project or asset, with the bank's share decreasing over time. Signup and view all the answers

What is the Shariah-compliant contract used in Islamic Term Financing?

Ijarah, AITAB, Istisna’, Musharakah, and Mutanaqisah Signup and view all the answers

What is the significance of the Istisna' contract in Islamic banking?

The Istisna' contract allows for the manufacture and delivery of goods, providing a financing option for customers. Signup and view all the answers

How does the Ar-Rahn financing product differ from other Islamic banking products?

Ar-Rahn financing involves the use of collateral to secure financing, offering a unique financing option. Signup and view all the answers

How do the pricing rates of Islamic Term Financing and Conventional Term Loans compare?

Both have BFR/BR + Spread or BLR/BR + Spread Signup and view all the answers

What is the main difference between Islamic Term Financing and Conventional Term Loans?

The financing contract; Islamic Term Financing uses Shariah-compliant contracts Signup and view all the answers

What is a Tawarruq Contract in Islamic Term Financing?

An arrangement of two sale and purchase contracts (S&P contracts) Signup and view all the answers

What is the tenure of Islamic Term Financing?

Short/Medium/Long Term Signup and view all the answers

How are payments structured in Islamic Term Financing?

Periodically on a monthly/quarterly/half yearly/yearly basis Signup and view all the answers

Study Notes

Islamic Banking: Application of Funds (Financing)

Islamic banks use collected deposits to provide financing to customers (deficit unit) through various financing facilities.
The acceptance of these facilities varies depending on the schools of Islamic thought and interpretations.

Islamic Banking Business under IFSA 2013

According to Section 2 of IFSA, "Provision of Finance" means entering into or making an arrangement for another person to enter into businesses or activities that are in accordance with Shariah.
Examples of Shariah-compliant financing facilities include:
Equity or partnership financing (musharakah, musharakah mutanaqisah, and mudarabah)
Lease-based financing (al-ijarah, al-ijarah muntahia bi al-tamlik, and al-ijarah thumma al-bai`)
Sale-based financing (istisna, bai bithaman ajil, bai` salam, murabahah, and musawamah)
Currency exchange contracts
Fee-based activities (wakalah)
Purchase of bills of exchange, certificates of Islamic deposit, or other negotiable instruments
Acceptance or guarantee of any liability, obligation, or duty of any person

Conceptual Framework of Islamic & Conventional Banking

Application of funds in Islamic banking involves:
Financing
Revolving financing facilities
Investment
Contrast with conventional banking:
Financing
Revolving credit facilities
Loan and advances
Investment

Consumer Retail/Financing Products

Islamic term financing products:
Asset acquisition financing (e.g., property, vehicle, al-ijarah thumma al-bai`)
Personal financing (e.g., credit card, pawn-broking, Tawarruq, Qard bilujrah)
Islamic term financing characteristics:
Short, medium, or long-term tenure
Periodic payments on monthly/quarterly/half-yearly/yearly basis
Pricing based on BFR/BR + Spread or fixed/floating rates

Islamic Term Financing: Tawarruq Contract

A Tawarruq contract is an arrangement consisting of two sale and purchase contracts (S&P contracts)
The 1st S&P contract involves the sale of a commodity by a seller to a purchaser on a deferred basis
The 2nd S&P contract involves the sale of the commodity by the purchaser to a third party (broker) at a lower price

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Description

This quiz covers the application of funds in Islamic banking, including financing facilities and their acceptance in different Islamic schools of thought.