24 Questions
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
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
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
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.
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.
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.
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.
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.
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.
What type of rates can be attached to Islamic Term Financing?
Fixed or Floating or a combination of both Fixed & Floating rates
What type of financing does Islamic banking offer besides term financing?
Revolving financing facilities, trade finance facilities, and investment products.
What is the purpose of collateral/security in Islamic Term Financing?
To secure the financing exposure of the bank
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.
What is the Shariah-compliant contract used in Islamic Term Financing?
Ijarah, AITAB, Istisna’, Musharakah, and Mutanaqisah
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.
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.
How do the pricing rates of Islamic Term Financing and Conventional Term Loans compare?
Both have BFR/BR + Spread or BLR/BR + Spread
What is the main difference between Islamic Term Financing and Conventional Term Loans?
The financing contract; Islamic Term Financing uses Shariah-compliant contracts
What is a Tawarruq Contract in Islamic Term Financing?
An arrangement of two sale and purchase contracts (S&P contracts)
What is the tenure of Islamic Term Financing?
Short/Medium/Long Term
How are payments structured in Islamic Term Financing?
Periodically on a monthly/quarterly/half yearly/yearly basis
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
, baibithaman 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
This quiz covers the application of funds in Islamic banking, including financing facilities and their acceptance in different Islamic schools of thought.
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