Unit 5: Introduction to Islamic Banking
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Questions and Answers

What does Shari’ah govern in Islamic finance?

  • The distribution of profits
  • The overall Islamic financial system (correct)
  • The rules for interest rates
  • The qualification of assets for investment

    • What is Sukuk primarily considered as?

  • A loan with interest
  • A guarantee of repayment
  • A proof of ownership (correct)
  • A form of debt

    • How does the source of income differ between debt instruments and Sukuk?

  • Sukuk income comes from government subsidies
  • Debt instruments generate income from profits, while Sukuk derives income from profits of business activities (correct)
  • Sukuk generates income through fixed interest rates
  • Debt instruments derive income from alternative investments

    • What is the main purpose of Sukuk?

    <p>To finance various projects compliant with Shari’ah</p> Signup and view all the answers

    What type of agreement does Wakala represent in Islamic finance?

    <p>An agency contract to delegate tasks</p> Signup and view all the answers

    Which of the following describes Takaful?

    <p>A mutual guarantee to share losses among participants</p> Signup and view all the answers

    What is the primary characteristic of assets eligible for Sukuk?

    <p>They must be suitable for profitable investment under Shari’ah</p> Signup and view all the answers

    What type of contribution is Zakat Payable?

    <p>A mandatory almsgiving for charity</p> Signup and view all the answers

    What is the primary characteristic of Kafala in Islamic finance?

    <p>A personal guarantee provided by a third party for a debtor's debt</p> Signup and view all the answers

    What is the primary difference in how depositors are viewed in Islamic banking compared to conventional banking?

    <p>Depositors are primarily viewed as investors sharing risk.</p> Signup and view all the answers

    In a Mudarabah contract, who bears the losses unless misconduct occurs?

    <p>The rab-al-maal (capital provider)</p> Signup and view all the answers

    What distinguishes Murabahah financing from other types of financing?

    <p>It includes a markup on the asset's cost during sale</p> Signup and view all the answers

    How does Islamic banking approach the concept of profit generation compared to conventional banking?

    <p>It earns profit through trade and sharing losses.</p> Signup and view all the answers

    What is a Musharakah agreement primarily based on?

    <p>On shared capital contributions and profit distribution</p> Signup and view all the answers

    What is a significant risk factor in conventional banking that Islamic banking avoids?

    <p>Mismatched assets and liabilities.</p> Signup and view all the answers

    How is loss shared in a Musharakah financing agreement?

    <p>In relation to each partner’s contribution</p> Signup and view all the answers

    In the context of Islamic banking, what happens when an organization suffers a loss?

    <p>Management can be reassessed or replaced.</p> Signup and view all the answers

    What is the defining feature of Qard in Islamic finance?

    <p>It obligates the borrower to repay the exact initial loan amount</p> Signup and view all the answers

    What was a significant milestone for Islamic banking in the Philippines in 1973?

    <p>Establishment of the first Islamic bank.</p> Signup and view all the answers

    What does Rahn refer to in Islamic finance?

    <p>A pledge of an asset to secure a loan obligation</p> Signup and view all the answers

    What is one of the goals of the Bangko Sentral ng Pilipinas regarding Islamic banking?

    <p>To promote financial inclusion for all Filipinos.</p> Signup and view all the answers

    What concept does Riba represent in Islamic finance?

    <p>The receipt and payment of interest on loans</p> Signup and view all the answers

    How is money viewed differently in Islamic banking as opposed to conventional banking?

    <p>Money is treated as a product rather than just a medium.</p> Signup and view all the answers

    Why is time value considered differently in conventional banking?

    <p>Charging interest is linked directly to time.</p> Signup and view all the answers

    What was the primary purpose of the enactment of Presidential Decree No. 542?

    <p>To align Al Amanah Bank's functions with Islamic beliefs and principles</p> Signup and view all the answers

    What significant change did Republic Act No. 6848 introduce?

    <p>It enabled AAIIBP to become a universal bank.</p> Signup and view all the answers

    Which of the following events occurred first in the timeline of Islamic banking legislation in the Philippines?

    <p>Enactment of Presidential Decree No. 542</p> Signup and view all the answers

    What is a key focus of AAIIBP's 5-year Rehabilitation Plan approved in 2008?

    <p>Recapitalization and financial viability</p> Signup and view all the answers

    What does the 2018 Organic Law for the Bangsamoro Autonomous Region provide for Islamic banking?

    <p>It mandates the promotion of Islamic banking and finance development.</p> Signup and view all the answers

    What crucial guidelines were introduced in BSP Circular No. 1070?

    <p>Shari’ah Governance Framework for Islamic banks</p> Signup and view all the answers

    What is the significance of Republic Act No. 11439?

    <p>It regulates and organizes Islamic banks in the Philippines.</p> Signup and view all the answers

    What is one of the core values of AAIIBP?

    <p>Shari’ah compliance</p> Signup and view all the answers

    What is the primary mission of Al-Amanah Islamic Investment Bank of the Philippines?

    <p>To offer Islamic banking products and benefits to Filipinos.</p> Signup and view all the answers

    Which deposit product is offered under Islamic Banking principles?

    <p>Current Account under 'Wadiah'</p> Signup and view all the answers

    What principle is NOT part of the Islamic Financing Products offered by the bank?

    <p>Conventional Overdraft</p> Signup and view all the answers

    Which of the following best describes the bank's vision?

    <p>To promote socio-economic development and be a leading Islamic financial institution.</p> Signup and view all the answers

    What major challenge does the bank face?

    <p>Lack of awareness and understanding of Islamic banking.</p> Signup and view all the answers

    Which service is included in the bank's 'Other Services' category?

    <p>OFW Remittance</p> Signup and view all the answers

    What is the purpose of the BSP initiatives mentioned?

    <p>To increase awareness and understanding of Islamic banking.</p> Signup and view all the answers

    Which branch is NOT listed as a location for Al-Amanah Islamic Investment Bank?

    <p>Manila</p> Signup and view all the answers

    What is the primary objective of the State regarding Islamic banking and finance?

    <p>To enhance financial inclusion for the underserved Muslim population.</p> Signup and view all the answers

    Who should constitute the Shari’ah Advisory Council in an Islamic bank?

    <p>Qualified persons in Shari’ah and banking or related fields.</p> Signup and view all the answers

    What is a core element of financial arrangements in Islamic banking?

    <p>Risk sharing among parties involved.</p> Signup and view all the answers

    How does the government intend to treat Islamic banking transactions compared to conventional banking?

    <p>As par with similar conventional transactions.</p> Signup and view all the answers

    What does BSP Circular No. 1069 (s. 2019) allow regarding Islamic banks?

    <p>Creation of Islamic banking units within conventional banks.</p> Signup and view all the answers

    What is one responsibility of the Shari’ah Advisory Council according to the Islamic Banking Act?

    <p>Review applications of Shari’ah principles.</p> Signup and view all the answers

    What is the purpose of BSP Circular No. 1070 (s. 2019)?

    <p>To ensure effective Shari’ah compliance and governance.</p> Signup and view all the answers

    Which of the following is NOT a characteristic of Islamic banking?

    <p>Investment in industries involving prohibited activities.</p> Signup and view all the answers

    Study Notes

    Unit 5: Introduction to Islamic Banking

    • Islamic banking is Shari'ah-compliant finance, grounded in Islamic faith principles for commercial transactions. It avoids riba (interest).

    • Islamic banking activities follow Shari'ah Islamic law.

    • Islamic banking business avoids riba (interest). Transactions adhere to Shari'ah principles.

    Outline of Discussion

    • 5.1 Principles of Islamic Banking

      • Overview: Terminologies and Practices
      • Islamic Banking vs. Conventional Banking

    • 5.2 Historical Developments in the Philippines

      • Al Amanah Islamic Investment Bank of the Philippines (AAIIBP)
      • BSP Circulars on Islamic Banks (IBs) and Islamic Banking Units (IBUs)

    How does Islamic Banking work?

    • Fundamental Principles:
      • Sharing of profit and loss
      • Prohibition of the collection and payment of interest (riba) by lenders/investors
      • Money must be used in Shari'ah-compliant activities to generate profits
      • Partnership (Mudarabah)
      • Trade (Murabahah)
      • Lease (ljarah)
      • Equity Participation

    Equity Participation

    • Borrowers give the bank a share in profits rather than paying interest
    • If a bank lends to a business, the business shares profits with the bank
    • If a business defaults, the bank doesn't profit

    Islamic Banking Terminologies

    • Gharar: Uncertainty
    • Halal: Lawful/permitted under Shari'ah
    • Haram: Unlawful/forbidden under Shari'ah
    • Ijarah Financing (Operating Lease): A lease contract where the user owns the asset
    • Ijarah Muntahia Bittamleek (Finance Lease): Option to own asset at the end of the lease period - either by sales contract (purchase) or a gift contract
    • Islamic Banking Unit: Division of a conventional bank following Shari'ah principles
    • Kafala: Personal guarantee.
    • Maysir: Gambling
    • Mudarabah (Silent Partnership): Contract between capital provider and entrepreneur. Profits shared. Losses borne solely by the capital provider except if caused by the entrepreneur's errors
    • Murabahah Financing (Cost-plus Financing): Purchase and resale of an asset at a cost-plus profit agreement.
    • Musharakah Financing (Profit/Loss Sharing): Partner contract between IB/IBU and customer to contribute capital to an enterprise (profits and losses are shared according to the agreement).
    • Qard (Loan): Obligation to return exact loan amount at end of contract term.
    • Rahn (Pledge Contract): One party charges an asset to guarantee repayment.
    • Riba (Interest): Receipt and payment of interest on lending.
    • Sukuk (Islamic Bonds): Certificates representing undivided shares in assets, usufructs, or services.
    • Takaful (Islamic Insurance): Mutual guarantee; participants contribute to a risk fund

    Islamic Banking vs. Conventional Banking

    • Islamic Banking: Depositors are investors, not lenders. Risk sharing. Assets and liabilities matched. Real assets are products.
    • Conventional Banking: Depositors are lenders, fixed interest, asset/liability mismatch risks, money is a medium of exchange/store of value.

    Islamic Banking in the Philippines

    • Promotes inclusive banking
    • Bangko Sentral ng Pilipinas (BSP) supports Islamic banking
    • Goal of financial inclusion of all Filipinos
    • Provides access to financial services for Muslims and alternative options for non-Muslims

    Republic Act No. 11054 (2018)

    • Organic Law for the Bangsamoro Autonomous Region in Muslim Mindanao (BARMM)
    • Promotes Islamic banking and finance
    • Establishes Shari'ah Supervisory Board

    Republic Act No. 11439 (2019)

    • Islamic Banking Act
    • Encourages Islamic banking growth
    • Creates opportunities for financial inclusion

    BSP Circulars (on IBs & IBUs)

    • Guidelines on the establishment of Islamic banks (IBs) and Islamic banking units (IBUs) (Circular 1069)
    • Shari'ah governance framework (Circular 1070)
    • Management of liquidity risk (Circular 1116)
    • Guidelines for reporting transactions (Circular 1139)

    Shari'ah Governance Framework

    • Comprehensive system of measures, arrangements, requirements, structures and policies for Islamic Banks (IBs) and Islamic Banking Units (IBUs)
    • Board of Directors (BOD) is ultimately responsible for Shari'ah compliance.

    Al-Amanah Islamic Investment Bank of the Philippines (AAIIBP)

    • Only Islamic universal bank in the Philippines
    • Subsidiary of DBP
    • Offers Islamic and conventional banking services

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    Unit 5 - Introduction to Islamic Banking PDF

    Description

    Explore the principles and practices of Islamic banking in this quiz. Understand the key differences between Islamic and conventional banking, along with the historical developments in the Philippines. Test your knowledge on Shari'ah-compliant finance and its foundational principles such as profit-sharing and the prohibition of riba.

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