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Quiz 4

Q1. Explain the following Islamic financial products: a) Istisna Istisnaa' is 'an order from purchaser (buyer) to a manufacturer (seller) to produce a specific good for him (buyer) against mutually agreed price and period for manufacturing and delivery'; So the main feature is manufacturing of the sold good; Istisnaa' is only possible in goods which require manufacturing; There is flexibility in payment of price; It is may be paid according to any schedule by mutual consent (In advance, in tranches or at the time of delivery of the goods); b) Salamm Salam is a type of Sale in which: The seller undertakes to supply some specific goods to the buyer at a future date, against an agreed price which is fully paid in advance and the delivery of the sold commodity is deferred; So there are three distinguishing features of Salam: The subject matter (commodity to be purchased/sold) is delivered in future; The price is paid full in advance; The goods for sale will be specific; Another name of Salam is Salaf, meaning of both are same;

c) Parallel Salamm Parallel Salam is not a kind of Salam; it is an arrangement by buyer to sell the commodity he purchased from someone; The buyer cannot sell the commodity before he takes the possession from seller in a Salam contract as we discussed earlier; But the buyer may sell the commodity he bought on Salam to another person on Salam basis; This arrangement is called 'Parallel Salam'; d) Takaful It is an Arabic word which means Guaranteeing each other It is a system of Islamic Insurance based on the principle of TAAWUN (mutual assistance) and TABARRU (Gift, Give away, donation) where the risk is shared collectively by the group VOLUNTARILY.

You undertake a contract (aqad) to become one of the participants by agreeing to mutually help each other, should any of the participants suffer a defined loss.

Q2. List and briefly explain the questionable practices of Islamic bank. Islamic banks faces interest based organization externally Based on Kibor, Libor Intention ? To be more profitable than conventional setups Profit computation based upon interest rate HARAM LATE FEES transformed into HALAL Daroorah products excessively marketed Contract term conditions & implication not explained Acts as middle party Parallel Contractually LOSS transferred to client Murabaha markup highly questionable as practiced Combining 2 contracts into 1 Client not paid when agent The danger of making principle out of contracts Darurah excuse used to legalize Capitalist practices, into Islam Attitude of Bank this is 100% shariah compliant! Monopoly of Shariah advisors

Q3. As a student of Islamic finance what changes if any do you think are necessary in Islamic finance as practiced by Islamic banks? 100% elimination of all questionable practices is necessary in Islamic finance as practiced by Islamic banks. (Opposite & anti of points of previous answer)

Q4. Draft a complete contract an istisnaa involving the mudarib party which is comprised of a musharkah of 3: Check this link for answer (AT YOUR OWN HEALTH RISK): http://www.sbp.org.pk/press/essentials/Istisna%20Agreement.htm

Q5. After completing your MBA program: a) How Islamic is takaful Following the conventional insurance companies, restructure in Islamic guise Primary objective Profiteering! All other benefits are basically bi-products Basic argument of tying camel repeated given Did the prophet (s) & sahaba (r) tie the camel? Takaful is a twisted, recently manufacture solution in light of the lucrative billion dollar insurance industry

b) From a purely Islamic point of view what is alternative of takaful The responsibility to help the unfortunate is of the government The government entity dealing with these issues was Bait-ulMaal

Zakat, Sadaqat, tabaruat, & taxes were used to help the unfortunate The best option is still Bait-ul-Maal, but it does not exist because there isnt any Islamic government! Create a Waqf fund, from zakat & sadaqat for the unfortunate Salaries of the Takaful Waqf Fund should be minimized; so should the expenses If an excess fund exists, it may be invested in a low risk halal opportunity Beneficiaries of the waqf fund are all those who have a genuine need; The genuine need of the unfortunate can be launched in a short fund raising campaign c) What should people do if they dont want to deal with conventional insurance or takaful? Such people should go for Islamic alternatives of takaful mentioned in part b of this question. d) Discuss why conventional insurance is HARAM? The Council of Islamic Fiqh Scholars (1975) ruled that traditional insurance is HARAM due to the presence of three main elements. Gharar (uncertainty) Maisir (gambling) Riba (interest or usury) The participant loses the money paid for the premium when the insured event does not occur Gharar. The company will be in deficit if the claims are higher than the amount contributed by the participants Gharar. But this does not happen because of statistics.

The element of Riba (Interest) exists in lending or borrowing funds/investments at fixed interest, and other related practices in the investment activities of conventional Insurance companies. Qimar already seen!

Q6. List and briefly explain the questionable practices of Islamic banks in their implementation of parallel salamm. Parallel Salam is allowed with a third party only; The seller in the first contract cannot be made purchaser in the parallel contract of Salam; It will be a buy-back arrangement, which is not permissible; If the purchaser in the second contract is a separate legal entity, then it is necessary that it should not be a subsidiary or sister concern of the seller company in the first contract; The arrangement will not be allowed because in practical sense it will be a 'buy-back' arrangement. Q7. Briefly explains the following terms. a) Short sale Short selling is the practice of selling securities or other financial instruments that are not currently owned, with the intention of repurchasing them afterwards ("covering") at a lower price. b) Future sale A futures sale is a central sale where investors can sell their current stocks on standardized futures contracts; that is, a contract to sell

specific quantities of specific stocks at a specified price with delivery set at a specified time in the future. These types of contracts fall into the category of derivatives. Such instruments are priced according to the movement of the stock indices. These contracts are named "derivatives" because the value of these stocks are derived from another asset class c) P/E Value of 50 P/E value of 50 reflects that after paying price of Rs. 50 investor is earning just Re. 1.

d) Taawun It is a principle of Islamic insurance which refers to mutual assistance (cooperation) e) Tabarruat It is a principle of Islamic insurance which refers to voluntary contribution (give, gift away, and donation) f) Qimar Qimar means gambling. Technically, it is an arrangement in which possession of a property is contingent upon the happening of an uncertain event. By implication it applies to a situation in which there is a loss for one party and a gain for the other without specifying which party will lose and which will gain. Q8. Discuss and explain whether the stock market is halal or HARAM?

Theoretically the idea of a stock market is Islamically acceptable & halal Ulema issue FATWA on the basis of information provided; thus, Ulema say that stock market trading is halal Ulema put a few valid Islamic restrictions which are as follows: Short selling HARAM Futures trading Gambling Futures short selling HARAM Avoid day trading keep min 4 days Margin trading involves interest HARAM Speculation trading is the same as gambling But practically the stock market operates very differently & there are elements of: Gharar (uncertainty) Maisir (gambling), betting, speculation Riba (interest) Qimar(one parties loss is anothers gain) Kazab (lying, and misleading) Due to above elements it is HARAM as practiced.

Q9. Briefly summarize the points of those ulema who say that Islamic banking is HARAM? Silent No incentive either way Other ways to beat the WEST Cannot exist without SHARIAH

Islamic perspective has become alive With passage of time it had to happen spoiling image You cannot have a purely Islamic Bank in an un-Islamic environment! Inflation will keep on reducing the value of the capital Will interest-based institution allow pure Islamic bank to succeed? What was the fate of BCCI (Muslim Bank)? (BCCI was a successful Muslim bank neutralized before it could pose a threat)

Q10. Discuss an application of istisnaa & its benefits. Benefits: The client can get finance in advance for raw material, working capital and other overhead expenses. By the execution of Istisna agreement house financing, import and export products can be easily designed on Istisna basis. Application: House Financing Project Financing BOT Arrangement (build, operate, transfer) Export Pre Shipment

Q11. Briefly discuss in your opinion which form of Islamic finance is the best and why?

In my opinion all instruments & forms of Islamic Finance is best at their respective place as long as they are shariah compliant & they are being practiced as stated theoretically in an un-questionable manner. Criteria of best depend on scenario & necessity of party that is being financed that which mode of Islamic finance they opt as per their feasible requirements.