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The structure of Islam is founded on pillars. Just as the strength and stability of any structure
depends on the supporting pillars, the strength and stability of Islam depends on its pillars.
Muslims are duty-bound to acquaint themselves with the nature of Islam’s pillars. Discuss
the five important of pillars of faith in Islam in detail

“There is no God but God (Allah), and Muhammad is His Messenger.” It distinguishes
Muslims from those of other faiths. The Shahada is perhaps better known in the

Salah is the ritual prayer of Islam through which all Muslims conform to the will of Allah.
Prayer is performed in the direction of Mecca five times a day

The term zakat refers to the obligatory donation of a portion of a Muslim’s surplus wealth.

Islamic charities encourage donors to use their services to relieve suffering and to help
refugees, victims of environmental disasters,

Sawm – Muslims are expected to fast during Ramadan – the ninth month in the Islamic
calendar.

Completing the Hajj, the pilgrimage to Mecca, is a duty that every Muslim should perform
during their lifetime.

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A well-established Shariah Governance framework is important for a comprehensive

regulatory and supervisory infrastructure. Islamic banks will have to adhere to this
framework for guidance on the compliancy of their practices, hence making it vital for the
future of Islamic finance. The significance of Shariah governance is highlighted by the
fact that if we have an inadequate infrastructure the compliance of Islamic finance to
Islamic laws can be challenged. The Islamic Banking products and operations are completely
different from Conventional Product. Islamic Bankers must follow the rules and regulations
which are governed by the shariah Supervisory Board. Illustrate and examine any five
different functions which is performed by shariah supervisory Board(SSB)in regulating the
Islamic Banking infrastructure

This includes:
a. certifying financial instruments for their compliance with the Shariah;
b. verifying transactions for compliance with the Shariah;
c. calculating zakah payable by Islamic financial institutions;
d. disposing of non-shariah-compliant income;
e. advising on the distribution of income among investors and shareholders.

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Question 4
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Manufacturer wants to buy $100,000 worth of wood but doesn’t have enough funds. The
manufacturer approaches the bank and signs an

agreement to purchase the wood from the bank at cost ($100,000) plus profit (maybe 20
percent of the contract amount, or $20,000).

The manufacturer is liable to pay the bank $120,000 after the bank delivers the goods. Both
parties know the profit and the cost of the product at the onset; there’s no financial
uncertainty in the transaction. Analyze the above said example Is meeting all the necessary
requirements of Murabaha contract and categorize the three different phases of murabaha
with relevant example

ANSWER
Under a murabaha contract, a bank purchases a commodity in order to supply it to a customer
who isn’t financially able to make such a purchase directly. The bank sells the commodity to
the customer for the cost plus profit — the profit being a markup that both the bank and
customer agree on upfront.

The customer can make a lump payment when the commodity is delivered but usually sets up
a deferred payment installment schedule.

The murabaha contract is a basic sale transaction, and certain rules need to be followed to
make sure it’s sharia-compliant:

If the client defaults on the payment, the financier isn’t allowed to charge extra fees as late
payment or penalty charges. Sharia scholars allow charging additional fees in cases of loss or
damage due to a client’s default, and they allow certain penalties to ensure that a buyer is not
negligent. But such fees and penalties cannot be treated as income for the bank; they must be
given to charity.

The contract should be used only for purchases. It’s not intended to be used for financing a
working capital requirement.

Here are two types of murabaha contracts an Islamic bank may offer:

1. Murabaha to the purchase orderer: In this contract, the bank specifically purchases the
assets for the client’s order. The client requests that the bank purchase the good(s) on
her behalf, and she agrees to buy the good(s) from the bank.

2. Commodity murabaha: Interbank transactions are a source of funds for Islamic banks.
The commodity murabaha is used as an instrument in Islamic interbank transactions.
Generally, this financial instrument is used to fund the Islamic bank’s short-term
liquidity requirement. This product was developed as an alternative to conventional
interbank funding.

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Question 5
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Comment any two documents which are required to create a murabaha contract

ANSWER
For example, consumers use murabaha when purchasing household appliances, cars, or
real estate. Businesses use this type of financing when purchasing machinery, equipment, or
raw materials. Murabaha is also commonly used for a short-term trade, such as issuing letters
of credit for importers.

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Mention any two components for a valid sale

ANSWER
 Offer.
 Acceptance.

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What do you mean by Riba

ANSWER

Riba is a concept in Islamic banking that refers to charged interest. It has also been referred
to as usury, or the charging of unreasonably high-interest rates. There is also another form of
riba, according to most Islamic jurists, which refers to the simultaneous exchange of goods of
unequal quantities or qualities

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Question 8
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Define the term Shariah

ANSWER

Islamic canonical law based on the teachings of the Koran and the traditions of the Prophet
(Hadith and Sunna), prescribing both religious and secular duties and sometimes retributive
penalties for lawbreaking. It has generally been supplemented by legislation adapted to the
conditions of the day, though the manner in which it should be applied in modern states is a
subject of dispute between Muslim traditionalists and reformists.

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Assess any five differences between Islamic and Conventional Banking
Aspects Conventional Banks Islamic Banks
Principle Based on interest transaction The absence of interest-based
(riba) transaction, but based on
profit and loss sharing
Operational Profitable transaction. Halal is not a Halal (legal, permitted based
major consideration on Islamic rule) and profit
business transactions only
Structure Only under the supervision of Bank Under the supervision of Bank
Organization Indonesia Indonesia, National Sharia
Council, and Sharia
supervisory Board
Relationship Relationship is often defined as that of The relationship to its clients
creditor-debtor defined as partners, investors
and trader, buyer and seller
Evaluation of Since income from the advances, it gives Since it shares profit and loss,
project little attention to developing expertise in the Islamic banks pay greater
assessment of the project and evaluation. attention to developing in
Risks are transferable at a price (and assessment of the project and
sometimes incremental) evaluations
Contract structure of The investor / lender is guaranteed of a It promotes risk sharing
loan between predetermined rate of interest or returns between investor and the user
investor and of funds /entrepreneur
entrepreneur
ANSWER

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Question 10
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Islam has different valid principles to follow in respect to saving and investment, and it is
considered as the route of the Islamic economy. Islam prohibits predetermined pricing of
capital, the Islamic position is that if a loan is given or taken for moral or humanitarian
reasons, the principal amount should be protected and any excess on that is forbidden as
immoral and exploitative. If loan or investment is made for economic reasons, then the owner
of capital has no right to demand a fixed rate of return. One cannot legitimately ask for any
additional payment without sharing the risk of business and with all the other operations.
Outline the five important principles of Islamic Banking

ANSWER

1)Prohibition of predetermined loan repayments as interest (riba)

• Believes that fiat (paper) money is not a commodity that commands a rental fee
(interest rate). It does not reproduce. It only grows when used in an economic
activity.
• Riba Free bankers cannot merely take the interest rate of the day and charge it under
the name of rent, service charge, index, or profit.
• Financing should be based on renting assets and services at the actual prevailing
market rental/lease rate commanded by the market forces of supply and demand – not
on the rental of money.

2) Profit and loss sharing is at the centre of the Islamic system. Believes that one of its
prime objectives is to remove riba from peoples’ behavior and lives, one step at a time. Does
not intend to remove or “destroy” riba-based conventional banks and systems. The aim of
Riba Free banking is to develop an alternative system that serves all people, regardless of
faith and background.

3) Making money out if money is unacceptable. All financial transactions must be asset-
backed. Built on asset/services – based financing. This requires that a commodity, tangible
asset, and/or service must change hands at a fair market value – one that is gathered from the
live market – using the concept of marking to the market.

4) Prohibition of speculative behavior (gharar- uncertainty). Believes that speculations

and its tools i.e. trading in risk and paper trading are prohibited (haram).

5) Only shariah approved contracts are acceptable i.e. profit-sharing contracts

(Mudarabah and Musharakah), sale-based contracts (Murabaha, Tawarruq, Ijarah, Ujr, Al-Bai
Bithamin Ajil, Bai-Al Inah) future sale contracts (Salam and Istisna’), security-based contract
(Kafalah, Hawalah, Rahn) and supporting contracts (Wakalah and Wadia’ah)

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The Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFF