MCQs for Chapter 12: Regulation and supervision of Islamic financial

institutions (IFIs)

1. True or False - one of the following statements is false:

a) Islamic financial institutions are not well regulated.
b) There is no one-size-fits-all set of regulations for Islamic financial institutions.
c) Singapore and the UK are some of the countries that maintain a unified set of laws for both Islamic
financial institutions and their traditional counterparts.
d) The IFSB is an international standard-setting body inaugurated in Malaysia in 2002.
e) The AAOIFI has issued up to 100 accounting, auditing and governance standards.

Correct answer: a) Islamic financial institutions are well regulated.

Incorrect answers:
b) The correct answer is a. Islamic financial institutions are well regulated. There is no one-size-fits-
all set of regulations for Islamic financial institutions.
c) The correct answer is a. Islamic financial institutions are well regulated. Singapore and the UK are
some of the countries that maintain a unified set of laws for both Islamic financial institutions and
their conventional counterparts.
d) The correct answer is a. Islamic financial institutions are well regulated. The IFSB is an
international standard setting body inaugurated in Malaysia in 2002.
e) The correct answer is a. Islamic financial institutions are well regulated. The AAOIFI has issued up
to 100 accounting, auditing and governance standards.

2. True or false – only one of the following statements is true:

a) AAOIFI standards are voluntarily used across all jurisdictions.
b) Islamic financial institutions do not have to be licensed in many jurisdictions.
c) The commingling of an Islamic window with a traditional one makes the preparation of financial
statements more difficult.
d) In reality, many jurisdictions apply a proper fit and requirement to shari'ah supervisory board
members.
e) The approach to the application of capital adequacy requirement is not uniform across
jurisdictions.

Correct answer: e) The approach to the application of capital adequacy requirement is not uniform
across jurisdictions.
Incorrect answers: a), b), c) and d) The answer is e. The approach to the application of capital
adequacy requirement is not uniform across jurisdictions.

3. Islamic financial institutions that operate in a dual banking environment face a unique risk
called ____________.
a) replacement risk
b) displaced commercial risk
c) liquidity risk
d) credit risk
e) exchange risk

Correct answer: b) Islamic financial institutions that operate in a dual banking environment face
displaced commercial risk.
Incorrect answers: a), c), d) and e) The answer is b. Islamic financial institutions that operate in a
dual banking environment face displaced commercial risk.

Written by Zayyad Adbul-Baki

To be used with Haniffa/Hudaib: Islamic Banking and Finance. An Introduction 978-1-4737-3460-9, © 2019 Cengage EMEA
4. In case a bank faces distress, the _________ ensures that there are high-quality liquid assets
available for one month’s survival of the bank.
a) net stable funding ratio
b) liquidity coverage ratio
c) asset ratio
d) quick asset ratio
e) margin ratio

Correct answer: b) Liquidity coverage ratio ensures that there are high-quality liquid assets for one
month’s survival of a bank.
Incorrect answers: a), c), d) and e) The answer is b. Liquidity coverage ratio ensures that there are
high-quality liquid assets for one month’s survival of a bank.

5. Basel III considers ___________ as a high-quality liquid asset for Islamic financial institutions.
a) murabaha
b) salam
c) ijarah
d) sukuk
e) istisna

Correct answer: d) Basel III considers sukuk as a high-quality liquid asset for Islamic financial
institutions.
Incorrect answers: a), b), c) and e) The answer is d. Basel III considers sukuk as a high-quality liquid
asset for Islamic financial institutions.

6. The use of murabaha as a liquidity management instrument is forestalled by all the following
except:
a) unresolved shari'ah concerns.
b) lengthy administrative processes.
c) high transaction costs.
d) non-tradability of the contract.
e) long gestation period of the contract.

Correct answer: e) Murabaha does not have a long gestation period.

Incorrect answers: a), b), c) and d) The answer is e. Murabaha is does not have a long gestation
period.

7. Islamic financial institutions make deposits in central banks known as _________ which they can
quickly liquidate at the time of need.
a) shari'ah compliant deposit facility
b) demand deposits facility
c) liquidity deposit facility
d) quick asset deposit facility
e) asset coverage facility

Correct answer: a) IFIs make deposits called shari'ah compliant deposit facilities at the central bank
to cater for liquidity needs. The central bank keeps it safe for the banks until they need it.
Incorrect answers: b), c), d) and e) The answer is a. IFIs make deposits called shari'ah compliant
deposit facilities at the central bank to cater for liquidity needs. The central bank keeps it safe for the
banks until they need it.

Written by Zayyad Adbul-Baki

To be used with Haniffa/Hudaib: Islamic Banking and Finance. An Introduction 978-1-4737-3460-9, © 2019 Cengage EMEA
Written by Zayyad Adbul-Baki
To be used with Haniffa/Hudaib: Islamic Banking and Finance. An Introduction 978-1-4737-3460-9, © 2019 Cengage EMEA
8. In the UK, Islamic banks facing liquidity problems can sell sukuk to the Bank of England who
would subsequently sell back to the bank through a mechanism known as ___________.
a) net stable funding
b) bai al inah
c) commercial wa’ad
d) qard hasan
e) sadaqah

Correct answer: c) The mechanism through which IFIs sell to the Bank of England and buy back for
liquidity purposes is called commercial wa’ad.
Incorrect answers: a), b), d) and e) The answer is c. The mechanism through which IFIs sell to the
bank of England and buy back for liquidity purposes is called commercial wa’ad.

9. All the following are different models used by Islamic banks in addressing liquidity stress except:
a) ju’alah.
b) wakalah fund.
c) commodity murabaha.
d) wadiah.
e) mudarabah fund.

Correct answer: e) There is no mudarabah fund for assessing liquidity stress.

Incorrect answers: a), b), c) and d) The answer is e. There is no mudarabah fund for assessing
liquidity stress.

10. Which of the following statements is false?

a) The wakalah model of is more shari'ah compliant.
b) The wakalah model is more operationally straight forward.
c) In Malaysia, a uniform approach is used to regulate both Islamic and traditional banks.
d) Bai al inah is not allowed by the shari'ah.
e) Qard hasan is not a form of liquidity stress mitigation strategy.

Correct answer: c) Malaysia uses a dual regulatory approach for Islamic and traditional banks.
Incorrect answers:
a) The answer is c. Malaysia uses a dual regulatory approach for Islamic and traditional banks. The
wakalah model of is more shari'ah compliant
b) The answer is c. Malaysia uses a dual regulatory approach for Islamic and traditional banks. The
wakalah model is more operationally straight forward.
d) The answer is c. Malaysia uses a dual regulatory approach for Islamic and traditional banks. Bai al
inah is not allowed by the shari'ah.
e) The answer is c. Malaysia uses a dual regulatory approach for Islamic and traditional banks. Qard
hasan is not a form of liquidity stress mitigation strategy.

Written by Zayyad Adbul-Baki

To be used with Haniffa/Hudaib: Islamic Banking and Finance. An Introduction 978-1-4737-3460-9, © 2019 Cengage EMEA