Selected Answers
Chapter One
2.
 Savings. Financial markets provide an avenue for the public’s
savings. Bonds, stocks and other financial claims sold in the
money and capital markets provides accessible liquid investments,
relatively low-risk outlet for public savings, which flow through
the financial markets into investments, so that more goods and
services can be produced (productivity increases).
 Wealth. Capital market provides an excellent avenue to store
wealth (preserve the value of assets we hold) until funds are
needed for spending. Unlike storing wealth in the form of tangible
assets, such as automobiles or items are subject to depreciation
and often carry a great risk of loss. However, bonds, stocks and
other financial instruments do not wear out over time and usually
generate income.
 Liquidity. The capital market provides a means of converting
financial instruments into cash, with little risk of loss. The capital
market provides liquidity (immediately spendable cash) for savers
who hold financial instruments, but are in need for cash.
 Credit. In addition to providing liquidity and facilitating the flow
of savings into investment to build wealth, the financial market
furnish credit to finance consumption and investment spending. In
this regard, individual can borrow money to buy properties or a
company can get financing to expand their businesses.
 Payments. The financial markets also provide a mechanism for
making payments for the purchase of goods and services. Certain
financial assets, including currency, non interest-bearing checking
accounts (demand deposits) and interest-bearing checking
accounts serve as a popular medium of exchange in making
payments all over the globe.
 Risk protection. Financial markets offer businesses, consumers
and government protection against life, health, property and
income risks. This is accomplished by allowing participants to
engage in both risk sharing and risk reduction approaches. Risk
sharing occurs when an individual or an institution transfers their
risk exposure to someone willing to accept that risk (such as an
insurance company), while risk reduction usually takes place
when we diversify our wealth across a wide variety of different
assets, so that our overall losses are likely to be limited.
 Policy. Governments, particularly the central bank, use financial
markets as one of the tools to manage monetary stability of the
country. Through financial markets, government could manage
some economic parameter such as money supply, inflation,
exchange rate, and other relevant factors the economy.
4. Islamic finance promotes a just, fair and balanced society. Therefore,
the many prohibitions are to provide social harmony and to protect the
interests and benefits of all parties involved in the market. For example,
the practice of a conventional financial system in imposing interest
gives injustice to the borrowers since the interest has to be paid
regardless of the outcomes of their business.
Islamic finance is structured on the principle of brotherhood and
cooperation, which stands for a system of equity-sharing, risk-sharing
and stake-taking between the surplus spending units and deficit
spending units.
As a system grounded on ethical and moral framework of the
shariah, Islamic finance is also characterized by ethical norms and social
commitments. Verses from Al-Qur’an and traditions from As-sunnah
are two divine guidances which provide halal (permissible) and haram
(prohibited) filter to control these norms in the Islamic financial system.
The Islamic financial institution is community oriented and
entrepreneur-friendly emphasizing on productivity and physical
expansion of economic production and services.
The Islamic financial institution operates within the limits that
ensure stability in the value of money and curtail destabilizing
speculation. This is due to the monetary flows through Islamic financial
modes are always tied directly to the flow of goods and services.
Chapter Two
2. The main functions of Tabung Haji Malaysia differ from Bank Islam
Malaysia Berhad. Tabung Haji was established in order to: (i) enable
Muslims to save gradually to support their expenditure during
pilgrimage and for other beneficial purposes; (ii) enable Muslims to
have active and effective participations in investment activities which
are permissible in Islam through their savings; and (iii) to protect,
safeguard the interests and welfare of pilgrims during pilgrimage by
providing various facilities and services.
On the other hand, the main function of Bank Islam Malaysia
Berhad when it was established is only to mobilise the Malay’s fund in
the country and invest it, on the basis of shariah principles.
4. There are six objectives for the CMP’s main strategic initiatives and
specific recommendations:
(1) to be the preferred fund-raising centre for Malaysian companies,
(2) to promote an effective investment management industry and a
more conducive environment for investors,
(3) to enhance the competitive position and efficiency of market
institutions,
(4) to develop a strong and competitive environment for
intermediation services,
(5) to ensure a stronger and a more facilitative regulatory regime,
and
(6) to establish Malaysia as an international Islamic capital market
centre.
Chapter Three
2. The main functions of Tabung Haji Malaysia differ from Bank Islam
Malaysia Berhad. Tabung Haji was established in order to: (i) enable
Muslims to save gradually to support their expenditure during
pilgrimage and for other beneficial purposes; (ii) enable Muslims to
have active and effective participations in investment activities which
are permissible in Islam through their savings; and (iii) to protect,
safeguard the interests and welfare of pilgrims during pilgrimage by
providing various facilities and services.
On the other hand, the main function of Bank Islam Malaysia
Berhad when it was established is only to mobilise the Malay’s fund in
the country and invest it, on the basis of shariah principles.
4. There are six objectives for the CMP’s main strategic initiatives and
specific recommendations:
(1) to be the preferred fund-raising centre for Malaysian companies,
(2) to promote an effective investment management industry and a
more conducive environment for investors,
(3) to enhance the competitive position and efficiency of market
institutions,
(4) to develop a strong and competitive environment for
intermediation services,
(5) to ensure a stronger and a more facilitative regulatory regime,
and
(6) to establish Malaysia as an international Islamic capital market
centre.
Chapter Four
2. There are some features which distinguish between Islamic and
conventional money markets: (i) money market instruments, (ii)
Issuance process, (iii) Types of structure.
On the one hand, Islamic money markets utilize shariah compliant
contracts such as Mudharabah, Murabahah, and Wakalah. On the other
hand, conventional money markets use only debt contracts.
In Islamic money markets, the issuance process must be shariah
compliant and approved by both Shariah Council of Bank Negara
Malaysia and Securities Commission Malaysia. However, conventional
money markets need only approval from regulatory authorities.
In term of the structures, Islamic money markets’ structures are
based on assets, equity, and debts. Meanwhile, for conventional money
markets, the structure is solely relied upon debt based structures.
4.
a. BSAS is a place where Islamic banks which have surplus funds
will place their money and Islamic banks which need funds will
try to find funds placed with the same tenor as their proposal.
Therefore, Al Rajhi Bank can go to BSAS and find the matchingtenor placed fund there, let say it came from Bank Islam. The
mechanism is, Bank Islam will first purchase CPO from Bursa
Suq Al-Sila’ at spot price (RM130 million) and then sell the CPO
to Al Rajhi Bank at deferred payment, with 3.5% per annum
profit margin. Al Rajhi Bank will subsequently sell the CPO to
Bursa Suq Al-Sila’ at spot (RM130 million) thereby generating a
placement. At the end of 90 days, Bank Islam will therefore
receive the cost price of RM130 million plus a profit of 3.5% per
annum.
b. Profit paid to Bank Islam:
X 
130,000,000  3.5  90
= RM1,121,917.81 i.e. a return of 3.5% p.a
36500
Thus, the total amount must be paid by Al Rajhi bank to settle
the 90-days Murabaha contract is: RM(130,000,000 +
1,121,917.81) = RM131,121,917.81
Chapter Five
2. Factors distinguish between asset-backed and asset-based sukuk are:
 Asset-based sukuk uses shariah compliant assets/business venture
to facilitate issuance of sukuk. Asset-backed sukuk uses assetbacked shariah compliant assets/business ventures which form
primary source of income /return to investor.
 The key accounting concept for asset-based sukuk is ON balance
sheet (for originator/obligor) and for asset-backed sukuk is OFF
balance sheet (for originator) or a t rue sale criterion: legal and off
balance sheet accounting.
 The funding cost of the asset-based sukuk is mainly depending on
originator/issuer credit rating /standing while for asset-backed
sukuk is mainly based on the strength of the asset cash flow.
 Lastly, the rating for asset-based sukuk is based upon the
corporate rating of issuer/obligor, and for the asset-backed sukuk
is based upon the strength of the cash flow.
5. Sukuk al-Murabaha can be traded in secondary markets as long as it is
not yet sold to the end buyer. Once the goods are sold then trading is
only accepted at par value.
Chapter Six
2. Due to tradition and geographical difference between markets, thus
there are differences in the shariah compliant equities screening
methods. However, in general, they have similar steps on doing the
screening methods.
 Industry sector-based screening, and
 Accounting-based screening
4. The main benefit obtained by the companies when they are listed in
shariah compliant stocks is that they can attract investors from both
side, Islamic and conventional investors.
Chapter Seven
2. From data given, the interest income portion is ($1800/$360000) =
0.5%. this means that contaminated element on this stock can be
purified as the portion is less than 5%. Eventually, the amount need to
be given as charity is (0.5% x $20000) = $100.
4. The role of shariah advisory board of Islamic mutual funds are:
 Creating shariah compliant investment guidelines. As different
shariah advisor may have different school of thought, the shariah
decision on the guidelines may also be different among them.
 Monitoring and evaluating the funds activities to ensure the
shariah compliance. Example of this is on whether the manager
did activities which are deemed to be non–shariah-compliant or
not. (such as gambling, speculation etc.)
 Selecting the appropriate charities in the case of purifications.
Once the non halal revenue has been identified and calculated, it
is then the job of the shariah advisor on the use of that portion.
The advisor may suggest appropriate charitable institution to it.
 Assisting and supervising the funds management on the issue of
development of Muslim. As the stakeholder of the Islamic mutual
funds are not necessarily Muslim, another job of shariah advisor is
to ensure that the Muslim ummah get the most benefit of Islamic
mutual funds. For example, buying stocks from the companies
which own by Muslim, buying government sukuk form Islamic
countries etc.
 Proposing zakat. The other role of the shariah advisor is to
propose zakat on the Islamic mutual funds transaction.
Chapter Eight
3. Rental of real estate is permissible, except when the property is used by
the tenant(s) for non-permissible activities such as:




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Financial services based on riba (interest);
Gambling or gaming;
Conventional insurance;
Entertainment activities that are not allowed by the shariah law;
Manufacturing or sale of tobacco based products or related
products;
 Stock broking or share trading in shariah non-compliant
securities; and
 Hotels and resorts.
 Other activities which are not permitted by the shariah law.
5. Among the reasons on why investors are willing to invest in Islamic
REITs:
 It is shariah-compliant investment;
 Higher certainty of income in the form of dividend;
 Islamic REITs will typically have multiple properties in its
portfolio as well as diversified tenant pool which reduces reliance
on a single property and tenant in the case of directly held real
estate;
 It allows investors access to investment grade assets within the
property market for the small initial capital outlay;
 Investors have the opportunity to invest in properties which are
managed by professional management companies.
Chapter Nine
2. It is a price in each share of the portfolio. It is a market value of
portfolio minus the liabilities divided by the number of shares. This
price is important information for the investors.
4. It is in the diversification, convenience and low cost
6. Stock Trading Unit TrustsIndex FundsETF
8. The Manager, the Trustee, The Participating Dealer, The Investors
10. SBL allows to borrow the eligible securities for settling down a failed
transaction or to cover the regulated short sell. Basically short selling is
a practice of selling a security in which the seller at that point in time
does not own. In Islam, the seller has to own assets before it is sold.
Hence SBL is replace with the Islamic principle of wa’d and Bai’
Chapter Ten
2. Forward contract is a legal binding agreement between two parties in
which one party to sell an asset or product in the future at price agreed
by the other party. Future contract is basically the same as forward
contract with few differences such as on the realization. In the forward
contract, the realization of the gains or losses for the parties (buyer and
seller) only occurs in the settlement date. Conversely, the realization for
the future contract is on the daily basis.
4. The conditions are it is inevitable whereby deeds are accompanied by
risks and the risk is small and lastly unintentional.
6. Salam contract. It is a contract of buy and sell of commodities in which
the buyer pays the full amount at the time of the contract and receive the
good in the future.
8. Urbun contract. Basically urbun is a down payment.
10. It is a sale contract in which the either one of the parties has a right to
cancel the sale within a stipulated time.