NAME: NOR IZZATI BINTI SAZALI Question 1 /10

STUDENT ID: 2019359383 Question 2 /10

GROUP: RBA2424A Question 3 /10

Question 4 /10

TOTAL

FIN 546 ISLAMIC FINANCE

FINAL ASSSESSMENT

LONG ESSAY QUESTIONS (40 marks)

INSTRUCTIONS:
Answer All Questions.
QUESTION 1

The differences between Islamic Shipping Guarantee and Islamic Bank Guarantee in terms of
sources of funds and features.

Islamic Shipping Guarantee is a letter of performance and indemnity issued by the Islamic bank
on behalf of the buyer or importer. It is a contract where the Islamic bank agrees to discharge
the liability of the third party in case of default by the third party. But for Islamic Bank Guarantee
is an indemnity letter in which the Islamic bank commits itself to pay a certain sum if a third
party fails to perform or if any other form of default occurs.

Furthermore, for Islamic Shipping Guarantee, the customer need to informs the bank of the
Islamic Shipping Guarantee requirements and requests the bank to provide the facility. The
bank may require the customer to place a deposit to the full amount of the price of the goods to
be purchased or imported which the bank accepts under the principle of al-wadiah yad
dhamanah. But for the Islamic Bank Guarantee the customers must first have an approved
Islamic Bank Guarantee line. Request for financing must include submission of relevant
documentary evidence of the underlying transactions and compliance to the terms of the
facility. The customer requests the issue of Islamic Bank Guarantee and the Islamic Bank
Guarantee may be provided in respect of the performance of a task or the settlement of a
commitment.

In addition, for Islamic Shipping Guarantee, the bank establishes the Islamic Shipping
Guarantee and pays the proceeds to the negotiating bank utilizing the customer’s deposit and
subsequently releases the documents to the customers. The bank charges the customer fees
and commission for its services under the principle of al-ujr (fee). And for Islamic Bank
Guarantee, the Islamic Bank issues the Islamic Bank Guarantee if the Shariah principles and
other requirements are met. The Islamic bank must honor and effect immediate payment in
case a claim is made by the beneficiary on first demand, provided the claim meets all the
conditions of the guarantee.
QUESTION 2
The challenges that need to be realised by Islamic banks in order that they can become an
efficient financial intermediary.

The first challenge is unfamiliarity with the Islamic Banking System. Many people in the
Muslim and non-Muslim world do not understand what Islamic banking actually is. The basic
principle is clear, that it is contrary to Islamic law to make money out of money and that
wealth should accumulate from trade and ownership of real assets. However, there does not
appear to be a single definition of what is or not an Islamic-banking product; or there is not a
single definition of Islamic banking. A major issue here is that it is the Shariah Councils or
Boards at individual Islamic banks that actually define what is and what is not Islamic
banking, and what is and what is not the acceptable way to do business, which in turn can
complicate assessment of risk for both the bank and its customer. More generally, the
uncertainty over what is, or is not, an Islamic product has so far prevented standardization.
This is difficult for regulators as they like to know exactly what it is they are authorising. It is
also an added burden on the banks that have to educate customers in new markets.

The another challenge is absence of liquidity instruments. Many Islamic banks lack liquidity
instruments such as treasury bills and other marketable securities, which could be utilised
either to cover liquidity shortages or to manage excess liquidity. This problem is aggravated
since many Islamic banks work under operational procedures different from those of the
central banks; the resulting non-compatibility prevents the central banks from controlling or
giving support to Islamic banks if a liquidity gap should occur. So the issue of liquidity
management must come under active discussion and scrutiny by the authorities involved is
Islamic banking.

Last but not least, the use of advanced technology and media. Many Islamic banks do not
have the diversity of products essential to satisfy the growing need of their clients. The
importance of using proper advanced technology in upgrading the acceptability of a product
and diversifying its application cannot be over emphasized. Given the potentiality of
advanced technology, Islamic banks must have to come to terms with rapid changes in
technology, and redesign the management and decision-making structures and, above, all
introduce modern technology in its operations. Many Islamic banks also lack the necessary
expertise and institutional capacity for Research and Development (R & D) that is not only
necessary for the realization of their full potential, but also for its very survival in this age of
fierce competition, sophisticated markets and an informed public. Islamic banking cannot but
stagnate and wither without dynamic and ongoing programmes. In addition, Islamic banks
have so far not used the media appropriately.

QUESTION 3
Four (4) advantages of Islamic finance.
The first advantage is reducing the impact of harmful products and practices. Shariah
principles forbid any transactions that support industries or activities which are forbidden in
Islam. For example, usury, speculation, and gambling - whether these are legal or not in the
place of transaction.

Another advantage is principle of financial justice. Financial justice is a requirement that

helps Islamic finance products function in a Shariah compliant way. Islamic finance paves
way for the sharing of profit/loss and risk involved in proportional manner. Financial justice is
a basic requirement for the functioning of Islamic finance products. Contrary to this, Islamic
financing paves the way for the sharing of net profit/loss and the risk involved in a
proportional manner between the lender and the beneficiary. Therefore, if a financier is
expecting a claim on profits of a project, it is necessary that he/she should also carry a
proportional share of the loss of that project.

Next advantage is encouraging stability in investments. In Islamic finance, investments are

approached with a slower, insightful decision-making process, when compared to
conventional finance. Companies whose financial practices and operations are too risky are
usually kept away by Islamic financing companies. By performing intensive audits and
analyses, Islamic finance promotes the reduction of risk and creates the space for a greater
investment stability.

Last but not least, the advantage is accelerating economic development. Islamic finance
companies certainly have profit creation and growth as their objectives. For which, they
choose to invest in businesses based on their potential for growth and success. Thus in the
Islamic banking industry, each bank will invest in promising business ventures and attempt
to out-perform its competitors, in order to attract more funds from its depositors. This will
eventually result in a high return on investments both for the bank and the depositors. This is
unlikely in a conventional bank, where depositors redeem returns on their deposits based on
a pre-determined interest rate.
QUESTION 4
The conditions for both property and usufruct that are contracted under the principle of
Ijarah.

The conditions for Property

1. The property must be belonging to lessor

2. The property is known to both parties and is specified

3. The property can be acquired by the lessee for his use until the end of tenancy or lease

4. The property should be in a good condition possible for leasing

5. It is the liability of the lessor to repair damages of the property in order to make it possible
for leasing

6. It is the liability of the lessee to ensure the cleanliness and safety of the property

The conditions for Usufruct

1. The use of the service (usufruct) can be valued with money.

2. The usufruct must be valid according to Islamic commercial law.

3. The lessee should be able to make use of the property on lease.

4. The usage of the property should be made clear in order to avoid any argument.

5. The usufruct does not entitle the lessee to own the property.

6. The lessee is not obliged to inform the lessor his intention for using the property, except in
the case of possible destruction.

7. The usufruct of property beyond its normal usage is considered as an act of intention.