1. Discuss The role of Financial System in an economy ?

 Financial systems allow the movement savings by collecting and pooling funds
from various sources. They then create smaller instruments which provide
opportunities for individuals to hold diversified portfolios. Without pooling
individuals and households would have to buy and sell complete firms.
 They can also transform illiquid assets such as, penny stocks which are more
difficult to turn into cash. With liquid financial markets savers and lenders can
hold onto assets like equity or bonds, which can be easily converted into fiat
money with purchasing power.
 For lenders, the services are commutable in terms of risk, return and liquidity
provided by particular investments. Financial middlemen and markets make
longer-term investments more attractive and manage investment in higher
return and longer development investments. They provide different forms of
leanding to borrowers. Financial markets provide debt or equity finance.

Financial systems are closely related with the growth of an economy

 They contribute to a nation's growth by ensuring an almost never ending flow of

surplus funds to deficit units. To make it simpler, financial markets help to shift
money from industry to industry or firm to firm based on the supply and demand
for their products.
 Financial markets also create investment funds. By buying stocks and many other
things, firms and individuals can invest in companies through financial markets.
 Entrepreneurship growth is also a key factor which comes from financial markets.
They allow entrepreneurs and firms to access the funds needed to fulfill their
investments.
2. Discuss the objective and standards of Accounting And Auditing Organization for
Islamic Financial Institution.

ANS:

What Is the Accounting and Auditing Organization for Islamic Financial Institutions?

The Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) is a
not-for-profit organization that was established to maintain and promote Shari'ah
standards for Islamic financial institutions, participants, and the overall industry. The
Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) was
created on February 26, 1990, to ensure that participants conform to the regulations set
out in Islamic finance.

The founding and associate members, as well as the regulatory and supervisory
authorities of the Accounting and Auditing Organization for Islamic Financial
Institutions, define the acceptable standards for various functions. This includes areas
such as accounting, governance, ethics, transactions, and investment.

Understanding the Accounting and Auditing Organization for Islamic Financial

Institutions (AAOIFI)

In Islamic finance, there are unique rules, restrictions, and requirements regarding
business and investing. In order to be considered acceptable, transactions must adhere
to the principals under Shariah. The Accounting and Auditing Organization for Islamic
Financial Institutions sets compliance standards for institutions that wish to gain access
to the Islamic banking market.

The AAOIFI is continually updating its scope to include the various new financial
instruments entering markets around the world. For example, new hedging mechanisms
would first need to be discussed and accepted by the AAOIFI before any member would
offer these services.

The objectives of AAOIFI are:

 To develop accounting and auditing thoughts relevant to Islamic financial

institutions
 To disseminate accounting and auditing thoughts relevant to Islamic financial
institutions and its applications through training, seminars, publication of
periodical newsletters, carrying out and commissioning of research and other
means
  To prepare, promulgate and interpret accounting and auditing standards for
Islamic financial institutions
 To review and amend accounting and auditing standards for Islamic financial
institutions

AAOIFI carries out these objectives in accordance with the precepts of Islamic Shari’a
which represents a comprehensive system for all aspects of life, in conformity with the
environment in which Islamic financial institutions have developed. This activity is
intended both to enhance the confidence of users of the financial statements of Islamic
financial institutions in the information that is produced about these institutions, and to
encourage these users to invest or deposit their funds in Islamic financial institutions
and to use their services.

3. Give short description of international Islamic Financial Market (IIFM) and Islamic
Financial Service Board (IFSB)

ANS:
What is International Islamic Financial Market (IIFM) ?

IIFM is the international Islamic financial market’s organization focused on the Islamic
Capital & Money Market segment of the Islamic finance industry. Its primary focus lies in
the standardization of Islamic financial products, documentation and related processes
at the global level.
IIFM was founded with the collective efforts of the Central Bank of Bahrain, Bank
Indonesia, Central Bank of Sudan, Labuan Financial Services Authority (Malaysia),
AutoritiMonetari Brunei Darussalam and the Islamic Development Bank (a multilateral
institution based in Saudi Arabia).
Besides the founding members, IIFM is supported by its permanent member State Bank
of Pakistan and further supported by a number of regional and international financial
institutions as well as other market participants as its members.
The main strength of IIFM is pooling of expertise from banks, legal and other market

participants who work together under the guidance of Shari’ah scholars

What IIFM provides to the Industry?

1 Addressing the standardization needs of the industry & creating awareness

2 Universal platform to market participants through 'Global Working Groups' for the
development of Islamic Capital and Money Market
3 Shari’ah harmonization in documentation, products and processes
What Is the Islamic Financial Services Board?

The Islamic Financial Services Board (IFSB) is an international standard-setting

organization that promotes the soundness and stability of Islamic banking, by issuing
global prudential standards and guiding principles in the areas of capital adequacy,
corporate governance, risk management, and transparency, among others.

Understanding the Islamic Financial Services Board (IFSB)

The Islamic Financial Services Board (IFSB) is based in Kuala Lumpur, Malaysia, and
began operations in early 2003. It was founded by a consortium of central banks and the
Islamic Development Bank, with the goal of promoting the awareness of issues that
could have an impact on the Islamic financial services industry. It issues Sharia-
compliant standards, holds conferences and seminars, and provides guidance and
supervision, among other initiatives.

While IFSB standards are mainly concerned with the identification, management, and
disclosure of risk related to Islamic financial products, another Islamic financial
standards organ, the Accounting and Auditing Organization for Islamic Financial
Institutions (AAOIFI), sets best practices for handling the financial reporting
requirements of Islamic financial institutions.

The ISFB consists of:

 The general assembly, which includes all members of the ISFB

 The council, which acts as the policy-making body of the IFSB and includes the
senior executive of each full member of the organization
 The technical committee, which advises the council on issues and consists of up
to 15 persons appointed by the council
 The working group, which drafts standards and guidelines and reports to the
technical committee
 The secretariat, which acts as the permanent administrative body and is headed
by a secretary-general appointed by the council

As of December 2017, the IFSB had 185 members, including full members, associate
members or observer members.
 Shariah
4. Define Sharia and describe the sources of islamic law.
ANS:
What Is Sharia?

Sharia (also known as "Shariah" or "Shari'a") is an Islamic religious law that governs not
only religious rituals but also aspects of day-to-day life in Islam. Sharia, literally
translated, means "the way."

There is extreme variation in how Sharia is interpreted and implemented among and
within Muslim societies today. This is especially prevalent for its financial laws.

 Sharia refers to an Islamic religious law that governs day-to-day life, including
financial matters, in Islam.
 In finance, Sharia establishes guidelines for investment and banking. Examples of
these guidelines is the prohibition against investment in alcohol- and tobacco-
related businesses and against collecting interest.
 Sharia-compliant finance is a fast-growing line of business among banks and
investment houses because investors are eager to work with booming oil
economies.

The sources of islamic law

1 Qur’an : The Holy Qur’an is the real foundation on which the entire structure of Islam rests.
The Holy Qur’an is the absolute and the final authority in any discussion related to Islamic
principles or codes. One could even say that the Holy Qur’an is the only source and that the
other two sources – Tradition and Ijtihad– are directly or indirectly derived from the Quranic
teachings.

The Holy Qur’an, however, deals with the essentials. It leaves the details to the Tradition and
Ijtihad. We have already covered some aspects relating to the Holy Qur’an and we will cover
more later.

2. Sunnah : After the Holy Qur’an, the most important Islamic textual material is the Tradition,
which includes the Sunnah and Hadith of the Holy Prophet Muhammad, may peace and
blessings of Allah be upon him. The Sunnah is the practice of the Holy Prophet Muhammad,
may peace and blessings of Allah be upon him, while the Hadith is his sayings.

As the Holy Qur’an deals mainly with the broad principles of Islam, the details were frequently
supplied by Holy Prophet Muhammad, may peace and blessings of Allah be upon him, by his
actions and his sayings. Since written communication was not very common in those days, the
transmission of the actions and sayings of the Holy Prophet Muhammad, may peace and
blessings of Allah be upon him, took place from one person to another by the word of mouth.

Ijmaa is the term used for a opinion or command of Islam where all the good and respected
scholars of Islam are unanimous in their ruling.

For example, there is Ijmaa amongst the scholars that there are five obligatory prayers, or that
adhaan must be given before the prayers, or that a funeral prayer must be read over a
deceased believer, or that swine is prohibited in Islam, etc

Qiyaas is a term used when determining the root-cause of the process to do Ijtehaad. Qiyaas is
a process whereby a clear ruling of the permissibility or impermissibility of an act or thing is
applied to an issue closest related to it. For example, Allah and His Messenger (saws) have
declared khamr (wine, alcohol, etc.) haraam. Now if someone were to ask for a ruling on the
usage of marijuana, the scholars of Islam would do Qiyaas and determine the root cause of the
haraam of khamr is its intoxication; thus all things that intoxicate would be considered haraam.
Because the usage of marijuana intoxicates, it too would be considered haraam.

Maqasid al-Shariah
Maqasid al-ShariahMaqasid comes from an Arab plural word which is “maqsad”, the root word
is “qasd” which mean of intuition, aim or objective in an actions. Maqasid, The Arabic root word
of Shariah is the verb “shara‟a”. The literal meaning of “shara‟a” is to open upon a street, like
to open a door upon a street. In legal term “shara‟a” means to make or establish laws. From
“shara‟a” also comes Shariah which in legal term means laws relating to allaspects of human
life established by Allah S.W.T for his servants. Maqasid al-shariah isrefered to as the goal or
objective to be achieved in an Islamic law.

Maslahah (Concerns of Public Interest)

Maslahahis one of the juristic devices that have always been used in Islamic legaltheory to
promote public benefit and prevent social evils or corruption. The plural of the Arabic word
maslahah is „masalih ‟ which means welfare, interest or benefit. Literally, maslahah is defined as
seeking the benefit and repelling harm. The words maslahah and manfa`ah are treated as
synonyms. Manfa`ah (benefit or utility),however, is not technical meaning of maslahah . What
Muslim jurists mean by maslahah is the seeking of benefit and the repelling of harm as directed
by theLawgiver or Shariah.
Characteristics of Maqasid Al-Shariah
The Maqasid Al-Shariah has four main characteristics
1) Basis of legislation
Legislation has to serve the interest of all human beings and save them fromharm.
2) Universal
Aiming to serve the interests of mankind and requiring the adherence of allhuman beings. This
is because the Quran is the last revelation, applicable to theall mankind till the end of time.
3) Inclusive
They encompass all human acts whether they are related to Ibadat(responsibilities to God) or
muamalat (responsibilities towards other humanbeings).
4)Definitive
They have not been derived from a single text or item of evidence, but from amultiplicity of
texts and different aspects of evidence

Classification of Maqasid Al-Shariah

1 Daruriyah (Essential)
It is known as the essential interests of life which people essentially depend upon, comprising
the five objectives of Shariah: religion(deen) life (nafs), intellect (Ñaql ), procreation (nasl ) and
wealth (mal ). These are essentials serving as bases for the establishment of welfare in this
world and the hereafter. If they are ignored then coherence and order cannot be established,
fasad (chaos and disorder) shall prevail in this world, and there will be obvious loss in the
hereafter.

2) Hajiyyah (need or complimentary)

Complementary interests are defined as benefits which seek to removeseverity and hardship
that do not pose a threat to the very survival of normalorder. The term refers to interests, the
neglect of which will lead to hardshipbut not to total disruption of the normal order of life. In
other words, theseinterests, which are a level below the five essentials, are needed in order
toalleviate hardship, so that life may be free from distress and predicament .

3) Tahsiniyyah (embellishments)

The embellishments refer to interests whose realisation leads to refinementand perfection in

the customs and conduct of people at all levels of achievement. For example, the Shariah
encourages charity to those in need,beyond the level of the obligatory zakah. In customary
matters and relationsamong people, the Shariah encourages gentleness, pleasant speech
andmanner, and fair dealing. Other examples include permission to use beautiful,comfortable
things; to eat delicious food; to wear fine clothing and so on.
Maqasid Al-Shariah and Islamic Finance
The earlier sections have discussed on the fundamental principles on the objectives of Shari`ah
particularly in dealing with everyday life. The next focus is to apply evaluatemaqasid alshari`ah
and maslahah in Islamic banking and finance. In fact, one of thebiggest challenges of Islamic
banking and finance industry today is to come up withproducts and services that is Shari`ah
compliant or legitimate from Islamic point of viewwithout undermining the business aspects of
being competitive, profitable and viablein the long run.
The major components of Islamic Financial Services are
1) Islamic Banking
a. Financing
b. Deposit
c. Investment
2) Islamic Capital Market
a. Equity
b. Islamic Securities
c. Funds and Unit Trusts
d. I-REITS
e. Venture Capital / Private Equity
f. Derivatives
3) Takaful/Islamic Insurance
a. Takaful
b. Retakaful

Maqasid al-Shariah in Islamic Banking

The earlier sections have defined Maqasid al-Shariah, and discussed the prohibition of riba. This
section will discuss on the importance of Maqasid al-Shariah and maslahah inIslamic Banking. It
is of crucial importance to the Islamic banks to develop financial products that are Shariah-
compliant without jeopardizing their competitiveness and profitability in the long run. The
pressing question is how to determine whether a productis Shariah compliant or otherwise?
How to resolve the legality of a contract from Shariah perspectives?

Shariah- Compliant : Legality vs Permissibility

The Fiqhi scholars have two different views on this matter .Some of them emphasize on
whether the structure of the product is permissible while the other group prefers to look into
the underlying objectives of the contracting parties. They do not want the products cleverly
disguised as a shariah compliant product when in actual case it is not. The difference in opinion
is due to the hadith that mentions “matters are determined by intention”.
Based on this hadith, the legality of the contracts must be established byintention (niyyah) not
merely by its structure alone.

On the other hand, Imam Shafi stated that it is unreasonable to decide on the legality
of contracts by implication of intention, as it is complex and sometimes improbable to
categorize the intention of the contracting parties. In addition, they stated that some Shari‟ah
texts
indicate that evaluating things must be based on their structure and manifestation.

The scholars decided to reconcile the two conflicting opinions by introducing the two types of
hukm (ruling): Hukum Qada‟i and Hukm Diani.

1) Hukum Qada’i

This hukm is to determine if the contract complies with all the Shari‟ah conditions and
requirements pertaining to its form and structure. If the contract structure is Shariah-compliant
then it is termed as valid contract (sahih).

2) Hukum Diani

This hukm is to determine whether the purpose of the contract is Shariah compliant and if it is
then the contract is permissible (halal).Thus, a transaction is deemed to be halal when it serves
the legal purpose and intention, and sahih if the contract meets all contractual conditions and
requirements. Consequently, a sahih (valid) contract is not necessarily halal (permissible).

It must be stated here that the scholars of Fiqh have different views with regard to the validity
of a contract only. However, they have no issue with the permissibility of acontact on its matter
or the contracting parties‟ niyyah. Even Shafi scholars expressed examples of cases when real
intention does nullify a contract such as selling fruit products to be used for alcohol making or
furnishing arms to people who will use it against the Muslims. This indicates that the
importance on the structure or expressed intention is more appropriate when the genuine
intention is hard to establish.

For an Islamic product to be classified as Shariah compliant by the jurists, the contractmust
commonly be both valid and permissible. The pertinent question is, are contemporary Islamic
banking following the same principles One of the most debatableproducts of Islamic banking is
buy-back sale (bay‟ al inah) which is mostly applied in Malaysia. In bay‟ al inah approach the
Islamic bank is theoretically acting as a trader selling or buying as the word “bay” means sale,
but in actual terms the Islamic bank simply proceeds as a financier who provides capital without
exposing itself to any risk and without tak ing engagement in the venture procedure. Bay‟ al
inah here is resorted to as a legal device to avoid riba based loan. However, financing based on
bay‟ al inah and the conventional riba based loan are very similar; they satisfied closely the
samecontracting parties‟ purposes, and apply exactly the same economic matter and
outcomes, although their form may be different.

Thus not all products offered by Islamic banks are enhancing maslahah or fullyembracing the
objective of Shari‟ah. If Islamic banks focus only on the structure orvalidity of a contract instead
of focusing also on the underlying purpose or the permissibility then the bank is in opposition
to the key principles of Maqasid al-Shariah.In the case of Bay Al-Inah, Maqasid al-Shariah has
been used as a rationalization forapplication of rather questionable transaction, even though
observing Maqasid al-Shariahmust be the first factor to determine their prohibition.

What is Sukuk?

Literally sukuk means certificates. Technically, sukuk refer to securities, notes, papersor
certificates, with features of liquidity and tradability. Accounting and AuditingOrganization for
Islamic Financial Institutions (AAOIFI) defines

“Investment sukuk are certificates of equal value representing undivided shares in ownership of
tangible assets, usufructs and services (in the ownership of) the assets of particular projects or
special investment activity, however, this is true after receipt of thevalue of the sukuk, the
closing of subscription and the employment of funds received for the purpose for which the
sukuk were issued”

Sukuk can be structured in various forms. The types of Sukuk issued can take variousstructures
depending on the underlying Shariah principles such as Bai’ Bithamin Ajil, Murabaha, Salam,
Istisna, Ijarah, Musharakah, Mudharabah and Wakalah. These can be further grouped into three
main clusters Sale-based sukuk (comprising of Bai‟ Bithamin Ajil, Murabaha, Salam, Istisna‟a),
lease-based sukuk (Ijarah) and equity based sukuk (Musharaka, Mudaraba and Wakala)

The Main Difference between Conventional Insurance and Takaful

In conventional insurance, the company sells a policy to the insured that would pay premium
for the risk he agrees to be indemnified by the company or insurer. The principals of
conventional insurance are as listed below, the policy will determine:

1) The kind of risk that is covered.

2) The risks that are excluded

3) The period of coverage for the indemnity

4) The limit of compensation that the insured will get

5) The limit of damage or loss the company will be responsible for

6) Payment to insurer if loss arises from an event defined by the policy, during the period under
cover

7) The company takes all the money or premium that has been paid up front , in case nothing
happens during the period under cover

Based on the above principles, the Muslim jurists concluded that insurance is not Shariah-
compliant. The first objection is the presence of the element of chance taken by the company.
There is no certainty in the outcome of the contract. Ambiguity is something that is not
acceptable in Islam mainly because any of the two parties will be exposed to injustices.
Ambiguity and uncertainty of this type is called al-Gharar which when present in any contract
will cause the contract to be void.