ACCA Financial Management (F9) Certification Practice Exam

Under Islamic finance principles, what term is used to describe the prohibition of charging interest?

1. Murabaha

2. Mudaraba

3. Riba

4. Musharaka

The correct answer is: Riba

In Islamic finance, the term that refers to the prohibition of charging interest is "Riba." This principle is fundamental to Islamic finance, as it underscores the ethical and moral underpinnings of financial transactions within this system. Riba encompasses not only excessive interest but any predetermined increase in a loan that is considered unjust or exploitative. Charging interest is viewed as a method of generating profit without providing a corresponding service or risk, which is contrary to the principles of fair and equitable financial dealings promoted in Islamic teachings. The prohibition of Riba encourages profit-sharing and investments in real economic activities to ensure that financial transactions are productive and contribute to welfare. The other terms listed relate to specific financial contracts within Islamic finance. Murabaha is a cost-plus financing structure where the seller discloses the cost and profit margin. Mudaraba refers to a partnership where one party provides capital and the other provides expertise and management. Musharaka is another partnership structure, but it involves all partners contributing capital and sharing profits and losses. None of these directly address the prohibition of interest as clearly as Riba does.