Protection of Capital and Investments — practice questions

Correct answer: B. Clause 2: Protection of capital and investments means using available methods to prevent loss, decrease or destruction; it is wider than a guarantee of invested capital. A guarantee is an undertaking by a particular party to bear any loss, decrease or destruction of the capital, whereas protection refers to safeguarding it. Clause 3/1 describes protecting capital by permissible means as desirable, since it serves the objectives of Shari’ah regarding wealth.

Correct answer: D. Clauses 3/2 to 3/6: An investment manager, whether Mudarib, investment agent or managing partner, must exercise due diligence to protect the funds; if he fails to use the usual means of protection, he is liable. He acts in a fiduciary capacity and is not liable except for wilful misconduct, negligence or breach, but failing to take professional measures that normally protect the funds is itself negligence. Conversely, it is not permissible to stipulate that he is unconditionally liable for any loss of capital.

Correct answer: A. Clause 3/7: Where a loss is caused by the Mudarib’s wilful misconduct, negligence or breach, the capital provider may hold him liable for the loss of capital but not for loss of profit. However, if actual or constructive liquidation has determined that the investment accrued profit which was added to the capital and then lost through the Mudarib’s misconduct, negligence or breach, he must indemnify the loss of that profit, as it has become part of the capital. Expected future profit is never recoverable.