ACCOUNTING ISSUES
ON MURABAHA
FINANCING
6/28/2016
1
Nature of Asset based Financing
transactions
Financing
involving exchange
of goods such as :
Murabaha or Bai
bithamin Ajil
Salam & Parallel
Salam
Istisna’ & Parallel
Istisna’
6/28/2016
Financing
involving exchange
of services
Ijarah
Ijarah Al Muntahia
Biltamleek
Al Wakalah
(Agency)
2
Nature of Asset Based
Financing Transactions
Two types of Murabaha:
– Murabaha
– Murabaha to the purchase orderer
Al Murabaha is defined as the sale
of goods at cost plus mark up
The purchaser sould be informed of
his cost of purchase and the profit
amount
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Figure 1 : Murabah Financing
MARK -UP
SELLER
BUYER
PRICE = COST + PRE DETERMINED MARK-UP
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4
Nature of Murabaha to the
purchase orderer
Murabah to the Purchase orderer
involves three parties namely, the
purchase orderer, the purchaser
and the seller.
Involves intermediary due to lack of
expertise or need for credit facility
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Figure 2 : Murabaha to the
purchase orderer
Mark-up
Financier
Cash
Price
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Customer
Supplier/
Developer
S&P
Agreement
6
Principles of Murabaha
Financing
Cost of capital/ financing should be
disclosed
‘Usury free’ activities
Transparency facilities
Right of orderer (purchaser) to have
recourse to seller or cancel the
contract
Advance payment or deposit is
allowed
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Principles of Murabaha
financing
 Murabaha with obligation to purchase
- customer bears risk for non- receipt
of goods (delivery)
- Bai Bithaman Ajil (Murabaha to
purchase orderer & customer obliged to
purchase)
 Murabaha without obligation to purchase
- total risk borne by the bank for nondelivery
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General rules of Murabaha
financing
 Assets can be a collateral to the financing amount.
 Early settlement is required if assets has been
pledged as collateral
 Any form of procrastination (failure to pay back) by
a solvent debtor such as the purchaser can be liable
for legal actions.
 Provides ease of payment to insolvent debtor
 The bank is prohibited to buy back his asset from the
purchaser
 Any price discount obtained by the bank could
benefit the purchaser.
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Recognition of Murabaha
financing
Order
Deposit
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Purchase
Disbursement
Financing
Receivable/
Collateral
Settlement/
Disposal
Cash/
Cash
Equivalent
10
Journal entries
DR Murabaha Financing
CR Cash (cost of purchase)
CR Unearned income (profit)
(Recognition of Murabaha financing asset)
DR Cash
CR Murabaha financing
(Repayment received from customer)
DR Unearned income
CR Profit and Loss a/c
( Income recognition at the end of each period)
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Measurement of Murabah
financing Assets
 Upon acquisition of Assets:
- With obligation : Assets should be
measured at lower of historical cost or
impaired value. (not to over valueprudence & protect the purchaser)
- Without Obligation: Assets should be
measured at cash equivalent value.
(reflect current value & protect the bank/
financier)
- A provision should reflect any decline
between the acquisition cost and cash
equivalent value.
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Measurement Murabah
financing Assets
Price discount if obtained after
acquisition should not be treated as
revenue but to reduce the cost of
the relevant goods unless agreed
by SSB.
Upon financing the customer:
- Murabaha receivables should be
recorded (by the bank) at face value
(cash equivalent value) less
provision for doubtful debts
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Income recognition of
Murabaha financing assets
 Profits are recognized at time of
contracting for cash or credit
transaction not exceeding the current
financial period.
 If credit period > one financial period
with a single or several installment , the
recognition methods are:
- Accrual basis method
- Cash basis method
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Income recognition of
Murabaha Financing Assets


1.
2.
3.
Accrual basis method recognizes profit based
on a proportionate allocation of profits
whether cash is received or otherwise
Cash basis method recognizes profit as and
when the installments are received and
requires the approval of SSB
Principle of matching expenses with income
is applied
Deferral profits (unearned) shall be offset
against Murabaha receivables in ths
statement of financial position
Settlement amount is based on outstanding
financial amount (accrual basis)
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Policies on Penalty
Penalty imposed on any
procrastination (failure to repay) in
payment (mutual agreement or
court action) is a form of revenue or
allocation to charitable fund
In case of insolvency, the bank has
no authority to ask client to pay for
penalty
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Illustration of Murabaha
Financing
 An Islamic financial institution provides
a financing of RM 100,000 at a constant
rate of return of 10% for a period –5
years and requires an annual installment
payment of RM 30,000
 Prepare an extract of the Balance Sheet
and income statement at the beginning
and end of Year 1
 Workings:
- Unearned income=
(5 x 30,000) – 10,000 = RM 50,000
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Illustration of Murabaha
Financing
Year 0
RM
Year 1
RM
Murabaha
financing
150,000
120,000
Unearned
income
(50,000)
(40,000)
Net
receivable
100,000
80,000
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Illustration of Murabaha
Financing
Murabaha Income
Year 1
RM
10,000
Working : Income = 10% of RM100,000
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