Murabahah and Murabahah for Purchase Orderer
Islamic Financial Transactions
Faizal Jaffar
0800907
Omer Bin Thabet
0800944
Huzaifa Baffa
0700410
1
Purpose
To highlight key features and appropriate accounting treatments associated
with Murabahah and Murabahah for Purchase Orderer contracts
Outlines
●
Definition
●
Key elements
●
Recognition and Measurement
●
Illustration
2
Murabahah is the most widely used financing instrument
Contract
Murabahah
Definition
Key conditions
Sale of goods at acquisition
cost plus an agreed profit
mark up.
Seller should disclose
to the purchaser the:
● Sale of specified goods at
● Price at which the
acquisition cost plus an
goods is purchased
Murabahah for
agreed profit mark up based
(acquisition cost);
Purchase Ordrer
on promise (wa’d) to
and
(MPO)
purchase given by the
● Amount of profit
purchaser.
● Promise to purchase may
be binding or non-binding
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Transaction structures
Murabahah
Transactions description:
(1) Islamic bank purchase the goods for murabaha sale from the vendor and pays for it.
(2) Islamic bank enters into a murabaha contract with customer and delivers the good.
(3) The customers pays the bank in installments/cash over the contract period.
Risk exposure
● Holding inventory of acquired goods
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Transaction structures
Murabahah for Purchase Orderer
Transactions description:
(1) Customer place an order with Islamic bank to purchase goods with the promise (may be
binding or non binding)
(2) Islamic bank purchase and pays for the goods from the vendor.
(3) Islamic bank executes a murabaha contract of sale with customer and delivers the goods.
(4) The customer pays for the goods on an installment/cash basis to the bank.
Risk exposure
● Holding inventory of acquired goods in the event that the customer fails/cancel the
purchases
Risk mitigation measure/ instruments
● Islamic bank accept Hamish Jiddiyyah (security deposit) or Urboun
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Risk mitigation measure
Hamish Jiddiyyah
● The amount paid by the purchase orderer upon request of the seller.
This is to ensure that the orderer is serious in his order of the asset.
● Islamic bank (the seller) may recover the actual loss incurred from the
amount of Hamish Jidiyyah in the event that the customer fails to fulfill
the binding promise to purchase; or
● refund the deposit to customer under the non-binding promise
Urboun
● The amount paid by the customer (purchase orderer) to the seller.
● The amount of Urboun shall form part of the purchase price in the
event that the customer proceeds with the sale and takes delivery of
the asset
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Recognition and Measurement and
Journal Entries
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Recognition and Measurement and Journal
Entries
No.
Transaction
1
Purchase of Asset by Bank
2
Murabaha sale
3
Installment receipt
4
Recognition of profit as each
installments received
5
Termination of contract
6
Rebate for early payment
DR
CR
Equipment
Cash/AP
Murabah financing
(cost=profit)
Equipment
(cost+deferred
profit)
cash
Murabah financing
Deferred profit
Profit &loss
A/R
Murabah financing
Deferred profit
Murabah financing
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Measurement of Murabah financing Assets

Upon acquisition of Assets:

With obligation : Assets should be measured at lower
of historical cost.

Without Obligation: Assets should be measured at cash
equivalent value. (reflect current value & protect the
bank/ financier).
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Measurement of 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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Measurement of Murabah financing Assets

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 is one financial period with a single
installment , the recognition methods are:


Accrual basis method recognizes profit based on a proportionate
allocation of profits whether cash is received or not.
Cash basis method recognizes profit as and when the installments
are received
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Measurement of Murabah financing Assets

Principle of matching expenses with income is
applied.

Deferral profits (unearned) shall be offset against
Murabaha receivables in the balance sheet.

Settlement amount is based on outstanding
financial amount (accrual basis)
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Accounting Illustration

An Islamic financial institution provides a
financing of $100,000 at a constant rate of return
of 10% for a period of 5 years and requires an
annual installment payment of $ 30,000.
solution:


Unearned income = (5 x 30,000) – 100,000 = RM
50,000.
Income = 10000(10% of RM100,000) per year.
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Accounting Illustration

Balance sheet:
Year 0
Year 1
Year 2
Year 3
Year 4
Murabaha
financing
150000
120000
90000
60000
30000
Unearned
income
(50000)
(40000)
(30000)
(20000)
(10000)
Net
receivable
100000
80000
60000
40000
20000

Income Statement:
Murabaha Income
10000
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