Islamic Financial Accounting
Standard-1
Murabaha
Interpretation and Implementation
Effective date January 1, 2006
Ahmed Ali Siddiqui
Vice President & Manager
Product Development & Shariah Compliance
Meezan Bank Limited
Scope of Presentation
The scope of this presentation comprises of two main parts;
-
-
Basic Concepts, Modalities and Documentation of Murabaha
Transaction
-
Process Flow of Murabaha Transaction
-
Documentation
Accounting Policies and Recording Procedure involved in Murabaha
transaction as per the requirements and guidelines of IFAS-1
-
Accounting Policies
-
Recording procedure and disclosure of Murabaha transaction
as per IFAS-1
Introduction
Murabaha is a kind of Sale whereby “Cost” as well as the “Profit” is
known to the Buyer and the Seller.
Payment of Murabaha price may be:
1) At spot
2) In installments
3) In lump sum after a certain time
Hence, Murabaha does not necessarily imply the concept of deferred
payment.
Process Flow Murabaha Financing
1. Client and the Bank sign an agreement to enter into Murabaha
through a Master Murabaha Financing Agreement (MMFA).
Bank
Agreement to
Murabaha
Client
Process Flow Murabaha Financing
2. Client appointed as an agent to purchase goods on the Bank’s
behalf.
Bank
Agreement to
Murabaha
Agency
Agreement
Client
Process Flow Murabaha Financing
3. Bank gives money to an agent/supplier for purchase of goods.
Bank
Client
Agreement to
Murabaha
Agency
Agreement
Disbursement to the agent or supplier
Supplier
Process Flow Murabaha Financing
4. The agent takes possession of goods on the Bank’s behalf.
Transfer of Risk
Bank
Vendor
Delivery
of goods
Agent
Process Flow Murabaha Financing
5(a). Client makes an offer to purchase the goods from the Bank
through a declaration.
Bank
Client
Offer to
purchase
Process Flow Murabaha Financing
5(b). Bank accepts the offer and sale is concluded / culminated.
Murabaha Agreement
+
Transfer of Title
Bank
Client
Process Flow Murabaha Financing
6. Client pays agreed price to the Bank according to an agreed
schedule. Usually on a deferred payment basis (Bai Muajjal)
Bank
Payment of Price
Client
Stages in Murabaha Financing
There are two stages in Murabaha transaction:
• Investment Stage (Agency to Purchase)
• Financing Stage (Declaration to payment)
Profit Recognition in Murabaha
• The profit for the Murabaha transaction shall be recognized after
the goods are sold by the bank to the customer.
Murabaha Documentation
There are a number of documents involved in a Murabaha
financing transaction. The most essential of these documents
are:
1) Master Murabaha Financing Agreement (MMFA)
2) Agency Agreement
3) Draw Down Notice
4) Summary Payment Schedule
5) Declaration
6) Details of Assets
Murabaha Documentation
1) Master Murabaha Agreement
• Its an agreement between the client and the Bank whereby
the client agrees to purchase goods from the Bank from time
to time as per the terms and conditions of this Agreement.
• This is an over all facility agreement under which various
Sub-Murabahas may be executed from time to time.
Murabaha Documentation
2) Agency Agreement
• The client is appointed by the Bank as its agent to purchase goods.
This agreement needs to be signed once between the client and the
bank.
• The disbursement of funds is done under this Agreement.
• List of assets form part of the main Agency Agreement which
defines the assets that the client is authorised to by on behalf of the
bank acting as an agent.
3) Draw Down Notice
• These documents are required for each disbursement/Murabaha
tranche.
• Draw down notice must mention the amount.
Murabaha Documentation
4) Summary Payment Schedule
• Summary of Payment schedule should be finalized prior to
signing of declaration of Murabaha agreement.
5) Declaration (Offer & Acceptance document)
• Declaration is to be signed by the customer immediately
after the purchase of the goods by the customer.
• This document establishes the actual sale transaction, i.e.
transfer of ownership of goods from the Bank to the customer.
• At this stage the specific details of the assets must be known
i.e. quantity, quality, price etc.
• Proper timing of declaration is extremely important.
Murabaha Documentation
6) List of Assets
•This forms part of the declaration whereby details of the goods
purchased are disclosed.
• Purchase evidences to be attached with the details of assets as a
proof of purchased by the client as an agent of the Bank.
• The purchase evidences may includes the invoices, good
receiving notes, good delivery challans or any other suitable
evidence, preferably in the name of the Bank or in the name of
the client as an agent of the Bank.
Accounting Policy for Murabaha
IFAS 1 - Murabaha
Accounting Policy for Murabaha
Transaction Recording
• Funds disbursed for purchase of goods are recorded as
‘Advance for Murabaha’. On culmination of Murabaha i.e. sale of
goods to customers, Murabaha financings are recorded at the
deferred sale price net of profit.
Previously, Murabaha financings were recorded at the time of
disbursement of funds.
• Goods Purchased but remaining unsold at the balances sheet
date are recorded as inventories.
Previously these were recorded as Advance against Future
Murabaha.
• Financing are stated net of specific and general Provisions
against non- performing financings, if any, which are charged to
the profit and loss account.
Accounting Policy for Murabaha
Revenue Recognition
• Profit on Murabaha Financings is recognised on accrual basis.
Effective January 01, 2006, profit on Murabaha transactions for
the period from the date of disbursement to the date of
culmination of Murabaha is recognised immediately upon the later
date.
Previously, profit on Murabaha was recognised from the date of
disbursement.
Reason for Change in accounting Policy
Below is a brief summary of recording procedure of the Bank for
Murabaha transactions both post and pre adoption of “IFAS-1
Murabaha”.
Pre-adoption
1) Murabaha Financings were recorded at
the time of disbursement of funds.
Post-adoption
2) Goods purchased but remaining unsold
at the balance sheet date were recorded as
‘Advance against future Murabaha’.
2) Goods Purchased but remaining unsold
at the balances sheet date are recorded as
Inventories.
3) Profit for the Murabaha transaction was
recorded from the date of disbursement.
3) Profit for the period from the date of
disbursement to the date of culmination of
murabaha is recognized immediately after
the date of culmination of Murabaha..
1) Funds disbursed for purchase of goods
are recorded as ‘Advance for Murabaha’.
On culmination of murabaha i.e. sale of
goods to customers, Murabaha Financings
are recorded at the deferred sale price net
of profit payment.
Case Study for Murabaha
Below is the case study for the understanding of
Murabaha transactions carried out at Meezan Bank
in various scenarios:
Example
Purchase price/Cost/Principal
Profit Rate
Tenure
Total profit on transaction
Sale price (Contract price)
Date of Disbursement to supplier/customer
Date of Culmination of Murabaha Transaction
Date of Maturity of Murabaha
Amount in Rs./%
1,000
10%
One year
100
1,100
January 01,2007
January 15,2007
December 31,
2007
Scenario-A
A-When there is bullet payment of profit and Cost (Principal) at the
end of the period:
1) At the time of payment to the client for the purchase of goods on behalf of bank or
directly to the supplier by the bank the transaction will be accounted for as
follows:
January 01, 2007
Dr Advance against Murabaha (B/S Asset side)
Cr Pay Order / Party Account (B/S Liability side)
1,000
1,000
Scenario-A
2) At the Culmination of Murabaha i.e. at the time of sale of goods
to the customers with signing of Declaration by the bank and the client
following entries would be passed:
January 15, 2007
Dr
Dr
Cr
Cr
Murabaha Financing
Unearned Murabaha Profit Receivable
Advance against Murabaha
Deferred Murabaha Income
1,000
100
1,000
100
3) Booking of Accrual of profit@ 10% from the date of disbursement to the date of
culmination, the following entry would be passed. [(1000 x 10%) x 15 / 365]:
January 15, 2007
Dr
Dr
Cr
Cr
Deferred Murabaha Income
Murabaha Profit Receivable
Income on Murabaha Financing
Unearned Murabaha Profit Receivable
4.10
4.10
4.10
4.10
Scenario-A-continued
4) Booking of Accrual of profit@ 10% for remaining days of the month,
the following entry would be passed. [(1000 x 10%) x 16 / 365]:
January 31, 2007
Dr
Dr
Cr
Cr
Deferred Murabaha Income
4.39
Murabaha Profit Receivable
4.39
Income on Murabaha Financing
4.39
Unearned Murabaha Profit Receivable
4.39
And so on this entry will be passed at the end of EACH month till maturity for the
accrual of profit.
Disclosure in Balance Sheet as on January 31, 2007
Murabaha receivable-gross
Less: Deferred Murabaha Income {100- (1000x10%x31/365)}
Murabaha Profit Receivable shown in other assets
Murabaha Financing Receivable
1,100
(91.51)
(8.49)
1,000
Scenario-A-continued
5) On Maturity of Murabaha transaction i.e. on December 31, 2007 and at the
time of receiving of final payment following entry would be passed:
December 31, 2007
Dr
Cr
Cr
Party Bank A/c
Murabaha Financing
Murabaha Profit Receivable
1,100
1,000
100
Scenario-B
B-In case Declaration is not received on January 15, 2007 and is received on
February 15, 2006:
1) At the time of payment to the client for the purchase of goods on behalf of bank
or directly to the supplier by the bank the transaction will be accounted for as
follows:
January 01, 2007
Dr
Cr
Advance against Murabaha
Pay Order / Party Account
1,000
1,000
On January15, 2007
No entry would be passed
At the end of First Month i.e. January 31, 2007
No entry would be passed for accruals of profit, as Declaration has not been
received from the customer.
Scenario-B
2) On February 15, 2007, at the culmination of Murabaha i.e. at the time of sale
of goods to the customers with signing of Declaration by the bank and the client,
the following entries would be passed:
February 15, 2007
Dr
Dr
Cr
Cr
Murabaha Financing
Unearned Murabaha Profit Receivable
Advance against Murabaha
Deferred Murabaha Income
1,000
100
1,000
100
Scenario-B-continued
3) Booking of Accrual of profit@ 10% from the date of disbursement to the date of
culmination, the following entry would be passed. [(1000 x 10%) x (31+15)/ 365]:
February 15, 2007
Dr
Dr
Cr
Cr
Deferred Murabaha Income
12.60
Murabaha Profit Receivable
12.60
Income on Murabaha Financing
12.60
Unearned Murabaha Profit Receivable
12.60
Scenario-B-continued
4) Booking of Accrual of profit@ 10% for remaining days of the
month, the following entry would be passed. [(1000 x 10%) x 13 / 365]:
February 28, 2007
Dr
Dr
Cr
Cr
Deferred Murabaha Income
3.56
Murabaha Profit Receivable
3.56
Income on Murabaha Financing
Unearned Murabaha Profit Receivable
3.56
3.56
And so on this entry will be passed at the end of EACH month till maturity for the
accrual of profit.
NOTE: In case the Murabaha declaration is NOT received on the due date, NO
Entry would be passed until the declaration is received.
Disclosure in Balance Sheet as at February 28, 2007
Murabaha receivable-gross
Less: Deferred Murabaha Income{100- (1000x10%x(31+28)/365)}
Murabaha Profit Receivable shown in other assets
Murabaha Financing Receivable
1,100
(83.84)
(16.16)
1,000
Scenario-B-continued
5) On Maturity of Murabaha transaction i.e. on December 31, 2007 and at the
time of receiving of final payment following entry would be passed:
December 31, 2007
Dr
Cr
Cr
Party Bank A/c
Murabaha Financing
Murabaha Profit Receivable
1,100
1,000
100
Treatment for Inventory
If goods purchased for Murabaha remain unsold on the reporting
date they are shown as “Murabaha Inventory” in Other Assets.
Following are possible scenario:
1) Bank is holding assets for future sale to its customers against a
promise
2) The Goods are imported as Bank’s agent and are not sold to the
importers i.e. they are in PAD
3) Any other reason due to which the goods remain unsold.
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