Professional Documents
Culture Documents
Murabaha Problems PDF
Murabaha Problems PDF
واﺳﺘﺪل ﻋﻠ ﺎ ﺑﺎﻟﻘ ﺎس ﻋﻠﻰ اﻟﺘﻮﻟ ﺔ ﻓﻘﺪ اﺷﺘﺮى رﺳﻮل ﷲ )ص( اﻟﻨﺎﻗﺔ ﻣﻦ أﺑﻲ ﺑﻜﺮ
..ﺒﺘ ﺎ ﻟ ﻗﺎل ﺑﻞ ﺑﺎﻟﺜﻤﻦª ﻟﻠ ﺠﺮة ﺑﺎﻟﺘﻮﻟ ﺔ ﻷﻧ ﺣ ﻦ أراد أﺑﻮ ﺑﻜﺮ
The Murabaha is also analogous to a form of sale called Tawliyyah (to sell as per the
purchasing price without making profit. This is because the Prophet (BBUH)
purchased a she-camel from Abubaker for use as transportation means to migrate to
Medina. Abubaker had wanted to give it to the prophet free of charge but the prophet
refused and said: I will preferably take it at the acquisition price”.
Chapter 7
CHAPTER LEARNING OBJECTIVES:
At the end of this chapter you will, insha Allah you will be able to:
7.1 Introduction
If you are still with me after the previous two long (and perhaps boring) chapters, you
will be well rewarded. This is the first chapter where we start making accounting
entries (at last!). Murabaha or cost plus markup sale is the first of asset based
financing contracts employed by Islamic banks. It is the most widely used financing
instrument as it somehow resembles a loan contract. Other asset based financing
contracts are salam and istisna’a. In contrast to these, we have contract based on
services i.e ijarah, ijarah muntahia bi tamlik (or ijarah thumma al bai’ (the Malaysian
version) and wakalah (agency contracts). In this chapter, we will first define murabaha,
murabaha to the purchase orderer. We will then discuss the rules and principles of the
contracts to understand what) accounting entries are needed. We will then learn the
accounting entries on contract intiation, instalment receipts, revenue recognition,
recognition and measurement of assets, and the accounting treatments for
termination, deposits and penalties. I will illustrate with some examples and will finally
leave you to do the problems in the chapter some of which have answers at the back
of the book.
(i) pay cash – difficult if it is a big ticket item, say vehicle, machinery or
buildings
(ii) get it on credit from the vendor, possibly through interest free credit card;
you can forget about getting interest free credit from a car dealer or housing
developer.
(iii) Get a loan to buy the asset either from a conventional financial institution.
(iv) Get an Islamic financing from an IFI.
(v) Defer or forget about the intended purchase.
In a conventional financing, the buyer usually pays a deposit to the vendor and the
remaining amount is financed through a loan or hire purchase or leasing, the
substance of which is he pays in installments, include interest for the time, he uses the
bank’s money.
There are two types of Murabaha viz. Murabaha and Murabaha to the Puchase
Orderer. We also have the controversial Malaysian Bai Bithaman Ajil.
(i) on the spot exchange, where the buyer gets the goods and pays the price
to the seller on the spot.
(ii) Sale for deferred payment (bai al muajjal), where the seller sells the goods
but the pays the agreed price at a future date in a full lump sum or in
installments over a period.
(iii) The buyer pays in advance for an agreed kind, quality, quantify of goods
and the seller either makes it to order (istisna) or buys or produces it
(salam) and delivers it to the buyer at a later agreed date.
Murabaha comes under (ii), and in its original practice, not necessarily a credit sale.
FAS2 defines murabaha as follows:
Definitions
a. The Islamic bank should make the cost or capital outlay known to the
client.
d. The Islamic bank should disclose any fault which occurs after the
purchase and should disclose all what is related to the fault.
e. The Islamic bank should disclose the terms applicable to the purchase
price, for example if the purchase was on credit.
Generated by Foxit PDF Creator © Foxit Software
http://www.foxitsoftware.com For evaluation only.
It is worth noting that a Murabaha sale in the above context means the selling
of a product owned by the seller at the time of negotiation and
contracting. (FAS 2, appendix B)
It is also worth noting, that murabaha is not necessarily a sale on credit or deferred
basis but to avail the experience of an expert buying agent. However, as practiced by
Islamic banks, it is invariably due the need for credit that it is practiced. Under fiqh
rules, the price for a murabaha sale need not be paid on spot, It can be deferred either
to one lump sum in the future or paid in a series of installments.
(1) (2)
(1) The banks buys the goods for murabaha sale from the vendor and pays for it.
(2) The Bank enters into a murabaha contract with a customer and delivers the good.
(3) The customers pays the bank in installments over the contract period.
Generated by Foxit PDF Creator © Foxit Software
http://www.foxitsoftware.com For evaluation only.
Some Islamic banks such as the Kuwait Finance House practices this model, in the
case of motor car financing. The bank has warehouses, where it keeps its cars which it
has bought from manufacturers or dealers. The customer wanting to purchase a car
with financing goes to the warehouse and selects a car, informs the bank and signs
the murabaha contract. He drives off with the car and pays for it later in installments.
However, most Islamic banks do not want to do this, as it involves trading and it is
risky in the sense that the bank is an owner of the bought goods (and this is reflected
in the balance sheet as inventory) and is thus liable for risk of loss, damage and
decline in value until the time it manages to sell it to a customer.
Hence, in most cases, Islamic Banks use “Murabaha to the Purchase Orderer. This is
defined as follows:
Definitions
Murabaha to the purchase orderer is a sale in which two parties or more
negotiate and promise each other to execute an agreement according to
which the orderer asks the purchaser to purchase an asset of which the
latter will take legal possession. The orderer promises the purchaser to
purchase the asset from him and give the ordered a profit thereon. The
two parties would conclude a sale after the possession of the ordered to
the asset (1). However, the purchase orderer may or may not be obliged
to conclude the sale. (FAS 2 Appendix B1/2/1)
(1)
(2) ISLAMIC CUSTOMER
VENDOR (3)
BANK
Generated by Foxit PDF Creator © Foxit Software
http://www.foxitsoftware.com For evaluation only.
(1) The customer orders the bank to purchase goods , which it promises (this may be
binding or non binding) to buy from the bank giving it some profit.
(2) The bank buys and pays for the goods from the vendor.
(3) The banks executes a murabaha contract of sale to the customer and delivers the
goods.
(4) The customer pays for the goods on an installment basis to the bank.
In a murabaha to the purchase orderer, the promise to buy of the customer (the
purchase orderer) may be binding or non binding. This result from different shari’a
opinions. One group of scholars view that the promise is non-binding because:
(a)The bank cannot sell what it does not possess (at the time of making the promise)
(b) The goods may be defective , deficient or unnecessary when delivered.
However, this will present problems to the Islamic banks as it incurs cost to purchase
the goods and as a financing institution would not want to be left with unsold inventory.
In order to reduce the risk of the Islamic bank, the bank may require a deposit from the
orderer (potential customer) to ensure his seriousness. Under the shari’a, there are
two types of deposits which the bank can demand. One is known as Hamish jiddiyah
and the other urboun, each with different characteristics. These two deposits are
defined by FAS2 as follows:
Definitions
Hamish jiddiyyah
It is the amount paid by the purchase orderer upon request of the
purchaser to make sure that the orderer is serious in his order of the
asset. However, if the promise is binding and the purchase orderer
declines to purchase the asset, the actual loss incurred to the
purchaser shall be made good from this amount.
Urboun
It is the amount paid by the client (orderer) to the seller (i.e., the
original purchaser) when the former purchases an asset from the
Generated by Foxit PDF Creator © Foxit Software
http://www.foxitsoftware.com For evaluation only.
In case of urboun deposit, this is deducted from the purchase price if the customer
proceeds with the sale. If not, the customer looses his deposit, even if the deposit is
more than the loss incurred by the bank.
In order to make it safer for Islamic banks, it should make the contract a binding
promise and then require Hamish Jiddiyah or Urboun. However, this does not solve
the problem of credit risk i.e. payment default by customer. To mitigate this, the bank
may request for a guarantee from the customer. The goods sold under murabaha can
be a collateral for the debt. In this case, however, the customer cannot sell the goods
untl the debt is repaid to the bank.
In the case of late payment and procrastination by the customer, the bank normally
cannot levy any penalty as this would amount to interest. If the shari’a board agree on
a penalty, then this penalty cannot be recognized as revenue but given away as
charity. The Islamic bank can institute legal proceedings to recover the debt and
financial damage caused by procrastination (e.g. legal fees, “lost opportunity”). Unless
Generated by Foxit PDF Creator © Foxit Software
http://www.foxitsoftware.com For evaluation only.
If the indebted owner is insolvent and fails to settle the debt, the bank should defer
collection until he becomes solvent.
If the bank gets a discount on the purchase price, this will belong to the bank unless it
was obtained at the time of making the promise to buy (by the customer) or before the
Murabaha sale was concluded.
The last rule to consider is early settlement of the debt or a lump sum payment before
scheduled time. Since, the transaction is a sale, the bank is under no obligation to give
a discount to the customer. However, due to competitive pressures, the Islamic banks
do give a discount for early settlement. This is allowed under the shari’a and is called
‘ibra. The amount must be agreed between the bank and the customer at the time of
settlement or before the lump sum payment is made.
Bai bithamin ajil model has been discussed in chapter ?? and will not elaborated here.
However, we will do an illustration of the accounting entries for the BBA later.
The following diagram depicts the transaction flow and the recognition (recording) of
the events in the accounts.
Refusal Gain/Loss on
disposal/deposit
refund
Order Purchase
Deposit Disbursement
Receivable /
collateral Cash / cash Rebate/
equivalent Write -off
Generated by Foxit PDF Creator © Foxit Software
http://www.foxitsoftware.com For evaluation only.
l 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.
l Upon financing the customer:
Ø Murabaha receivables should be recorded (by the bank) at face value
(cash equivalent value) less provision for doubtful debts
l Profits are recognized at time of contracting for cash or credit transaction not
exceeding the current financial period.
l If credit period > one financial period with a single or several installment , the
recognition methods are:
• Accrual basis method
Generated by Foxit PDF Creator © Foxit Software
http://www.foxitsoftware.com For evaluation only.
ILLUSTRATION 7-1:
MURABAHA FINANCING
2. Rukyah purchased a house from Sameera through an Islamic banking facility. If the
contract of the facility is based on Murabaha, which of the following scenarios would be
valid:
a) The Islamic bank establishes a Special Purpose Company which would collect the equal proportions
of capital from both the Islamic bank and Rukyah before purchasing the house from Sameera. The
title of ownership is shared by both parties until Rukyah purchases off the entire ownership.
b) Rukyah pays Sameera a downpayment and gets the Islamic bank to finance the remaining amount.
The title of ownership is passed to Rukyah upon making the downpayment.
c) The bank purchases the house from Sameera and subsequently sells the house to Rukyah at cost plus
a mark up. The title of ownership is passed to Rukyah upon concluding the sale agreement.
d) The bank purchases the house from Sameera and subsequently sells the house to Rukyah at cost plus
a mark up. The title of ownership is retained by the Islamic bank until full settlement.
I. The settlement of debts under Murabaha to the purchase orderer should not be contingent upon
the disposition of the goods sold.
II. Measurement of asset value under Murabaha at acquisition is at cash equivalent value.
III. Profits of a Murabaha shall only be recognized on proportionate allocation over the period of
the credit/financing.
Generated by Foxit PDF Creator © Foxit Software
http://www.foxitsoftware.com For evaluation only.
a) I, II and III
b) I and III only
c) II and III only
d) III only
e) up. The title of ownership is retained by the Islamic bank until full settlement.
What is the Islamic Bank’s journal entry at the start of the transaction in Year 1?
a) Dr Cr
Murabaha receivable 750,000
Cash 500,000
Unearned Income 250,000
b) Dr Cr
Murabaha receivable 500,000
Cash 500,000
Unearned Income -
c) Dr Cr
Murabaha receivable 500, 000
Cash 500,000
Unearned Income -
d) Dr Cr
Murabaha receivable 650,000
Cash 500,000
Unearned Income 150,000
Generated by Foxit PDF Creator © Foxit Software
http://www.foxitsoftware.com For evaluation only.
5 Mr. ABC made a non-binding promise to an Islamic Bank that he would buy a van from
the latter through a Murabaha transaction. Based on that promise, the Islamic Bank
collected hamish jiddiyah of US$ 500 from him, and bought a van from a vendor for US$
3,000 in cash. After the van is delivered to the Islamic Bank, Mr. ABC decided not to buy
it. The Islamic Bank then sold the van to another customer, Mr. DEF, for US$ 2,800 in
cash. Which of the following should apply?
Question 7-1
a. Bank Syari’ah Berhad provides a financing facility based on Bai’ Bithaman Ajil
(BBA) principles to Ahmad bin Ali for the purpose of house purchase. The
financing is amounting to RM300,000 at a constant rate of return 8% for a
period of 5 years. At the end of the contract, Ahmad owes the bank amounting
to RM32,000. As part of the normal requirements, the customers will be
charged a penalty fee of 3% per month for any outstanding amount due at the
end of the contract and the amount collected is normally disbursed as charity.
(i) Prepare an extract of the balance sheet and income statement of Bank
Syari’ah Berhad from the beginning till the end of the contract to
show the amount of net receivable and Murabaha (BBA) income.
(ii) Prepare journal entries to record all the above transactions in the
book of Bank Syari’ah Berhad (including the treatment for penalty
fee).
Question 7-2
Generated by Foxit PDF Creator © Foxit Software
http://www.foxitsoftware.com For evaluation only.
Mark – up 10 % on cost
Period of financing 4 years
Repayment in four equal yearly installments
Early payment rebate 50 % of outstanding profit
Bumi ventures paid all the installments for the first 3 years on schedule. At
the end of the 3rd year Bumi ventures informed the bank that it wanted to
settle the financing immediately and asked the bank to inform it of the
balance after rebate.
a) Show journal entries for the transactions for the 3 years in the books of
KFH.
b) Show the extract of the balance sheet and income statements of KFH in
respect of the above transactions at the end of the first 3 years and the
beginning of the fourth year showing clearly what the amount owing by
Bumi Ventures after rebate.
Question 7-3
Generated by Foxit PDF Creator © Foxit Software
http://www.foxitsoftware.com For evaluation only.
(i) Jan 1, year 1, the murabaha contract was signed and the bank
purchased the equipment for RM1,000,000 which was delivered
directly to the clients construction site. The bank paid for the
equipment in cash.
(ii) Dec 31, year 1, the client paid the bank RM 300,000 as scheduled.
(iii) Dec 31, year 2, the client paid the bank RM 300,000 as scheduled.
(iv) Dec 31, year 3, the client could not pay on time but subsequently
paid RM 300,000 and the penalty in Feb 28, year 4.
(v) Dec 31, year 4, the client paid the bank RM 300,000 as scheduled.
(vi) On Jan 31st, year 5, Malaysian constructions decided to pay off the
asset in full and requested Bank Islam Brunei for a rebate. Bank Islam
Brunei decided to give a 50% rebate on a pro rata basis (to the nearest
month) on the balance of the profits. On the same day, Malaysian
constructions settled the difference.
Required:
Question 7-4
Generated by Foxit PDF Creator © Foxit Software
http://www.foxitsoftware.com For evaluation only.
Bank Muamalat provides a Bai’ Bithaman Ajil financing facility to Dodik for
the purpose of buying a shop lot. The financing is amounting to RM400,000 at
a constant rate of return 10% for a period of 4 years. At the end of the
contract, Ahmad owes the bank amounting to RM40,000. It is the policy of
the bank to charge customers a penalty fee of 4% per month for any
outstanding amount due at the end of the contract and the amount collected
is disbursed as charity.
ii. Prepare journal entries to record all the above transactions in the book of
Bank Muamalat (including the treatment for penalty fee).
Question 7-5
Required:
Question 7-6
You are required to prepare an extract of the balance sheet and income
statement of Bank Muslimin Berhad from the beginning of the contract
up to year 5 to show the amount of net receivable and Murabaha
income.
Question 7-7
i. Prepare journal entries for Bank Muamalah Berhad only for the first
year and final year of the contract.
ii. Present a statement showing the amount of net receivable and murabaha
income for the whole duration of the contract.
Question 7-8
One of the major forms of financing offered by Islamic financial institutions is Bai
Bitham Ajil Financing. Essentially this is a deferred Instalment Sale with a Mark-up
Price.
60,000 of profit realized by the bank. The financing amount is RM 250,000 including a
mark-up of RM90,000.
Required:
Generated by Foxit PDF Creator © Foxit Software
http://www.foxitsoftware.com For evaluation only.
Question 7-9
Required:
Question 7-10
Hong Leong Islamic Bank (HLIB) gave a 5 year financing facility based on
BBA to Zaitun Industries to purchase factory machinery costing RM550,000
on 1st January 2006. . Zaitun would pay a deposit of RM50,000 of the
amount to the manufacturer as buying agent of Hong Leong. The bank
would take a profit of 8% per annum on a constant rate of return on the
financing it provided to Zaitun. Payment to be made on a semi-annual
basis. A penalty charge of 5% of the outstanding amount would be made for
any payments more than 30 days late. The Shariah Supervisory Board of
Hong Leong Islamic Bank had declared that any penalty on contracts can be
taken as revenue of the company provided that the customer has been
informed about it. Otherwise no penalty could be charged.
In 2008, Zaitun industries paid the instalment due on 30 June 2008, only on
30th August and was charged penalty which it disputed because it was not
told about the penalty clause and the contract accidentally omitted it. It also
informed Hong Leong Islamic Bank that it would like to pay the balance of
the price on January 1st 2009. and requested HLIB for a rebate based on ibra’
principles. HLIB decided to give an ibra of 20% of the remaining profit.
Zaitun paid off the requested amount to HLIB and ended the contract.
Required:
(i) Give the journal entries for year 2006, year 2008 and year 2009 in the
books of HLIB together with the extract of the Balance Sheet and Income
Statement for the year ended 31st December from the beginning until the
end of the contract.
(iii) Assuming the deposit paid by Zaitun was treated as the 1st ijarah
rental and the whole contract was an Ijara muntahia bitamlik where the
repayments under BBA in (a) was considered to be ijarah rental payments
and all the payments were made on time to Hong Leong and Zaitun
Generated by Foxit PDF Creator © Foxit Software
http://www.foxitsoftware.com For evaluation only.
decided to rent the machinery until the 5 year ijarah contract expired. Give
the journal entries in the books HLIB for 2006 and 2010 as well as the
income statement and balance sheet for 31st December 2006 and 2010
provide HLIB follows FAS8 of AAOIFI. Depreciate the machine on a
straight line basis with no residual value.