Murabahah and Murabahah For Purchase Orderer: Islamic Financial Transactions

Murabahah and Murabahah for Purchase Orderer
Islamic Financial Transactions
Faizal Jaffar Omer Bin Thabet Huzaifa Baffa

0800907 0800944 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 Definition Key conditions
Sale of goods at acquisition

Murabahah
cost plus an agreed profit
Seller should disclose
mark up.
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 (wad) to and
(MPO) purchase given by the Amount of profit
purchaser.
Promise to purchase may

be binding or non-binding
3
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
4
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
5
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
6
Recognition and Measurement and
Journal Entries
7
Recognition and Measurement and Journal
Entries
No. Transaction DR CR
1 Purchase of Asset by Bank Equipment Cash/AP
2 Murabaha sale Murabah financing Equipment

(cost=profit) (cost+deferred
profit)
3 Installment receipt cash Murabah financing
4 Recognition of profit as each Deferred profit Profit &loss

installments received
5 Termination of contract A/R Murabah financing
6 Rebate for early payment Deferred profit Murabah financing

8
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).
9
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
10
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
11
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)
12
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.
13
Accounting Illustration
Balance sheet:
Year 0 Year 1 Year 2 Year 3 Year 4
Murabaha 150000 120000 90000 60000 30000

financing
Unearned (50000) (40000) (30000) (20000) (10000)
income
Net 100000 80000 60000 40000 20000
receivable
Income Statement:
Murabaha Income 10000
14

Murabahah and Murabahah For Purchase Orderer: Islamic Financial Transactions

Uploaded by

Copyright:

Available Formats

Murabahah and Murabahah For Purchase Orderer: Islamic Financial Transactions

Uploaded by

Document Information

Original Description:

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Murabahah and Murabahah For Purchase Orderer: Islamic Financial Transactions

Uploaded by

Copyright:

Available Formats

Murabahah and Murabahah for Purchase Orderer

Islamic Financial Transactions

Faizal Jaffar Omer Bin Thabet Huzaifa Baffa

To highlight key features and appropriate accounting treatments associated

Recognition and Measurement

Contract Definition Key conditions

Sale of goods at acquisition

Sale of specified goods at Price at which the

Promise to purchase may

Risk mitigation measure/ instruments

refund the deposit to customer under the non-binding promise

The amount paid by the customer (purchase orderer) to the seller.

2 Murabaha sale Murabah financing Equipment

4 Recognition of profit as each Deferred profit Profit &loss

6 Rebate for early payment Deferred profit Murabah financing

Upon acquisition of Assets:

With obligation : Assets should be measured at lower

Without Obligation: Assets should be measured at cash

Price discount if obtained after acquisition should

Income recognition of Murabaha financing assets

Principle of matching expenses with income is

Deferral profits (unearned) shall be offset against

Settlement amount is based on outstanding

An Islamic financial institution provides a

Murabaha 150000 120000 90000 60000 30000

You might also like