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Chapter 8. Accounting for Mudaraba Financing
.. ‫ وآﺧﺮون ﻀﺮﺑﻮن ﺑﺎﻷرض ﺒﺘﻐﻮن ﻣﻦ ﻓﻀﻞ ﷲ‬:
“others traveling through the land, seeking Allah’s bounty” (Al Muzzamil, 73:20).
ً‫روي أن اﻟﻌﺒﺎس ﺑﻦ ﻋﺒﺪ اﻟﻤﻄﻠﺐ إذا دﻓﻊ ﻣﺎﻻً ﻣﻀﺎرﺑﺔ اﺷﺘﺮط ﻋﻠﻰ ﺻﺎﺣﺒ أن ﻻ ﺴﻠﻚ ﺑ ﺑﺤﺮا‬
‫وﻻ ﻨﺰل ﺑ واد ﺎ ً وﻻ ﺸﺘﺮي ﺑ ذات ﻛﺒﺪ رطﺒﺔ ﻓﺈن ﻓﻌﻞ ﻓ ﻮ ﺿﺎﻣﻦ ﻓﺮﻓﻊ ﺷﺮط إﻟﻰ رﺳﻮل ﷲ‬
..‫ﺻﻠﻰ ﷲ ﻋﻠ وﺳﻠﻢ ﻓﺄﺟﺎزه‬
It was reported that Al Abbas bin abd Almuttalib used to pay money for Mudaraba and to stipulate the
mudarib that he should not travel by sea, pass by valleys or trade in livestock, and that the mudarib
would be liable for any loses if he did so. These conditions were brought before Prophet Mohamed and
he approved them.(Al Bayhaqi 6/111).
Chapter
8
CHAPTER LEARNING OBJECTIVES:
At the end of this chapter you will, insha Allah you will be able to:
i.
ii.
iii.
iv.
v.
Explain the meaning of mudaraba and how this contract is used
by Islamic banks to finance customers
List the principles of mudaraba and as well as the rules explain the
shari’a rules.
Journalise accounting entries for mudaraba.
Prepare the balance sheet and income statement extracts for
mudaraba transactions
Apply shari’a and accounting principles as per FAS 3 to solve
accounting problems for complex events.
8. 1 Introduction
In this chapter, we study mudaraba, a unique labour-capital partnership, which was
the cornerstone alternative to interest based banking, advocated by early Islamic
economists such as Dr Nejatullah Siddiqui. Although, Islamic banks have failed to use
this instrument widely on the asset side for financing customers, Islamic banks uses
this contract on the liability side to attract deposits through investment accounts.
Although the original mudaraba contract envisaged the capital investor as one party
and the businessman as the party, banks use a two tier mudaraba, where the first tier
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Chapter 8. Accounting for Mudaraba Financing
is between the depositor (as the capital owner) and the bank as the mudarib
(businessman). However, since the bank itself does financial intermediation only and
does not actually carry out the business, it re enters into a another mudaraba contract
with an actual businessman or company. This is not a problem under the shari’a
provided the two contracts are not linked and the depositor does not prohibit the bank
from re-mudaraba.
We shall first define mudaraba and explain how it is used by the bank for financing and
deposit mobilization. Next we delve into some of the fiqh rules regarding mudaraba.
This should be borne in mind when recording transactions, allocating profits and
valuing assets and liabilities. We then consider recognitions issues and the associated
journal entries for recording transactions and events up to the income statement and
balance sheet. Finally, we illustrate with examples and then leave you to the
questions.
8.2 Definition and financing model of mudaraba
Mudaraba is a partnership, in which one or more parties (Rab al mal or sahibul mal)
who provide the capital , contract with another party (the mudarib) who provide the
labor, management expertise or entrepreneurship. This can take several forms:
(i)
Bilateral mudaraba , where there is one capital provider and one
entrepreneur (can be an organization such as an Islamic bank.
RAB AL MAL
(CAPITAL
PROVIDER)
ISLAMIC BANK
(MUDARIB)
INVESTMENT
The distinguishing feature of any mudaraba is that :
(i)
the profit sharing ratio between the rab al mal and the mudarib (Islamic
bank) is agreed beforehand.
(ii)
Any losses, other than those incurred due to negligence or
mismanagement of the mudarib is borne by the rab al mal, the mudarib
looses his labour as he is not paid any salaries or fee. This introduces
agency problems to the rab al mal (Obiyatullah, 1998??)
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Chapter 8. Accounting for Mudaraba Financing
ILLUSTRATION 8-1:
BILATERAL MUDARABA
RM
$200,000
INVESTMENT
MU
70:30
(70%)
$24,000(30%)
$56,000(70%)/ ($80,000) (100%)
PROFIT(loss)=
$80,000/( $80,000)
If Rabbul Mal (RM) invested $200, 000 with Mudarib (MU) in the profit sharing ratio of
70:30 (70% to RM and 30% to MU), then if the investment results in a profit of
$80,000, then the mudarib will get 30% i.e. $24,000 (30%x $80,000) and the Rab al
Mal will get $56,000 (70% x $80,000).
However, if the investment resulted in a loss of $80,000 instead, then all this loss of
$80,000 will be borne by the rab al mal will , unless the mudarib was negligent.
(ii)
Multilateral mudaraba, where there are at least two capital providers and
one entrepreneur
RAB AL MAL 1
(CAPITAL
PROVIDER)
ISLAMIC BANK
(MUDARIB)
INVESTMENT
RAB AL MAL 2
(CAPITAL
PROVIDER)
In this case, where there are profits, after the bank gets its share, the rabs al mal are
allocated the profits in according to their capital. In the case of Islamic banks, there
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Chapter 8. Accounting for Mudaraba Financing
are many investment account holders (rabs al mal) and profit allocation can become
complex especially when the rabs al mal do not have coterminus contracts with the
bank i.e they invest for different periods of time.
ILLUSTRATION 8-2:
MULTILATERAL MUDARABA
RM 1:
$100,000
INVESTMENT
70:30
MU
RM 2:
$100,000
24,000/ ($0)
$28,000/($20,000)
PROFIT(loss)=
$80,000 ( $40,000)
$28,000/($20,000)
In the chart above, two rabs al mal invest $100,000 each with mudarib (MU) who
invests it. The profit sharing agreement between the rabs al almal and the mudarbib
being 70:30. If the ventures returns a profit of $80,000, then the mudarib gets
(30%x$80,000), $24,000 and the rabs al mal share $56,000. This amount is allotted
between RM1 and RM2 in proportion to their capital investment i.e 1:1 in this case,
therefore they each get $28,000
If the loss is $40,000, then RM1 bears $20,000 and RM2 bears $20,000. The mudarib
looses his labour, if the mudarib has NOT been negligent.
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Chapter 8. Accounting for Mudaraba Financing
(iii)
Re mudaraba where, the entrepreneur sources and hires another mudarib
under a another mudaraba contract. This is the
RAB AL MAL
(CAPITAL
PROVIDER)
ENTREPRENUER
(MUDARIB 2)
ISLAMIC
BANK
INVESTMENT
ILLUSTRATION 8-3:
RE MUDARABA
RM =$100,000
70:30
MU 1
$9,000/($0)
60:40
INVESTMENT
MU 2
$20,000/($0)
PROFIT(loss)=
$50,000/( $30,000)
$21,000/($30,000)
Rabbul Mal (RM) provides $100,000 capital to Mudarib (MU1) with PSR 70:30. This is in
turn handed over to Mudarib 2 (MU2)with profit sharing ratio 60:40. If the venture earns a
profit of $50,000, then MU2 gets 40% of $50,000= $20,000, M1 gets
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Chapter 8. Accounting for Mudaraba Financing
30%x60%x$50,000=$9,000 and the rab al mal gets 70%x60%x$50,000=$21,000.
However, if the investment results in a loss of $30,000, this loss is borne by the rab al mal.
Definitions
Mudaraba
It is a partnership in profit between capital and work. It may be conducted
between investment account holders as providers of funds and the Islamic
bank as a mudarib. The Islamic bank announces its willingness to accept the
funds of investment amount holders, the sharing of profits being as agreed
between the two parties, and the losses being borne by the provider of funds
except if they were due to misconduct, negligence or violation of the
conditions agreed upon by the Islamic bank. In the latter cases, such losses
would be borne by the Islamic bank. A Mudaraba contract may also be
concluded between the Islamic bank, as a provider of funds, on behalf of itself
or on behalf of investment account holders, and business owners and other
craftsmen, including farmers, traders etc. Mudaraba differs from what is known
as speculation which includes an element of gambling in buying and selling
transactions.
Unrestricted Investment Accounts(1)
With this type of account, the investment account holder authorizes the Islamic
bank to invest the account holder’s funds in a manner which the Islamic bank
deems appropriate without laying down any restrictions as to where, how and
for what purpose the funds should be invested. Under this arrangement the
Islamic bank can commingle the investment account holder’s funds with its
own funds or with other funds the Islamic bank has the right to use (e.g.,
current accounts). The investment account holders and the Islamic bank
generally participate in the returns on the invested funds. (Statement of
Concepts,
Restricted Investment Accounts (1)
With this type of account, the investment account holder imposes certain
restrictions as to where, how and for what purpose his funds are to be
invested. Further, the Islamic bank may be restricted from commingling its own
funds with the restricted investment account funds for purposes of investment.
In addition, there may be other restrictions which investment account holders
may impose. For example, investment account holders may require the Islamic
bank not to invest their funds in instalment sales transactions or without
guarantor or collateral or require that the Islamic bank itself should carry out
the investment itself rather than through a third party.
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Chapter 8. Accounting for Mudaraba Financing
8.3 Mudaraba principles, rules and complexities
Offer and acceptance
Capital:
As with other Islamic contracts, the
mudaraba contract must be preceded by
offer and acceptance Both the parties , the
fund provider and the mudarib should be
eligible to act as principal and agent
(contracting capacity).
Specific amount and type (currency).
Normally in cash but can be in inventory.
In such case, the historical cost or value of
such assets should be considered as
mudaraba capital. Hanbalis allow nonmonetary assets.
Cannot be in the form of debt as this is not
readily available (even if the debt is owed
by the mudarib).
Capital must be paid to the mudarib. The
contract can allow payment by installments.
The wording of the offer and acceptance
must indicate the purpose of the contract,
explicitly or implicitly. There should be no
counter offer i.e. the party must accept of
the same conditions as the conditions of
the offer.
The contract can be verbal or in writing but
in practice is invariably written. It can be
concluded through correspondence or by
fax.
Profit
Sharing
Ratio
should
be
determined at the time of contracting.
PSR can be adjusted
subsequently.
Profit is the amount earned in excess of
the amount of the initial murabaha
capital. No revaluation of capital is
permitted.
Capital provider bears all the loss
unless due to trespass or omission by the
mudarib
No work interference by capital
Provider (Hanbalis permit this)
The entrepreneur should comply with
shari’a rules and any conditions imposed
unless these contradict the mudaraba
contract.
Can be limited to a period.
The entrepreneur should comply with
capital provider’s instructions
No guarantee of recovery of fund
except for betrayal guarantee.
( performance bond) or a third party
guarantee.
Distribution Method:
According to Maliki it is realised upon
distribution between the two parties
Profit can be on a realization or cash
basis. (recognized when distributed or
losses deducted from capital or when
declared.
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Chapter 8. Accounting for Mudaraba Financing
8.4 Recognition of mudaraba transactions and journal entries
Accounting issues on Mudaraba
•
•
•
•
Recognition of Asset and Liability
Recognition of Profit/ Income or Loss/ Expense
Valuation of Asset
Disclosure
8.4.1 Recognition and Measurement of Mudaraba Financing
FAS 3, Mudaraba Financing is a standard for the provision of mudaraba financing by
the Islamic bank and does not deal with the deposit side of receiving the funds on
mudaraba basis. However, in this chapter we will consider both.
When the capital is paid to the mudarib or placed in his disposition (for example,
credited to his account) then Mudaraba financing capital is recognized by debiting
Mudaraba Financing and crediting cash.
If the capital is paid in installments, each installment is recognized as capital when
paid.
If payment of capital is conditional of an occurrence of a future event or delayed to a
future time, capital is recognized only when it is paid to the mudarib.
If the capital is in the form of non-monetary assets such a plane or building then the
heading of “non Monetary mudaraba asset.
If capital provided by the Islamic bank is in kind (trading assets or non-monetary
assets), the capital shall be valued at fair value of the assets. Any difference between
fair value and book value shall be recognized as profit or loss to the bank.
Expenses of contracting procedures such as feasibility studies are not considered
mudaraba capital unless specifically agreed.
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Chapter 8. Accounting for Mudaraba Financing
ILLUSTRATION 8-5:
RECOGNITION OF MUDARABA FINANCING
Bahrain Islamic Bank executes a mudaraba contract for $1,000,000 with Babul
Bahrain constructions on 1 Muharram 1428. The feasibility study and legal
expenses cost the bank $50,000 and was paid by the Bank. The $1,000,000 is to
given to babul Bahrain constructions for their use in the mudaraba as follows:
1 Muharram 1428: $200,000 cash +$300,000 (fair value) of a crane which was used
for ijarah purposes by the bank in a previous assets with a book value of $400,000.
1 Safar 1428: $200,000 fair value of construction materials which was left over from
terminated istisna contract, the carrying value was $150,000.
1 Jamada I, : $300,000 in cash.
Required: Journal entries in the books of Bahrain Islamic Bank for the above
transactions which were executed as scheduled.
ANSWER:
Muharram 1
Dr Mudaraba Financing
Non-Monetary Mudaraba Asset
Loss on Crane (P/L account)
$200,000
$300,000
$100,000
Cr. Cash
Cr Assets on Ijarah
$200,000
$400,000
Being initiation of mudaraba contract with Babul Bahrain Constructions.
Safar 1
Dr. Mudaraba Financing
$200,000
Cr. Istisna work in progress
$150,000
Cr Profit and Loss
50,000
Being transfer of construction materials as capital to Babul Bahrain constructions at
a fair value of $200,000.
Jamada 1
Dr. Mudaraba Financing
Cr Cash
Being payment of last installment of capital.
$300,000
$300,000
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Chapter 8. Accounting for Mudaraba Financing
8.4.2 Measurement of Mudaraba Capital at the end of the financial year after
contracting.
Mudaraba capital should not be revalued subsequent to the execution of contract
but should be at initial carry value except for any repayment of capital which
should be de/ducted from the Mudaraba Financing Account. However, if a partial
loss of the capital occurs (e.g. theft or fire) before the work on the mudaraba is
started (and this is NOT caused by negligence of the mudarib., this should also be
deducted from mudaraba financing account and debited to pofit and loss account.
If the whole of the mudarba capital is lost, (not due to mudraibn then the Islamic
bank must bear the loss, and terminate the mudarba contract. Any unpaid
amounts remaining becomes a receivable of the bank from the ex mudarib.
8.4.3. Recognition of the Islamic bank’s share in the profit and losses
If a mudaraba starts and finishes within the financial year of the bank, profit
and losses (bank’s share) should be recognized by the bank in that financial
year.
If a mudraba transaftion carries on after the financial year end, the profit or losses
should be recognized in the accounts for that period. To the extent that profits are
distributed. The Islamic Bank’s share of losses should be recognized to the extent
such losses are deducted from the Mudaraba capital.
If the mudraba is terminated or settlement is made and the mudarib has not paid
the profits to the bank, this will be treated as a receivable from the mudarib.
Losses due to liquidation is recognized at the time of liquidation by reducing the
Mudaraba capital.
ANY MISCONDUCT OR NEGLIGENCE OF THE MUDARIB RESULTING IN
LOSSES WILL BE BORNE BY THE MUDARIB AND IT BECOMES A
RECEIVABLE DUE FROM THE MUDARBIB.
Any provision made for the decline in the value of Mudaraba assets should be
DISCLOSED in the notes to the accounts.
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Chapter 8. Accounting for Mudaraba Financing
8.4.3 Journal Entries: Summary
No.
1
Transactions /Events
Cash
Recognition
of
Mudarabah
Deposit
(Liability)
(Being deposit received from
RabbulMal / Capital provider)
DR
CR.
Mudaraba Deposit
Cash
Withdrawal of deposit
Mudarabah Deposit
2
(Being deposit repaid to
Rabbul Mal/ Capital provider)
Provision of Mudaraba financing Mudarabah Financing Cash
3
to Mudarib
Asset
Non-Monetary assets provided Non Monetary
3a
on Mudaraba
Mudaraba Assets
4
5.
6
Profit received from mudarib
Cash
Profit disbursed to rabul malz P & L
Loss set off against rab al mal P&L
Cash
Repayment of mudaraba capital
to the bank.
Profit and Loss
Cash
Mudarabah Financing
Mudaraba Financing
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Chapter 8. Accounting for Mudaraba Financing
8.5 Asset and Liability measurement
AAOIFI : presentation and disclosure of Mudarabah Financing
Balance Sheet
Mudaraba Financing
( Non Monetary Mudarabah Asset)*
Less : Provision for decline
in value of mudaraba Assets
Net Mudarabah Financing
XX
(XX)
XX
*Jointly or self finance assets
Income statement
Mudarabah income
XX
8.6 Accounting Problem
Bank Syari’ah Malaysia Berhad contributed $2,000,000 for a four-year Mudaraba
financing contract (Mudarabah Muqayaddah) at the profit sharing ratio of 2:1
between the Bank (Rabb al-Mal) and Ihsan Corporation (Mudarib) respectively.
Assume that the venture incurred a loss of $150,000 in the first year; realized profit
of $375,000 in the second year; incurred a loss of 250,000 in the third year; and
realized profit of $350,000 in the fourth year.
Required:
(a)
Prepare the necessary journal entries to recognize asset and profit/loss of the
above transactions, and show how profit/loss will be allocated between the
Bank, and the Mudarib will appear in the respective income statements at the
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Chapter 8. Accounting for Mudaraba Financing
end of first, second, third and fourth year, if the profit of Mudarabah is
determined at the end of:
(i) each period
(ii) at the end of the contract
(b)
Comment on the impacts different basis of profit allocation (i.e. each period
vs. end of the contract) on the income of the Bank and the Mudarib.
(c)
What are the different forms and types of Mudarabah contracts?
(IIUM B.Acc, semester 2, 2004/2005, Q1)
Solution:
Each period method :
Year 0: Dr. Mudharabah Financing
Cr. Cash
2,000,000
2,000,000
Year 1: Dr.Profit and Loss
Cr. Mudharabah Financing
( loss in 1st year )
150,000
Year 2 : Dr. Cash / Receivable (2/3 x 375,000)
Cr. Profit and Loss
(Profit in 2nd year )
250,000
Year 3 : Dr. Profit and Loss
Cr. .Mudharabah Financing
( loss in 3rd year )
250,000
Year 4 : Dr. Cash / Receivable (2/3 x 375,000)
Cr. Profit and Loss
(profit in 4th year )
233,333
Dr. Cash / Receivable
Cr. Mudharabah Financing
( Capital repayment , year 4 )
150,000
250,000
250,000
233,333
1,600,000
1,600,000
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Chapter 8. Accounting for Mudaraba Financing
End of contract Method:
Year 1: Dr. Mudharabah Financing
Cr. Cash
2,000,000
2,000,000
Year 4 : Dr. Cash / Receivable
Cr. Mudharabah Financing
2,000,000
2,000,000
Profit / Loss
Year 1
Year 2
Year 3
Year 4
( 150,000)
375,000
( 250,000)
350,000
325,000
Bank 2/3
216,667
Mudharib 1/3 108,333
Year 4 : Dr. Cash / Receivable
Cr. Profit and Loss
216,667
216,667
Comparison between the different methods:
Each Period
Income Statement:
Year 1
Year 2
Year 3
Year 4
Bank
(150,000)
250,000
(250,000)
233,,333
Mudarib
0
125,000
0
116,667
Total
83,333
241,667
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Chapter 8. Accounting for Mudaraba Financing
End of contract :
Year 4
Bank
Mudharib
216,667
108,333
Comments
Different method ( end of contract vs. Each period ) will lead to different amount
of income recognized by both the Rabbul-Mal and Entrepreneur.
For each period, loss during the contract will borne by Rabbul Mal, thus reduced
total profit. Mudharib only earned profit not loss (protect Mudharib) may
lead to moral hazard.
For end of contract ,loss will be absorbed by profit, some argued not true
Murbahah, some others argued that we should consider it as a project
basis.
Method of profit recognition must be transparent to both parties at the beginning
of the contract to avoid abuse by one party over the other.
Different forms of Mudharabah
Mudharabah Muqayaddah (restricted Investment) vs. Mudharabah Mutlaqah
(unrestricted investment )
Simple (1 tier Mudharabah)
Multilateral ( 2 tiers Mudharabah )
Re-Mudharabah ( 3 parties involved )
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Chapter 8:Accounting for Mudaraba Financing
Question
CIPA Multiple Choice
Questions
.
The following is a hypothetical example of the Total Assets as presented in the
financial statements of Bank Al-Iman. Questions 1-5 follow.
Bank Al-Iman
Consolidated Statement of Financial Position (extract)
as at 31 December, 2005
2005
US$
__________
Assets:
Cash and cash equivalent
Sales receivables
Investments:
Investment securities
Mudaraba financing
Musharaka investments
Participations
Inventories
Investment in real estate
Assets for rent
Istisna’a
Total investments
Other assets
Fixed assets (net)
Total assets
146,323,796
4,680,445
29,850,000
10,000,000
5,000,000
205,000,000
2,000,000
130,250,000
183,500,000
1,000,000
__________
566,600,000
15,832,000
50,940,500
__________
784,376,741
__________
1. The Mudaraba Financing as provided in the above extract of Consolidated
Statement of Financial Position suggests the following contractual relationship:
a) Bank Al-Iman has mobilized deposits on a Mudaraba basis and manages the funds in the best
interest of the Mudaraba equity holders.
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Chapter 8:Accounting for Mudaraba Financing
b) Bank Al-Iman has entered into projects as the provider of capital during the year 2005 and it
is not clear whether the funds are sourced from their shareholders’ capital or from Mudaraba
investors.
c) Bank Al-Iman has entered into a parallel Mudaraba contract between Mudaraba investors and
project managers and hence plays the role of capital provider on the one hand and funds
manager on the other hand.
d) All of the above is true.
2. When an Islamic bank undertakes a contract of Mudaraba to finance a project
submitted by a client, the following rules will apply except:
a) The bank can pre-agree upon signing the contract the profit sharing ratio between the bank
and the client.
b) The bank can set a minimum rate of return in the contract which the client will guarantee.
c) The bank will agree to bear all losses provided it is not resultant of the client’s negligence.
d) The bank will not interfere in the administration and management of the project or
venture but expect a periodic status report to be prepared by the client.
53. Bank Al-Hakim enters into a Mudaraba contract with Ms. Lily as Mudarib,
where the bank agrees to provide the full capital required for the enterprise.
However, as part of the terms of the contract, the bank contributes 70% of the
capital in cash for the enterprise and the remaining 30% will be set off by way of
Muqassah from an existing debt due by Ms. Lily to be settled in 6 months’ time. Is
this contract valid?
a) Yes, as long as the debt is measured at fair-value and equals the 30% required for the capital
and that both parties agree to the set-off arrangement.
b) No, because there are reciprocal obligations.
c) No, because debt is not allowed as capital of Mudaraba contracts.
d) None of the above is true.
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Chapter 8:Accounting for Mudaraba Financing
Question 8-1
Bank Muamalah Berhad (rabb al-mal) entered into a restricted
Mudaraba contract on the 1st. of January 2003 with Jaya Sdn. Bhd.
(mudarib) to provide $500,000 capital. Jaya Sdn. Bhd. is a specialist
personal computer distributor in Malaysia used the whole amount of
capital to purchase 250 units of computer on the 1st of February 2003. At
the time of the contract, the computer has a fair value of $600,000. The
mudarib sold all the 250 computers during the year 2003 for the total
income of 700,000. Later in the same year, Jaya Sdn.
Bhd. bought another 200 computers at $400,000 and
sold it before the end of the year at $500,000.
Profit sharing as agreed at the beginning of the contract
between Bank Muamalah Bhd. and Jaya Sdn. Bhd. was
at the ratio of 70% and 30% respectively.
You are required to:
Determine the profit of the Bank Muamalah Bhd. at the end of 2003 if the
mudaraba goods (i.e. computers) are valued at:
i.
Historical cost.
ii.
Fair value.
(IIUM B.Acc, semester 1, 2003/2004, Q1a)
Question 8-2
In the year 2004, Bank Muslimin Berhad earned annual profit attributable to Mudaraba
depositors (Mudaraba Mutlaqah) amounting to $ 950,000. Depositor’s profit sharing
ratio under Mudaraba deposit account is currently at 0.7 (70:30 – Depositors:Bank). The
following is the information pertaining to deposit types, average balance, and the
weights used for Mudaraba deposit account in the Bank for the year 2004:
1.
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Chapter 8:Accounting for Mudaraba Financing
Deposit Types
6 months & less
9 months & less
12 months & less
More than 12 months
Average Balance
in Year 2004
250,000
300,000
400,000
550,000
1,500,000
Weights
0.5
0.75
1.0
1.25
You are required to compute and determine:
i. Weighted average balance for each deposit types;
ii. Depositor’s share of profit based on the weighted average balance; and,
iii. Depositors rate of return for each deposit types.
2. Bank Syari’ah Malaysia Berhad earns a gross profit for the year 2004 on
Mudarabah al-Mutlaqah investment fund amounted to $1,500,000. During
that year the overhead expenditure incurred was $450,000 and indirect
revenue earned through the penalty fee of late payment for Islamic financing
was amounted to $280,000.
Which method of profit distribution policy that you think the Bank may
adopt, assuming other variables remain constant?
(IIUM B.Acc, Resit semester 3, 2004 / 2005, Q1 b & c)
Question 8-3
A.
An Islamic bank bought goods for $100,000 and it entered into a
Mudarabah contract with a client in which the goods were the mudarib
capital. At the time of the contract, the goods had a fair value of
$110,000. the Mudharib (client) sold the goods for $120,000
i.
During the same year, the mudharib bought another
consigmnet of goods at $120,000 and sold it for $130,000.
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Chapter 8:Accounting for Mudaraba Financing
ii.
Profit is allocated between the Islamic Bank and the Mudharib
at the ratio of 70% to 30% respectively.
Required:
Determine the profit of the Islamic Bank if the Mudharabah goods are
valued at:
i.
ii.
Historical cost
Fair value
B.
An Islamic bank paid $100,000 for a two-year Mudharabah contract .
Profit is shared in the ratio of 2 : 1 between the Islamic Bank and the
Mudharib, respectively.
Assume that the Mudharabah :
i.
ii.
Realised a profit of $9,000 in the first period
Incurred a loss of $21,000 in the second period.
Required:
Show how the profit to be allocated between the Islamic bank and the
Mudharib will appear in their respective financial statements at the end of
the first and second period if the profit of the Mudharabah is determined
at the end of:
i. Each period
ii.The contract
(AIA, Professional Examination II, 2002, Q 5)
Question 8-4
Bank Shari’ah Malaysia Berhad contributed $2,000,000 for a fiveyear Mudaraba contract (Mudarabah Muqayaddah) for property
(a)
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Chapter 8:Accounting for Mudaraba Financing
development project to Shah Alam Sdn. Bhd. The profit sharing ratio
agreed by both parties is 2:1 between the Bank (Rabb al-Mal) and Shah
Alam Sdn. Bhd. (Mudarib) respectively. The project incurred loss of
$120,000 in the first year; realized profit $375,000 in the second year;
realized profit of $450,000 in the third year; incurred loss of $220,000 in
the fourth year; and realized profit of $250,000 in the fifth year.
Required :
(i)
Prepare the extract of necessary journal entries to recognize asset and
profit/loss of the above transactions based on the income recognition
method determined at the end of each period.
(ii)
Show how profit to be allocated between the Bank, and the Mudarib
will appear in the respective income statements from year 1 to year 5,
if the profit of Mudaraba is determined at the end of:
• Each period
• The contract
(iii) Comment on your answer to part (ii) above.
(IIUM B.Acc, semester 1, 2005/2006, Q1a)
Question 8-5
Abdullah bin Ahmad has entered into a Mudaraba contract with Bank
Syariah Berhad in which he provides monetary capital of $500,000 to be
managed and invested by the Bank. The Bank provides Al-Mudharabah
Moqayadah investment account facility to Abdullah whereby the Bank
will invest in a specific project as agreed by the client. For this project
there are two other investors, Hashim and Ibrahim who have invested
$500,000 and $200,000 respectively. The profit sharing between four of
them is 5:5:2:2 for Abdullah, Hashim, Ibrahim, and the Bank
respectively. The Bank has entered into another Mudaraba contract (ReMudaraba) with Ihsan Development Berhad to undertake manufacturing
project and they agreed on the profit sharing ratio of 70:30 (Bank: Ihsan).
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Chapter 8:Accounting for Mudaraba Financing
You are required to dete$ine the profit or loss to be shared at the end of
the contract by the five parties involved above if:
Profit $550,000 ; or
Loss $350,000.
Question 8-6
(a)
(IIUM B.Acc, semester 2, 2002/2003, Q1a)
In the year 2005, Bank Ummah earned annual profit attributable to
Mudaraba depositors (Mudaraba Mutlaqah) after distributing profit to the
Bank amounting to $ 9,500,000. Depositor’s profit sharing ratio under
Mudaraba deposit account is currently at 0.7 (70 : 30 – Depositors : Bank).
The following is the information pertaining to deposit types, average
balance, and the weights used for Mudaraba deposit account in the Bank
for the year 2005:
Deposit Types
6 months & less
9 months & less
12 months & less
More than 12 months
Average Balance
in Year 2005
25,000,000
30,000,000
40,000,000
55,000,000
150,000,000
Weights
0.50
0.75
1.0
1.25
You are required to compute and determine:
i.
ii.
iii.
(b)
Weighted average balance for each deposit types.
Depositor’s share of profit based on the weighted average balance.
Depositors rate of return for each deposit types.
Based on the depositors rate of return as computed in part (a) above,
determine the profit attributable to the following depositors in the
Mudarabah General Investment Account of Bank Ummah:
i.
Ahmad bin Abdullah who invested $500,000 for the duration of 5
months.
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Chapter 8:Accounting for Mudaraba Financing
ii.
iii.
(c)
Chong Kok Seng who invested $420,000 for the duration of 12
months.
Sulaiman bin Muhamad who invested $230,000 from 1st. January
2005 to 15 August 2005.
Explain the disclosure requirements of MASB FRSi-1 on the following
issues:
i.
Profit Distribution Policy (4 Marks)
ii. Going Concern (4 Marks)
iii. Earnings or Expenditure Prohibited by Syari’ah (3 Marks)
(IIUM B.Acc, semester 2, 2005/2006, Q1)
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