Murabahah Financing

Murabahah Financing
Definition
sale of goods at cost plus agreed mark up.
cost and mark-up need to be disclosed
Types
Murabahah
Murabahah to the Purchase Ordere
Principles
Cost of capital/financing should be disclosed
‘Usury free’ activities
Transparency of facilities
Right of orderer (customer) to have recourse to bank or cancel the contract.
Advance payment or deposit is allowed
Deposit / Prepayment
Hamish Jiddiyyah
Definition
amount paid by the orderer (customer) upon a request from the bank to make sure that the orderer is serious in his demand for the asset
Effect of cancelling
If the contract is binding
If contract is not binding
actual damage incurred by the bank should be reimbursed from hamish jiddiyyah.
If not enough to cover the damage, the balance is to be asked from the customer
to be returned to the customer
Urboun
Definition
an amount of money paid in advance to the bank
if conculededthe urboun will be retained by the bank
if the customer concludes the deal and takes the asset, the urboun will be treated as part of the price paid in advance,
Journal Entries
Recognition
Repayment received
Income recognition
Dr. Murabahah Financing
Cr. Cash
Cr. Unearned Income
Dr. Cash/Receivables
Cr. Murabahah Financing
Dr. Unearned Income
Cr. Profit and Loss
Measurement of Murabahah Asset upon Acquisition
With Obligation
Without Obligation
Lower of
historical cost
impaired value
not to over-value
prudence
protect the customer
cash equivalent value
reflect current value
protect bank/financier
To provide provision
(decline between cost and CEV)
Upon Acquisition
Upon Financing
face value
less: provision of doubtful debt
Income recognition
At time of contract
Method
Accrual basis
Cash basis
based on proportionate of profit
every end of the years
regardless cash received or not
only when cash is received
required the approval of SSB
Penalty
imposed on any procrastination (failure to repay) in payment
Value
1% - revenue
>1% - 3% - charitable fund
unless stated
Types
Murabahah
Murabahah to the Purchase Orderer
Stages
1. The Islamic bank buys the goods for Murabahah sale from the vendor and pays for the goods.
2.The vendor delivers the goods to the Islamic bank.
3.The Islamic bank enters into a Murabahah contract with customer and delivers the goods
4.The customer pays the goods (Price= Cost + Pre-determined mark-up) to Islamic Bank.
Stages
1.The customer orders the Islamic bank to purchase goods, which it promises to buy from the Islamic bank giving it some profit.
Nature
Three parties involved
Purchase Orderer / Customer
Bank
Seller/Vendor
2.The Islamic bank buys and pays for the goods from the vendor.
3.The vendor delivers the goods to the Islamic bank.
4.The Islamic bank executes a Murabahah contract of sale with the customer and delivers the goods.
5.The customer pays for the goods on an instalments basis to the Islamic bank.
Nature
Two parties involved
Bank
Customer
38