Professional Documents
Culture Documents
There
are three fundamentals for
Mudharabah financing, namely:
1. The two contracting parties, i.e. rab al-mal
(capital provider) and mudharib
(entrepreneur)
2. The subject matter of the Mudharabah, i.e.
capital, labour and profit; and
3. The offer and acceptance.
Accounting for Mudharabah Financing 3.2
8
Illustration of
Multilateral Mudarabah
C1 provides RM50,000 If loss is RM20,000
C2 provides RM50,000 C1 bears the loss of
RM10,000 and recover
PSR is 70:30, If profit is RM 40,000
RM40,000 capital
C1 recovers RM50,000 capital and shares
C2 bears the loss of
RM14,000 profit
RM10,000 and recover
C2 recovers RM50,000 capital and shares RM40,000 capital
RM14,000 profit
E2 shares RM12,000 profit
9
Illustration of Re-Mudarabah
CI provides RM100,000 If profit is RM40,000
PSR between C1 and E1 (intermediary) E2 shares profit of RM16,000 (40,000
is 70:30 x 0.4)
PSR between E1(intermediary) and E2 is E1 shares profit of RM 7,200 (40,000x
60:40 0.6x 0.3)
C1shares RM16,800 (40,000 x 0.6x0.7)
If loss is RM 20,000
C1 bears the loss of RM20,000 and
recover RM80,000 capital
10
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.
Recognition and Measurement of
Mudaraba Financing
Ifpayment 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.
Ifthe capital is in the form of non-monetary
assets such a plane or building then the heading
of non Monetary mudaraba asset.
Recognition and Measurement of
Mudaraba Financing
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.
Accounting issues on Mudarabah
ILLUSTRATION 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.
ILLUSTRATION RECOGNITION OF MUDARABA FINANCING
One-period Mudharaba
Example 2
Islamic Bank signed a mudharaba contract for $300,000 with Al nahda
company on January,1 2014. The $ $300,000 is to given to Al nahda in cash at
the date of contract.
The profit ratio sharing (PRS) is 60-40 between the Bank (Rabb al-Mal) and Al
nahda (Mudarib) respectively
The bank received the following payments from Al nahda company as follows:
Jan.15 : 100,000
Feb. 15: 70,000
Mar. 5: 100,000
Mar. 15: 80,000 and the parties agreed to end the Mudaraba successfully
Required: Journal entries in the books of Islamic Bank for the above
transactions .
:Solution
300,000Jan.1 : Dr. Mudharabah Financing
300,000 Cr. Cash
Profit Recognition
1. Realisation Method: according to Hanbali and Shafie is when the
revenue is earned i.e. after determining its costs
2. Distribution Method: according to Maliki it is realised upon
distribution between the two parties
20
Measurement of Mudaraba Capital at the end of the
financial year after contracting.
Is discouraged by fuqaha
Valued at fair value , any difference between fair value and book value goes
to the profit and loss
Any provision made for the decline in the value of Mudaraba assets should be
DISCLOSED in the notes to the accounts.
AAOIFI : Presentation and Disclosure of Mudarabah
Financing
Balance Sheet
Income statement
Mudarabah income XX
25
Accounting Problem
Bank Syariah 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 Mend 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?
Solution:
Each period method :