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The scope of this presentation comprises of two main parts;

- Basic Concepts, Modalities and Documentation of Murabaha
Transaction
- Process Flow of Murabaha Transaction
- Documentation

- Accounting Policies and Recording Procedure involved in Murabaha

transaction as per the requirements and guidelines of IFAS-1

- Accounting Policies
- Recording procedure and disclosure of Murabaha transaction
as per IFAS-1
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R
 is a kind of Sale whereby ³Cost´ as well as the ³Profit´ is

known to the Buyer and the Seller.

Payment of Murabaha price may be:

1) At spot
2) In installments
3) In lump sum after a certain time

Hence, Murabaha does not necessarily imply the concept of deferred

payment.

 



1. Client and the Bank sign an agreement to enter into Murabaha

through a Master Murabaha Financing Agreement (MMFA).

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2. Client appointed as an agent to purchase goods on the Bank¶s

behalf.

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3. Bank gives money to an agent/supplier for purchase of goods.

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]. The agent takes possession of goods on the Bank¶s behalf.

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M(a). Client makes an offer to purchase the goods from the Bank
through a declaration.

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M(b). Bank accepts the offer and sale is concluded / culminated.





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ï. Client pays agreed price to the Bank according to an agreed

schedule. Usually on a deferred payment basis (Bai Muajjal)

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There are two stages in Murabaha transaction:

‡ Investment Stage (Agency to Purchase)

‡ Financing Stage (Declaration to payment)

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‡ The profit for the Murabaha transaction shall be recognized after

the goods are sold by the bank to the customer.




There are a number of documents involved in a Murabaha

financing transaction. The most essential of these documents
are:

1) Master Murabaha Financing Agreement (MMFA)

2) Agency Agreement
3) Draw Down Notice
]) Summary Payment Schedule
M) Declaration
ï) Details of Assets




1) Master Murabaha Agreement

‡ Its an agreement between the client and the Bank whereby

the client agrees to purchase goods from the Bank from time
to time as per the terms and conditions of this Agreement.

‡ This is an over all facility agreement under which various

Sub-Murabahas may be executed from time to time.



2) Agency Agreement

‡ The client is appointed by the Bank as its agent to purchase goods.

This agreement needs to be signed once between the client and the
bank.
‡ The disbursement of funds is done under this Agreement.
‡ List of assets form part of the main Agency Agreement which
defines the assets that the client is authorised to by on behalf of the
bank acting as an agent.
3) Draw Down Notice
‡ These documents are required for each disbursement/Murabaha
tranche.
‡ Draw down notice must mention the amount.




]) Summary Payment Schedule

‡ Summary of Payment schedule should be finalized prior to

signing of declaration of Murabaha agreement.

M) Declaration (Offer & Acceptance document)

‡ Declaration is to be signed by the customer immediately
after the purchase of the goods by the customer.
‡ This document establishes the actual sale transaction, i.e.
transfer of ownership of goods from the Bank to the customer.
‡ At this stage the specific details of the assets must be known
i.e. quantity, quality, price etc.
‡ Proper timing of declaration is extremely important.




ï) List of Assets

‡This forms part of the declaration whereby details of the goods

purchased are disclosed.

‡ Purchase evidences to be attached with the details of assets as a

proof of purchased by the client as an agent of the Bank.

‡ The purchase evidences may includes the invoices, good

receiving notes, good delivery challans or any other suitable
evidence, preferably in the name of the Bank or in the name of
the client as an agent of the Bank.
 
 




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‡ Funds disbursed for purchase of goods are recorded as
µAdvance for Murabaha¶. On culmination of Murabaha i.e. sale of
goods to customers, Murabaha financings are recorded at the
deferred sale price net of profit.
S , Murabaha financings were recorded at the time of
disbursement of funds.
‡ Goods Purchased but remaining unsold at the balances sheet
date are recorded as inventories.
S  these were recorded as Advance against Future
Murabaha.
‡ Financing are stated net of specific and general Provisions
against non- performing financings, if any, which are charged to
the profit and loss account.
 
 







 
‡ Profit on Murabaha Financings is recognised on accrual basis.
Effective January 01, 200ï, profit on Murabaha transactions for
the period from the date of disbursement to the date of
culmination of Murabaha is recognised immediately upon the later
date.
Previously, profit on Murabaha was recognised from the date of
disbursement.
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Below is a brief summary of recording procedure of the Bank for
Murabaha transactions both post and pre adoption of ³| AS-1
Murabaha´.

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1) Murabaha Financings were recorded at 1) Funds disbursed for purchase of goods
the time of disbursement of funds. are recorded as µAdvance for Murabaha¶.
On culmination of murabaha i.e. sale of
goods to customers, Murabaha Financings
are recorded at the deferred sale price net
of profit payment.

2) Goods purchased but remaining unsold 2) Goods Purchased but remaining unsold
at the balance sheet date were recorded as at the balances sheet date are recorded as
µ
   
  | .

3) Profit for the Murabaha transaction was 3) Profit for the period from the date of
recorded from the date of disbursement. disbursement to the date of culmination of
murabaha is recognized immediately after
the date of culmination of Murabaha..
 

Below is the case study for the understanding of
Murabaha transactions carried out at Meezan Bank
in various scenarios:
j 
   

Purchase price/Cost/Principal 1,000

Profit Rate 10%
Tenure One year
Total profit on transaction 100
Sale price (Contract price) 1,100
Date of Disbursement to supplier/customer January 01,2007
Date of Culmination of Murabaha Transaction January 1M,2007
Date of Maturity of Murabaha December 31,
2007





  S   
!

 At the time of payment to the client for the purchase of goods on behalf of bank or
directly to the supplier by the bank the transaction will be accounted for as
follows:

  "#$""%
Dr Advance against Murabaha (B/S Asset side) 1,000
Cr Pay Order / Party Account (B/S Liability side) 1,000



$ At the  

 i.e. at the time of sale of goods
to the customers with signing of Declaration by the bank and the client
following entries would be passed:

  &#$""%
Dr Murabaha inancing 1,000
Dr Unearned Murabaha Profit Receivable 100
Cr Advance against Murabaha 1,000
Cr Deferred Murabaha |ncome 100
' Booking of Accrual of profit@ 10% from the date of disbursement to the date of
culmination, the following entry would be passed. [(1000 x 10%) x 15 / 365]:
  &#$""%

Dr Deferred Murabaha |ncome 4.10

Dr Murabaha Profit Receivable 4.10
Cr |ncome on Murabaha inancing 4.10
Cr Unearned Murabaha Profit Receivable 4.10

 

] Booking of Accrual of profit@ 10% for remaining days of the month,
the following entry would be passed. [(1000 x 10%) x 16 / 365]:
  '#$""%

Dr Deferred Murabaha |ncome 4.39

Dr Murabaha Profit Receivable 4.39
Cr |ncome on Murabaha inancing 4.39
Cr Unearned Murabaha Profit Receivable 4.39
And so on this entry will be passed at the end of EACH month till maturity for the
accrual of profit.
(     '#$""%

Murabaha receivable-gross 1,100

Less: Deferred Murabaha |ncome {100- (1000x10%x31/365)} (91.51)
Murabaha Profit Receivable shown in other assets (8.49)

   )
 #"""

 


& On Maturity of Murabaha transaction i.e. on December 31, 2007 and at the
time of receiving of final payment following entry would be passed:

'#$""%

Dr Party Bank A/c 1,100

Cr Murabaha inancing 1,000
Cr Murabaha Profit Receivable 100



(|      &#$""%  


 &#$""*!
 At the time of payment to the client for the purchase of goods on behalf of bank
or directly to the supplier by the bank the transaction will be accounted for as
follows:
  "#$""%

Dr Advance against Murabaha 1,000

Cr Pay Order / Party Account 1,000
+  &#$""%
,-
 

   '#$""%
No entry would be passed for accruals of profit, as Declaration has not been
received from the customer.



$ + 
 &#$""%# at the culmination of Murabaha i.e. at the time of sale
of goods to the customers with signing of Declaration by the bank and the client,
the following entries would be passed:

 &#$""%

Dr Murabaha inancing 1,000

Dr Unearned Murabaha Profit Receivable 100
Cr Advance against Murabaha 1,000
Cr Deferred Murabaha |ncome 100




' Booking of Accrual of profit@ 10% from the date of disbursement to the date of
culmination, the following entry would be passed. [(1000 x 10%) x (31+15)/ 365]:

 &#$""%

Dr Deferred Murabaha |ncome 12.60

Dr Murabaha Profit Receivable 12.60
Cr |ncome on Murabaha inancing 12.60
Cr Unearned Murabaha Profit Receivable 12.60



] Booking of Accrual of profit@ 10% for remaining days of the
month, the following entry would be passed. [(1000 x 10%) x 13 / 365]:

 $.#$""%
Dr Deferred Murabaha |ncome 3.56
Dr Murabaha Profit Receivable 3.56
Cr |ncome on Murabaha inancing 3.56
Cr Unearned Murabaha Profit Receivable 3.56
And so on this entry will be passed at the end of EACH month till maturity for the
accrual of profit.

,+/0! | 

   ,+/  #,+
0-
    

(     
 $.#$""%
Murabaha receivable-gross 1,100
Less: Deferred Murabaha |ncome{100- (1000x10%x(31+28)/365)} (83.84)
Murabaha Profit Receivable shown in other assets (16.16)

   )
 #"""




& On Maturity of Murabaha transaction i.e. on December 31, 2007 and at the
time of receiving of final payment following entry would be passed:

'#$""%

Dr Party Bank A/c 1,100

Cr Murabaha inancing 1,000
Cr Murabaha Profit Receivable 100
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If goods purchased for Murabaha remain unsold on the reporting

date they are shown as ³Murabaha Inventory´ in Other Assets.

ollowing are possible scenario:

1) Bank is holding assets for future sale to its customers against a
promise
2) The Goods are imported as Bank¶s agent and are not sold to the
importers i.e. they are in PAD
3) Any other reason due to which the goods remain unsold.
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