1. Islamic Financial Accounting Standard-1
Murabaha
Interpretation and Implementation
Effective date January 1, 2006
Ahmed Ali Siddiqui
Vice President & Manager
Product Development & Shariah Compliance
Meezan Bank Limited

2. Scope of Presentation
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

3. Introduction
Murabaha is a kind of Sale whereby “Cost” as well as the “Profit” is known to the Buyer and the Seller.
Payment of Murabaha price may be:
1) At spot
In installments
In lump sum after a certain time
Hence, Murabaha does not necessarily imply the concept of deferred payment.

4. Process Flow Murabaha Financing
1. Client and the Bank sign an agreement to enter into Murabaha through a Master Murabaha Financing Agreement (MMFA).
Agreement to Murabaha
Bank
Client

5. Process Flow Murabaha Financing
2. Client appointed as an agent to purchase goods on the Bank’s behalf.
Agreement to Murabaha
Bank
Client
Agency
Agreement

6. Process Flow Murabaha Financing
3. Bank gives money to an agent/supplier for purchase of goods.
Disbursement to the agent or supplier
Agency
Agreement
Supplier
Agreement to Murabaha
Bank
Client

7. Process Flow Murabaha Financing
4. The agent takes possession of goods on the Bank’s behalf.
Transfer of Risk
Delivery of goods
Vendor
Bank
Agent

8. Process Flow Murabaha Financing
5(a). Client makes an offer to purchase the goods from the Bank through a declaration.
Offer to purchase
Bank
Client

9. Process Flow Murabaha Financing
5(b). Bank accepts the offer and sale is concluded / culminated.
Murabaha Agreement +
Transfer of Title
Bank
Client

10. Process Flow Murabaha Financing
6. Client pays agreed price to the Bank according to an agreed schedule. Usually on a deferred payment basis (Bai Muajjal)
Payment of Price
Bank
Client

11. Stages in Murabaha Financing
There are two stages in Murabaha transaction:
Investment Stage (Agency to Purchase)
Financing Stage (Declaration to payment)
Profit Recognition in Murabaha
The profit for the Murabaha transaction shall be recognized after the goods are sold by the bank to the customer.

12. Murabaha Documentation
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)
Agency Agreement
3) Draw Down Notice
Summary Payment Schedule
Declaration
Details of Assets

13. Murabaha Documentation
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.

14. Murabaha Documentation
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.

15. Murabaha Documentation
4) Summary Payment Schedule
Summary of Payment schedule should be finalized prior to signing of declaration of Murabaha agreement.
5) 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.

16. Murabaha Documentation
6) 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.

17. Accounting Policy for Murabaha
IFAS 1 - Murabaha

18. Transaction Recording
Accounting Policy for Murabaha
Transaction Recording
Funds disbursed for purchase of goods are recorded as ‘Advance 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.
Previously, 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.
Previously 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.

19. Revenue Recognition Accounting Policy for Murabaha
Profit on Murabaha Financings is recognised on accrual basis. Effective January 01, 2006, 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.

20. Reason for Change in accounting Policy
Below is a brief summary of recording procedure of the Bank for Murabaha transactions both post and pre adoption of “IFAS-1 Murabaha”.
Pre-adoption
1) Murabaha Financings were recorded at the time of disbursement of funds.
2) Goods purchased but remaining unsold at the balance sheet date were recorded as ‘Advance against future Murabaha’.
3) Profit for the Murabaha transaction was recorded from the date of disbursement.
Post-adoption
1) Funds disbursed for purchase of goods are recorded as ‘Advance 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 at the balances sheet date are recorded as Inventories.
3) Profit for the period from the date of disbursement to the date of culmination of murabaha is recognized immediately after the date of culmination of Murabaha..

21. Case Study for Murabaha
Below is the case study for the understanding of Murabaha transactions carried out at Meezan Bank in various scenarios:
Example
Amount in Rs./%
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 15,2007
Date of Maturity of Murabaha
December 31, 2007

22. Dr Advance against Murabaha (B/S Asset side) 1,000
Scenario-A
A-When there is bullet payment of profit and Cost (Principal) at the end of the period:
1) 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:
January 01, 2007
Dr Advance against Murabaha (B/S Asset side) 1,000
Cr Pay Order / Party Account (B/S Liability side) 1,000

23. Dr Unearned Murabaha Profit Receivable 100
Scenario-A
2) 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
following entries would be passed:
January 15, 2007
Dr Murabaha Financing 1,000
Dr Unearned Murabaha Profit Receivable
Cr Advance against Murabaha 1,000
Cr Deferred Murabaha Income
3) Booking of Accrual of 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 Income
Dr Murabaha Profit Receivable
Cr Income on Murabaha Financing
Cr Unearned Murabaha Profit Receivable

24. Scenario-A-continued
4) Booking of Accrual of 10% for remaining days of the month,
the following entry would be passed. [(1000 x 10%) x 16 / 365]:
January 31, 2007
Dr Deferred Murabaha Income
Dr Murabaha Profit Receivable
Cr Income on Murabaha Financing
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.
Disclosure in Balance Sheet as on January 31, 2007
Murabaha receivable-gross 1,100
Less: Deferred Murabaha Income {100- (1000x10%x31/365)} (91.51)
Murabaha Profit Receivable shown in other assets (8.49)
Murabaha Financing Receivable 1,000

25. Scenario-A-continued
5) 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:
December 31, 2007
Dr Party Bank A/c 1,100
Cr Murabaha Financing ,000
Cr Murabaha Profit Receivable

26. Dr Advance against Murabaha 1,000 Cr Pay Order / Party Account 1,000
Scenario-B
B-In case Declaration is not received on January 15, 2007 and is received on February 15, 2006:
1) 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:
January 01, 2007
Dr Advance against Murabaha 1,000
Cr Pay Order / Party Account 1,000
On January15, 2007
No entry would be passed
At the end of First Month i.e. January 31, 2007
No entry would be passed for accruals of profit, as Declaration has not been received from the customer.

27. Dr Unearned Murabaha Profit Receivable 100
Scenario-B
2) On February 15, 2007, 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:
February 15, 2007
Dr Murabaha Financing 1,000
Dr Unearned Murabaha Profit Receivable
Cr Advance against Murabaha 1,000
Cr Deferred Murabaha Income

28. Scenario-B-continued
3) Booking of Accrual of 10% from the date of disbursement to the date of culmination, the following entry would be passed. [(1000 x 10%) x (31+15)/ 365]:
February 15, 2007
Dr Deferred Murabaha Income
Dr Murabaha Profit Receivable
Cr Income on Murabaha Financing
Cr Unearned Murabaha Profit Receivable

29. Scenario-B-continued
4) Booking of Accrual of 10% for remaining days of the
month, the following entry would be passed. [(1000 x 10%) x 13 / 365]:
February 28, 2007
Dr Deferred Murabaha Income
Dr Murabaha Profit Receivable
Cr Income on Murabaha Financing
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.
NOTE: In case the Murabaha declaration is NOT received on the due date, NO Entry would be passed until the declaration is received.
Disclosure in Balance Sheet as at February 28, 2007
Murabaha receivable-gross 1,100
Less: Deferred Murabaha Income{100- (1000x10%x(31+28)/365)} (83.84)
Murabaha Profit Receivable shown in other assets (16.16)
Murabaha Financing Receivable 1,000

30. Scenario-B-continued
5) 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:
December 31, 2007
Dr Party Bank A/c 1,100
Cr Murabaha Financing 1,000
Cr Murabaha Profit Receivable

31. Treatment for Inventory
If goods purchased for Murabaha remain unsold on the reporting date they are shown as “Murabaha Inventory” in Other Assets.
Following are possible scenario:
Bank is holding assets for future sale to its customers against a promise
The Goods are imported as Bank’s agent and are not sold to the importers i.e. they are in PAD
Any other reason due to which the goods remain unsold.

32. THANK YOU