1. ACCOUNTING FOR MUDARABA

2. 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 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.

3. DEFINITIONS
A mudaraba contract may also be concluded between the Islamic bank, as a provider of fund 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 include an element of gambling in buying and selling transactions.( it is to the former that this standard applies).

4. DEFINITIONS Unrestricted Investment Accounts
This type of account, the investment account holder authorizes the Islamic bank to invest the account holder’s fund on the basis 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.

5. DEFINITIONS Unrestricted Investment Accounts
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.

6. DEFINITIONS Restricted Investment Accounts
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 of investment fund for the purposes of investment.

7. DEFINITIONS Restricted Investment Accounts
In addition, there may be other restrictions which investment account holders may impose.
For example, investment account holder may require the Islamic bank not to invest their funds in installment sales transactions or without guarantor or collateral require that the Islamic bank itself should carry out the investment itself rather than through a third party.

8. MUDARABA – RECOGNITION AT THE TIME OF CONTRACTING
Initial investment in Mudaraba is recognised when paid to Mudarib or placed under his disposition and is presented as Mudaraba Financing.
Incase Capital paid in installment, each installment is recognised when paid.
In case where the payment of Mudaraba capital is contingent on occurrence of an event, then the Mudaraba capital shall be recognized when paid.

9. MUDARABA – INITIAL INVESTMENT
In case capital provided in cash it is measured by the amount paid or amount placed under disposition of Mudarib.
If the capital is provided in the form of non-monetary assets, it is reported as “Non-monetary assets”.

10. MUDARABA – INITIAL INVESTMENT
Capital provided in kind is measured at fair value of the assets and any difference between fair value and book value is recognised as profit or loss.
Expenses incurred are not considered as part of Mudaraba capital, unless otherwise agreed by both the parties.

11. INITIAL RECOGNITION OF MUDARABA INVESTMENT
Recognized as investment when paid to Modarib
ISLAMIC BANK
Rs. 5 M
Presented as
Mudaraba Financing
In Financial
Statement
Paid or made available or provided in form of assets.
May be paid in full or may be paid in Installments. May include expenses paid, if agreed by both the parties.
Subsequently
Mudaraba Financing less any repayment less any losses incurred.
Profit receivable to be shown separately.

12. MUDARABA – PROFIT AND LOSS RECOGNITION
Any loss at the inception of work shall be borne by Islamic Bank. If the loss occurs after inception of work, it shall not affect the measurement of Mudaraba capital.
Profits or losses on Mudaraba transactions which commences and end during the same financial period is recognised at the time of liquidation of Mudaraba.

13. MUDARABA – PROFIT AND LOSS RECOGNITION
Islamic Bank’s share of profits on Mudaraba financing that continues for more than one financial period is recognised to the extent of profit distribution.
Share of profits is recognised as receivable due from the Modarib. Any share of losses is deducted from the Mudaraba capital.

14. MUDARABA – PROFIT AND LOSS RECOGNITION
Profits or losses on Mudaraba transactions which commences and end during the same financial period
At the time of liquidation of Mudaraba
Islamic Bank’s share of profits on Mudaraba financing that continues for more than one financial period
To the extent of profit distribution

15. MUDARABA – SUBSEQUENT MEASUREMENT AND TERMINATION
Subsequent measurement of Mudaraba financing is according to initial recognition less any repayments made by the customer.
If whole amount of the capital is lost without any misconduct or negligence of Modarib, the Mudaraba shall be terminated and Islamic Bank shall recognize the loss.

16. MUDARABA – SUBSEQUENT MEASUREMENT AND TERMINATION
If the Mudaraba is terminated or liquidated and at the time of settlement, the Mudaraba capital is not paid to the Islamic Bank, it shall be recognised as receivable (interest-free) due from the Modarib.

17. SAMPLE ACCOUNTING ENTRIES FOR MUDARABA – BANK AS MUDARIB1
Deposit received from customer / account holder
Debit
Credit
Cash (B/S – Asset Side)
1000
Depositor’s account (B/S – Liability Side) 2
Investment / Financing Placed
Investment (B /S)
Cash / DD (B/S) 3
Profit on Investment
Cash / Profit Receivable (B/S)
100
Income (P/L)

18. SAMPLE ACCOUNTING ENTRIES FOR MUDARABA – BANK AS MUDARIB4
Profit payable to Depositor
Debit
Credit
Sharing of income (P/L) 20
Depositor’s account (B/S – Liability Side) 5
Withdrawal by Depositor
Depositor’s account (B/S)
500
Cash / Clearing (B/S) 18