Murabaha Accounting

2.1. Introduction

Murabaha is a cost-plus profit sale contract whereby disclosure of cost to the buyer is necessary. Under Murabaha arrangement customer requests to the Islamic Financial Institution (IFI) to purchase an asset for him (customer) and sell on deferred payment. An essential feature of Murabaha is that IFI must purchase the required commodity from supplier first and then sell to the customer. Bank charges a certain profit usually linked with Inter Bank Offered Rate. Recovery could be agreed in installments or Balloon payment. Amount of installment or price of the asset cannot be (stipulated) increased or decreased in case of default or early payment (Shari’a standard 8). In order to create pressure on client for prompt payment a penalty is imposed upon customer as agreed in Murabaha contract. Amount of penalty for default in prompt payment recovered, cannot be included in income of IFI in any case and must be spent for charity (Usmani, 2002). Murabaha has successfully replaced the overdraft and short term loans facility under conventional banking. Murabaha is dominant mode of financing in portfolios of IFIs since the inception of Islamic banking due to its easiness in practice and low risk as compared to profit and loss sharing modes of financing.

Comparative study of conventional and Islamic financial system reveals following important points as for rights, liabilities, risks and rewards of the parties concerned. If client goes for conventional fiancé he will get simply Rs; 6,000,000 loan in cash form for a charge of 10% interest assuming same return as for Islamic bank. By the time loan approved and available to customer an asset of 6 million is created as loans receivables by conventional bank and another Liability of current deposit is created of equal amount while cash and balances decrease as and when amount is withdrawn. Conventional bank has no risk in this transaction except default on behalf of customer.  After expiry of one month interest revenue of Rs; 50,000 is due hence form the income of conventional bank. Asset (loan receivables) increased by Rs; 50,000 while liability of customer is also increased by Rs; 50,000.

Islamic Banking Book

 

This book is written with a clear focus on learning of Islamic banking by accounting, business and finance students/professionals. Resources available on the subject have so for focused on legal side and very negligible work is available on financial front for a common user. This book is written in financial perspective and author has focused upon financial impacts, generated by application of Islamic financial laws. However a summary of Islamic commercial laws of each chapter has been provided. Author has adopted balance sheet method to inculcate the knowledge; hence, understanding of elementary balance sheet is pre-requisite to get maximum out of this book. 
This book is divided into five parts. Part-1 presents update on Islamic banking, why and how Islamic banking started? What is current status? Meaning and prohibition of Riba (Interest) as reported in revealed books (Bible and Qura'n). Part two is about asset backed financing provided by IFIs. It includes trading (selling) modes of financing including Murabaha, Salam and Istisna'a; it also includes Ijara financing. At the start of part two, summary of Sharia rulings about sales is reported.  

[http://www.amazon.com/Islamic-Banking-Practice-Muhammad-Hanif/dp/146107259X/ref=sr_1_3?ie=UTF8&qid=1384153790&sr=8-3&keywords=islamic+banking]

Global Volume of Assets under Islamic Finance crossed US $ 1,460 Billion

Islamic finance assets world-wide continued a long run of growth to reach an estimated $1.45 trillion in 2012. UKIFS’s findings show that Islamic finance has shown resilience at a time when the global economy has slowed and conventional banking in Western countries has been under pressure. By contrast global assets of Islamic finance have doubled since the start of the economic downturn. 

The UK continues to maintain its position as the leading Western provider of Islamic finance with assets of USD$19bn. The UK also benefited from a globally buoyant sukuk market in 2012, with issuance up two-thirds to USD$139bn. This was reflected in 14 new sukuk listings on the London Stock Exchange since 2012. There are now 49 sukuk bonds with a combined value of $34bn listed on the London Stock Exchange. Additionally, seven exchange traded funds and two exchange traded products are also listed on the London market.

http://www.thecityuk.com/research/our-work/reports-list/islamic-finance-2013/

Islamic banks hold Basel III advantage

As banks prepare for the impact of Basel III regulations, many Islamic financial institutions are finding they already exceed the requirements.

With above-average Tier 1 capital, strong customer deposits and much lower levels of leverage and trading book risks, well-managed Islamic banks will not be looking for additional capital. So, does this mean that Basel III regulations will not affect Islamic banks in the same way they will conventional banks? Bankers are not so sure.

For a start there is the issue of liquidity. Despite apparent progress towards improving Islamic liquidity through increased sukuk issuance, for instance, there remains a lack of eligible liquidity instruments and adequate central bank facilities. This gap in the market would have to be filled to make Basel III compliance possible.

http://www.thebanker.com/Markets/Islamic-Finance/Islamic-banks-hold-Basel-III-advantage

Comparison of Leases IAS-17 Vs. Ijarah FAS-8

1-Introduction

Islamic finance is an emerging area in financial literature. Started with establishment of Islamic development bank in 193-74, it has shown a speedy growth and momentum in first decade of 21t century. Global volume of assets under Islamic finance has crossed the figure of US $ 1,289 billion by the end of December 2011. Islamic finance has shown resilience in global melt down and recorded average annual growth of 21% from 2007 to 2011 [IFSL-2012]. and according to an estimate of Islamic development bank ……………… Islamic banking was emerged as a reaction to Haram (prohibited by Islamic law) practices in financial sector including Riba (interest & usury), Gharar (excessive risk) Myser & Qimar (game of chance) and financing for Haram (prohibited) businesses [Examples of prohibited businesses include liquor, pork, pornography, promotion of adultery etc ]. In Pakistan Islamic finance has shown marvelous overall average annual growth of above 65% from 2004-12. At present June 2013, assets of Islamic banking has reached to PKR 903 Billion, deposits PKR 771 Billions and investment & financing PKR 700 Billions with a branch network of 1,115, covering 9% of market share. Accounting discipline has a deep rooted relationship with modern banking. We see due care and concentration of experts on this area of study. At present efforts are in the way to have a global set of accounting standards to make the accounting results relevant and comparable across the globe. Being a special type of finance based upon Islamic law [obligatory following by Muslims], Islamic finance needs accounting guidelines to execute day to day transactions and determine financial rights

One Day Workshop on Islamic Banking 26/10/2013

One Day Workshop

On

Islamic Banking

Dated: October 26, 2013

Venue:

Mehboob ul Haq Executive Development Centre

FAST School of Management National University of Computer & Emerging Sciences

Islamabad

Resource Person

Muhammad Hanif Fellow CMA

Assistant Professor ACC/FIN

For Registration and Inquiry, please contact

Muhammad Ali Accounts Officer

Ph: +92 51 111 128 128 Ex 179

Deposits Management

1. Introduction

Banking is a business of intermediation between savers (depositors) and users (investors) of funds, and Islamic banking has no exception. However the nature of relationship between Islamic bank and its customers is entirely different from conventional banking. In previous chapters (2 to 8) I have discussed the nature of relationship between Islamic bank and users of funds along with financial impact and legal rights and liabilities. In this chapter I will present the mechanism of deposits management by Islamic Financial Institutions (IFIs). Like conventional banking IFIs are also offering the facility of current, savings and fixed deposits, however no risk free return is offered rather deposits are accepted either interest free loans (current deposits) or  under Musharaka and Mudaraba modes of financing.

Current deposits are accepted as loans from depositors which can be withdrawn on demand by depositors. Some of the Islamic banks are accepting these deposits as Ammanah.  If Ammanah deposits are lost without negligence of bank, making the loss of depositors good is not responsibility of the bank, hence, Ammanah deposits are not recommended to safeguard the interest of both bank and customers. Under loan current deposit scheme bank has the flexibility to use the funds and customer is protected from loss of amount in case of any miss-happening (burglary, fire, theft etc.) in any branch of bank.

Islamic Banking: An Update

1. Introduction

Societies are building on the basis of certain ideologies and formation of Muslim society is based on Islamic ideology. In order to understand the institution building in any society understanding the ideology and philosophy of life (and death) is prerequisite. Muslims believe in oneness of Allah (God) the sole creator of this universe, prophet-hood (Messengers of Allah came to the world to reform the society), and Day of Judgment (everyone has to answerable for his deeds before Allah). According to religion of Islam life of every believer is regulated through the revelations (Qura’n & Sunnah). In order to extract legal order from Qura’n & Sunnah religious clerics conduct research and come up with a solution of existing problem keeping in view the objectives of Shari’a (Islamic law). Objectives of Shari’a include safety of faith (Hifz e Eimaan), life (Hifz e Jaan), wealth (Hifz e Maal), Conscious (Hifz e Aqal) and next generation (Hifz e Nasal) [Siddiqi, 2000]. While it is settled opinion of Muslim jurists that any sphere of life either directly regulated through revelations or juristic opinion by experts in Shari’a (if direct order is not found in revelations), hence, financial matters have no exception.

Capitalism is dominant economic system prevailing (complete or partial) in almost every society of the world including Muslim countries. According to capitalism factors of production include land, labor, capital and organization. Rewards for three of the production factors (i.e. land, labor and capital) are fixed while reward of entrepreneur is variable depending upon the outcome of the underlying project. Reward for three factors of production is risk free and cannot be negative however entrepreneur’s reward can be zero or even negative. Although underlying project is completed by participation of all factors of production however in case of reward, share of three of them (land, labor and capital) is fixed irrespective of outcome. If a huge profit is earned it belongs to entrepreneur (after servicing other factors of production) and if a heavy loss is suffered that also borne by entrepreneur.

Economic Substence or Legal Form: An Evaluation of Islamic Finance Practice

Presented at Global Forum on Islamic Finance 2013, PC Hotel, Lahore

I-Introduction

Islamic banking was started in last quarter of 20^th century and got momentum in first decade of 21^st century. Global volume of assets under Islamic financial system has reached to US$ 1,289/- billion by the end of December 2011 (IFSL-2012) with above 300 institutions operating in more than 50 countries. Islamic banking was emerged as a reaction to Haram(prohibited by Islamic law) practices in financial sector including Riba (interest & usury),Gharar (excessive risk) Myser & Qimar (game of chance) and financing for Haram(prohibited) businesses [Examples of prohibited businesses include liquor, pork, pornography, promotion of adultery etc ]. In order to address these issues especially Riba (interest & usury) a modified model of banking was required. Riba is the foundation on which whole structure of modern conventional banking stands. Thus existing contracts (including overdraft, credit card, export financing, agricultural loans, short, medium and long term loans, leases and mortgages etc.) of conventional banking primarily based on Riba, was not suitable in their original form for Islamic banking. Hence, modified business contracts (between bank and customers) were introduced based on principles of Islamic financial system. Major

Differences and Similarities in Conventional and Islamic Banking

Earlier Version published in International Journal of Business and Social Sciences, USA

I. Introduction

In the second half of 20^th century liberation of Muslim world from colonial powers almost completed and widespread renaissance of Islamic ideology took its path in Muslim societies whereby the masses started looking at the existing social systems through Islamic lenses and proposed modifications and developments. The Muslim thinkers and philosophers challenged the world’s ruling economic and social systems and uncovered their weaknesses. Capitalism was examined and criticized in detail due to its magnitude and general acceptability in majority of leading societies of the world.[i]

Out of the four factors of production (as described in Capitalism) reward of three is fixed and all risk is born by the entrepreneur alone. In capitalism, capital is a factor of production, hence, deserves the fixed reward in the form of interest --- a risk free reward. As the bank is dealer of money; and reward for using money is interest according to capitalist system; so the prime source of revenue and cost of funds to conventional banks is charging interest through lending and accepting deposits for interest respectively. Interest is the major driver of operations of conventional banks although other valuable services including guarantees, funds transfers, safety of wealth, facilitation in international trade etc. are also provided for reward and form substantial part of income of modern conventional banks.

As the conventional banks are established under the principles of capitalism and transect business by

Islamic House Financing: A Critical Analysis and Comparison with Conventional Mortgages

An earlier version of this Article was published in

Middle Eastern Finance & Economics

Issue 6, 2010.
Islamic House financing

A Critical Analysis and Comparison with Conventional Mortgage

Abstract

Housing is considered the basic necessity of human being and its shortage is a major problem worldwide especially in less developed countries including Pakistan. Recently the commercial banks in Pakistan have started looking for house financing. In addition to conventional banks Islamic banks are also providing house financing. This paper is focusing on house financing needs in Pakistan and critically analyzes the existing model of Islamic house financing (in practice) along with comparison of conventional mortgage. As per findings of this study huge potential for financing exists in local market. Current model of Islamic house financing (in practice) is not matched with the principles of Diminishing Musharaka however it suits in competing with conventional banks. The major difference (risk and reward sharing) between Islamic and conventional finance is lacking in operations of IFIs. At final pages of

Cash Financing Under Islamic Banking

11.1. Introduction

Islamic financial system is based on Shari’a (Islamic law) whereby interest charging in a loan transaction is Haram (unlawful). In order to adhere this Shari’a constraint Islamic Financial Institutions (IFIs)  do not provide finance in cash for a charge rather transect business by using trading, rental and equity based modes of financing. Trading and rental modes of financing are used excessively by IFIs in provision of financing as compared to equity financing due to lesser/zero uncertainty about the outcome of investment, however deposit collection is fully based on equity modes of financing. Generally Islamic banks provide financing through Murabaha (deferred sale of a commodity on profit), Salam (spot payment with deferred delivery of subject matter), Istisna’a (order to manufacture a product, payment may or may not made on spot), Ijarah (leasing or renting an asset for use ending in transfer of ownership), Musharaka (participation in profit and loss of a project or a business for a particular period), Diminishing Musharaka (a mortgage transaction whereby stake of bank decreases and that of customer increases over the period  ending in transfer of ownership to customer) and Mudaraba (partnership of skill and capital). Three of the modes are based on sale/purchase of an asset, one on renting an asset, two on partnership and one is mixture of partnership and leasing. Any customer who needs bank loan for any of its need can opt one or other mode of financing to transect business with Islamic banks. Deposits are collected under any of three

Islamic Capital Market

10.1. Introduction

Liquidity is the ability to meet obligations as and when due. Banking is a business of financial intermediary whereby money is collected from depositors and provided to business and industry to meet short and long term requirements. Deposits are collected under any of the three forms of accounts including current account, profit and loss sharing account and profit and loss fixed deposits. Except profit and loss fixed account depositors are free to deposit and withdraw the amount according to their preferences and financial plans, which creates uncertainty as for cash requirements of a bank are concerned to return the money of depositors. This uncertainty of cash requirements make the job of modern banker challenging because of required skill in funds management to utilize the funds prudently keeping in view the liquidity requirements as well as to earn normal rate of return for depositors and share holders.

Liquidity risk management is a challenging task for any bank including Islamic banks. Conventional banking has numerous opportunities to mitigate and manage liquidity risk including investment in short term interest based instruments issued by government and corporate sector. The most secured form of short term investment is treasury bills and other money market instruments. Likewise for medium to long term investments interest based bonds are available to conventional banks with a ready market for disposal