TUTO W7- MUDARABAH

CHAPTER 6
Q1
a. Distinguish the difference between the “pooling” and “separate investment account
method” of profit distribution.

- Pooling method (PM) is the net profit is shared at net income whilst SIAM, it is the
gross income that is shared.
- The rationale in using the pooling method is that the bank has the right to share the
overhead expenses with the investment accountholders while administrative expenses
will be borne by IFI
b. Given the above, which method of profit distribution policy would Bank Islam adopt?

- Islamic banks may prefer to use the pooling method if the overhead expenses are
greater than fee-based income as they will share higher profit.
- If the fee-based income is more than the overhead expenses, SIAM will be selected.
- There must be proper rules and guidelines to ensure investment accountholders are
protected.
- Bank Islam is advisable to use pooling method of profit distribution since overhead
expenses, which is RM 550,000 is more than other investment income, which is only
RM 330,000.
- They will share the overhead expenses incurred with the Investment Account Holder,
hence the Bank will have a higher share of profit
c. Using your answer to (b) above, calculate the
i. weighted average balance for each deposit type

Deposit Type Average Balance Weightage Weighted Average - RM

(RM) (Average Balance x Weightage)
6 months and less 20,000,000 0.5 0.50 x 20,000,000 = 10,000,000
9 months and less 30,000,000 0.75 0.75 x 30,000,000 = 22,500,000
12 months and less 45,000,000 1 1.0 x 45,000,000 = 45,000,000
More than 12 months 55,000,000 1.25 1.25 x 55,000,000 = 68,750,000
150,000,000 146,250,000
 ii. depositors share of profit based on the weighted average balance

Weighted Average -RM Share of Profit - RM

Average Balance (Average Balance x Weightage) [(Weighted average balance/sum of
Deposit Type Weightage
(RM) weighted average balance) x net income
distributed to depositors]*
6 months and less 20,000,000 0.5 0.50 x 20,000,000 = 10,000,000 (10,000,000/146,250,000) x 1,350,000
=92,307
9 months and less 30,000,000 0.75 0.75 x 30,000,000 = 22,500,000 (22,500,000/146,250,000) x 1,350,000
=207,692
12 months and less 45,000,000 1 1.0 x 45,000,000 = 45,000,000 (45,000,000/146,250,000) x 1,350,000
=415,384
More than 12 months 55,000,000 1.25 1.25 x 55,000,000 = 68,750,000 (68,750,000/146,250,000) x 1,350,000
=634,615
150,000,000 146,250,000 $1,350,000
*Rounded off
Calculation: (Pooling)
Gross Profit RM 2,500,000
(-) Overhead expenses RM 550,000
(+) Fee based income RM 300,000
Net income RM 2,250,000

Distribution of profit to depositors = 0.6 x RM 2,250,000 = RM 1,350,000

 iii. depositors rate of return for each deposit type

Share of Profit - RM
Weighted Average -RM Rate of return - %
Average [(Weighted average balance/sum of
Deposit Type Weightage (Average Balance x (Share of profit/average
Balance (RM) weighted average balance) x net
Weightage) balance) x 100
income distributed to depositors] *
6 months and less 20,000,000 0.5 0.50 x 20,000,000 = (10,000,000/146,250,000) x 1,350,000 (92,307/20,000,000) x 100
10,000,000 =92,307 =0.46 %
9 months and less 30,000,000 0.75 0.75 x 30,000,000 = (22,500,000/146,250,000) x 1,350,000 (207,692/30,000,000) x 100
22,500,000 =207,692 =0.69 %
12 months and less 45,000,000 1 1.0 x 45,000,000 = (45,000,000/146,250,000) x 1,350,000 (415,384/45,000,000) x 100
45,000,000 =415,384 = 0.92%
More than 12 months 55,000,000 1.25 1.25 x 55,000,000 = (68,750,000/146,250,000) x 1,350,000 (634,615/55,000,000) x 100
68,750,000 =634,615 =1.15%
150,000,000 146,250,000 $1,350,000

iv. Ahmad is an investor who has invested RM 450,000 from 1 March 2010 to 15 September 2010. Calculate the profit due to him.
= 0.69% x 450,000
= RM 3,105
 Q4
a. (i) Assuming other variables remain constant, which profit distribution policy do you think the bank might
prefer i.e., pooling method or SIAM method? show all your workings.
Calculation: (Pooling)
Gross Profit RM 35,000,000
(-) Overhead expenses (RM 13,000,000)
(-) Indirect expenses (RM 2,500,000)
(+) Fee based income RM 4,500,000
Net income RM 24,000,000
(-) Distribution of profit to depositors* (RM 7,200,000)
Net income (before tax and zakat) RM 16,800,000
*Distribution of profit to depositors = 0.3 x RM 24,000,000 = RM 7,200,000

Calculation: (SIAM)
Gross Profit RM 35,000,000
(-) Overhead expenses (RM 13,000,000)
Gross profit RM 22,000,000
(-) Distribution of profit to depositors* (RM 6,600,000)
(+) Fee based income RM 4,500,000
(-) Indirect expenses (RM 2,500,000)
Net income (before tax and zakat) RM 17,400,000

*Distribution of profit to depositors = 0.3 x RM 22,000,000 = RM 6,600,000

The following calculation indicates that the bank would prefer to employ the SIAM method because the fee-
based income ($4,500,000) exceeds the overhead expenses ($2,500,000). As a result, the profit distribution
between the bank and the depositor will likewise be higher. By applying the SIAM method, the bank will
receive $17,400,000 instead of $16,800,000 when applying the pooling method.

(ii) Which method of profit distribution policy is being recommended by MASB FRSi-1 and, why?
- Since the majority of fuqaha' propose that profit be distributed at gross profit, the SIAM method is the
profit distribution policy approach that is being recommended by MASB FRSi-1.
 b. You are required to compute

- weighted average balance for each deposit types.

Deposit Type Average Balance Weightage Weighted Average - RM

(RM) (Average Balance x Weightage)
6 months and less 25,000,000 0.25 0.25 x 25,000,000 = 6,250,000
9 months and less 30,000,000 0.5 0.5 x 30,000,000 = 15,000,000
12 months and less 40,000,000 1 1.0 x 40,000,000 = 40,000,000
More than 12 months 55,000,000 1.2 1.2 x 55,000,000 = 66,000,000
150,000,000 127,250,000

- depositor’s share of profit based on the weighted average balance (pooling method)

Average Weighted Average -RM Share of Profit - RM

Deposit Type Weightage (Average Balance x Weightage) [(Weighted average balance/sum of weighted average
Balance (RM)
balance) x net income distributed to depositors] *
6 months and less 25,000,000 0.25 0.25 x 25,000,000 = 6,250,000 (6,250,000/127,250,000) x 7,200,000 = 353,635
9 months and less 30,000,000 0.5 0.5 x 30,000,000 = 15,000,000 (15,000,000/127,250,000) x 7,200,000 = 848,723
12 months and less 40,000,000 1 1.0 x 40,000,000 = 40,000,000 (40,000,000/127,250,000) x 7,200,000 = 2,263,261
More than 12 months 55,000,000 1.2 1.2 x 55,000,000 = 66,000,000 (66,000,000/127,250,000) x 7,200,000 = 3,734,381
150,000,000 127,250,000 7,200,000
*Rounded off
 - depositor’s share of profit based on the weighted average balance (SIAM method)

Average Weighted Average -RM Share of Profit - RM

Deposit Type Weightage (Average Balance x Weightage) [(Weighted average balance/sum of weighted average
Balance (RM)
balance) x net income distributed to depositors] *
6 months and less 25,000,000 0.25 0.25 x 25,000,000 = 6,250,000 (6,250,000/127,250,000) x 6,600,000 =324,165
9 months and less 30,000,000 0.5 0.5 x 30,000,000 = 15,000,000 (15,000,000/127,250,000) x 6,600,000 = 777,996
12 months and less 40,000,000 1 1.0 x 40,000,000 = 40,000,000 (40,000,000/127,250,000) x 6,600,000 = 2,074,656
More than 12 months 55,000,000 1.2 1.2 x 55,000,000 = 66,000,000 (66,000,000/127,250,000) x 6,600,000 = 3,423,183
150,000,000 127,250,000 6,600,000
*Rounded off

- depositors rate of return for each deposit types (pooling method)

Weighted Average – RM Share of Profit - RM

[(Weighted average balance/sum of Rate of return - %
Average (Average Balance x
Deposit Type Weightage (Share of profit/average
Balance (RM) Weightage) weighted average balance) x net
balance) x 100
income distributed to depositors] *
6 months and less 25,000,000 0.25 0.25 x 25,000,000 = (6,250,000/127,250,000) x 7,200,000 (353,635/25,000,000) x 100
6,250,000 = 353,635 = 1.41%
9 months and less 30,000,000 0.5 0.5 x 30,000,000 = (15,000,000/127,250,000) x 7,200,000 (848,723/30,000,000) x 100
15,000,000 = 848,723 = 2.83%
12 months and less 40,000,000 1 1.0 x 40,000,000 = (40,000,000/127,250,000) x 7,200,000 (2,263,261/40,000,000) x 100
40,000,000 = 2,263,261 =5.66%
More than 12 months 55,000,000 1.2 1.2 x 55,000,000 = (66,000,000/127,250,000) x 7,200,000 (3,734,381/55,000,000) x 100
66,000,000 = 3,734,381 =6.79%
150,000,000 127,250,000 7,200,000
*Rounded off
 - depositors rate of return for each deposit types (SIAM method)

Average Weighted Average -RM Share of Profit - RM Rate of return - %

Deposit Type Balance Weightage (Average Balance x [(Weighted average balance/sum of
weighted average balance) x net (Share of profit/average
(RM) Weightage) balance) x 100
income distributed to depositors] *
6 months and less 25,000,000 0.5 0.25 x 25,000,000 = (6,250,000/127,250,000) x 6,600,000 (324,165/25,000,000) x 100
6,250,000 =324,165 = 1.30%
9 months and less 30,000,000 0.75 0.5 x 30,000,000 = (15,000,000/127,250,000) x 6,600,000 (777,996/30,000,000) x 100
15,000,000 = 777,996 = 2.59%
12 months and less 40,000,000 1 1.0 x 40,000,000 = (40,000,000/127,250,000) x 6,600,000 (2,074,656/40,000,000) x 100
40,000,000 = 2,074,656 = 5.19%
More than 12 55,000,000 1.25 1.25 x 55,000,000 = (66,000,000/127,250,000) x 6,600,000 (3,423,183/55,000,000) x 100
months 66,000,000 = 3,423,183 =6.22%
150,000,000 127,250,000 6,600,000

c. Why Mudarabah deposit should not be treated as a liability in the case of Islamic banks? What is the alternative treatment recommended by
AAOIFI?

- In the case of loss, the customers will not get the full capital, but most be deducted with the loss
- The alternative treatment recommended by AAOIFI is to present the Mudarabah unrestricted investment as a separate item between equity and
liability.
CHAPTER 7
Q1
Determine the profit or loss to be shared at the end of the contract by the five parties involved
Profit $550,000

- 70:30 (between Bank Syariah Bhd & Ihsan Development Bhd) – rabbul mal & mudarib
- 5:5:2:2 (among Abdullah, Hashim, Ibrahim and Bank Syariah Bhd) – rabbul mal

Parties Calculation Profit

Ihsan Development Bhd 3/10 x $550,000 $165,000
Bank Syariah Bhd 7/10 x 2/14 x $550,000 $ 55,000
Abdullah 7/10 x 5/14 x $550,000 $137,500
Hashim 7/10 x 5/14 x $550,000 $137,500
Ibrahim 7/10 x 2/14 x $550,000 $ 55,000
Total $550,000

Loss $350,000

- 5:5:2:2 (among Abdullah, Hashim, and Ibrahim) – rabbul mal

- Not shared among rabbul mal & mudarib

Parties Calculation Profit

Ihsan Development Bhd - -
Bank Syariah Bhd - -
Abdullah 5/12 x $350,000 $145,833
Hashim 5/12x $350,000 $145,833
Ibrahim 2/12 x $350,000 $ 58,333
Total $349,999
Q2
a. Calculate the profit earned/ loss incurred for the years 1 to 5.

Year Profit (Loss)

1. ($100,000)
2. 2/3 x $375,000 = $250,000
3. 2/3 x $450,000 = $300,000
4. 2/3 x $220,000 = $146,667
5. ($ 80,000)

b. Prepare the journal entries for years 1 to 5

Years Details DR CR
Y1 Mudarabah Financing $500,000
Cash $500,000
Provision of Mudarabah Financing

Mudarabah Loss $100,000

Mudarabah Financing $100,000
Loss in 1st year

Y2 Cash $250,000
Mudarabah Profit $250,000
Profit in 2nd year

Y3 Cash $300,000
Mudarabah Profit $300,000
Profit in 3rd year

Y4 Cash $146,667
Mudarabah Profit $146,667
Profit in 4th year

Y5 Mudarabah Loss $80,000

Mudarabah Financing $80,000
Loss in 5th year

Cash $320,000
Mudarabah Financing $320,000
Capital repayment at the end of contract
c. Show the extract financial statements for years 1 to 5
Statement of Profit/ Loss

Year 1 2 3 4 5
Mudarabah ($100,000) $250,000 $300,000 $146,667 ($ 80,000)
Profit /
(Loss)

Statement of Financial Position

Year 1 2 3 4 5
Mudarabah $400,000 $400,000 $400,000 $400,000 -
Profit /
(Loss)