Accounting for

Islamic Equity WEEK

Financing :
MUDARABAH
8
 1 2
NATURE OF SOME LEGAL
MUDARABAH PRINCIPLES OF
FINANCING MUDARABAH
TRANSACTIONS
3. 4.
FORMS OF RECOGNITION &
TOPIC MUDARABAH
TRANSACTIONS
MEASUREMENT OF
MUDARABAH

OUTLINE 5.
FINANCING

AAOIFI : 6.
PRESENTATION & EXAMPLE OF
DISCLOSURE OF QUESTION
MUDARABAH
FINANCING
 1.
NATURE OF
MUDARABAH
FINANCING
 Profits :
Shared between
the parties
according to a
predetermined
profit sharing ratio
Mudarabah is a Violation of the
contract in which stipulated contract
one party provides by the
capital (Rabbul
mal) and the other entrepreneur , the
party provides entrepreneur
work (Mudarib) bears such loss
Losses :
To be borne by
the Rabbul mal /
capital providers
 2.
SOME LEGAL
PRINCIPLES OF
MUDARABAH
TRANSACTIONS
 Offer and Manner of No work Profit Sharing
interference by Ratio should be
Acceptance disbursement capital provider determined at
(lump sum or the time of
in several contracting and
installments) profit to be
The
Can be trade / shared should
entrepreneur be known
non-monetary should comply
assets with Shariah
Profit : rules
Capital
the amount provider bears
received that the loss unless
No debt to No guarantee
exceeds the due to
be treated as of recovery of
capital funds except trespass or
capital omission
for betrayal
guarantee
 3.
FORMS OF
MUDARABAH
TRANSACTIONS • Bilateral
mudarabah
• Multilateral
mudarabah
• Re-
mudarabah
 One party of capital provider and another party of
entrepreneur.

BILATERAL
PSR
MUDARABAH
(SIMPLE IFI E
MUDARABAH)
 ➢ C1 provides RM 100,000 to E1
➢ PSR is 70:30 (C1 : E1)

If Profit is RM 40,000
BILATERAL ▪ C1 recovers RM 100,000 capital & shares RM 28,000
MUDARABAH profit
( SIMPLE ▪ E1 shares RM 12,000 profit
MUDARABAH)
If Loss is RM 20,000
▪ C1 bears the loss of RM 20,000 and recover RM
80,000 capital
 Several parties of capital provider and one party of
entrepreneur

MULTILATERAL IFI1
MUDARABAH
IFI2 PSR
E

IFI3

IFIN
 ➢ C1 provides RM 50,000
➢ C2 provides RM 50,000
➢ PSR is 70:30 (C : E)

If Profit is RM 40,000
MULTILATERAL ▪ C1 recovers RM 50,000 capital and shares RM 14,000 profit
▪ C2 recovers RM 50,000 capital and shares RM 14,000 profit
MUDARABAH ▪ E1 shares RM 12,000 profit.

If Loss is RM 20,000
▪ C1 bears the loss of RM10,000 and recover RM40,000 capital
▪ C2 bears the loss of RM10,000 and recover RM40,000 capital
 Three parties and includes capital provider,
intermediate Mudarib (entrepreneur) and final Mudarib
(entrepreneur).

RE-
PSR1 PSR2
MUDARABAH
(TWO-TIER
DEP IFI ENTR
MUDARABAH)
 ➢ C1 provides RM 100,000
➢ PSR between C1 and E1(intermediary) is
70:30
➢ PSR between E1(intermediary) and E2 is
60:40
RE-
If Profit is RM 40,000
MUDARABAH
(TWO-TIER
MUDARABAH)

If Loss is RM 20,000
 4.
RECOGNITION &
MEASUREMENT
OF MUDARABAH
FINANCING
➢ AAOIFI FAS 3 Mudarabah Financing, is a standard for the
provision of Mudarabah financing by the Islamic banks and
does not deal with the deposit side of receiving the funds on
Mudarabah basis

➢ Measurement of Mudarabah capital at the end of the financial

year after contracting :

1. Measured at initial carry value

2. Repayment of capital deducted from the Mudarabah
financing.
3. If partial loss of the capital occurs (eg. theft and fire) before
the work on the Mudarabah is started (and not due to
negligence of the Mudarib), this should also be deducted
from Mudarabah financing account and debit to P & L
➢ Ifthe capital is in the form of non-monetary assets,
such as an aircraft or building, then the heading of
non-monetary Mudarabah Asset is used.

➢ If capital provided by the Islamic bank is in kind

(trading assets or non-monetary assets), the capital
shall be valued at fair value of the assets. Any
difference between fair value and book value shall be
recognized as profit or loss to the bank.
➢ Expenses of contracting procedures such as
feasibility studies are not considered Mudarabah
capital unless specifically agreed.

➢ If the whole of Mudarabah capital is lost, Rabbul

Mal must bear the loss and terminate the
contract.

➢ Upon termination or liquidation of Mudarabah,

any remaining unpaid amount becomes a
receivable of the bank from ex-mudarib.
 Dr Mudarabah Financing
Cr Cash
(Mudarabah financing to Mudarib)

Dr Non-monetary Mudarabah Financing

Cr Asset
(Non-monetary asset to Mudarib)
JOURNA Dr Cash
L Cr P&L
(Profit received from Mudarib)
ENTRIES Dr P&L
Cr Mudarabah Financing
(Loss borne by Rabbul Mal)

Dr Cash
Cr Mudarabah Financing
(Capital repayment by Mudarib)
 5.
AAOIFI :
PRESENTATION &
DISCLOSURE OF
MUDARABAH
FINANCING
 Income statement for the year ended 31 Dec 20xx
Mudarabah income XX
BALANCE
SHEET
Balance Sheet as at 31 Dec 20xx
& Mudarabah Financing XX
INCOME Non Monetary Mudarabah Asset XX
STATEME Less : Provision for decline in (X) X
NT value of Mudarabah Assets

Net Mudarabah Financing XXX

 6.
EXAMPLE OF
QUESTION
 Bank Shariah Malaysia Berhad contributed RM2,000,000 for a five-year
Mudarabah contract for property development project to Shah Alam Sdn. Bhd.
The profit sharing ratio agreed by both parties is 2:1 between the Bank (Rabb
al-Mal) and Shah Alam Sdn. Bhd. (Mudarib) respectively.

The project incurred a loss of RM120,000 in the first year; realized profit
QUESTION 1 : RM375,000 in the second year; realized profit of $450,000 in the third year;
incurred loss of RM220,000 in the fourth year; and realized profit of RM250,000
in the fifth year.

Required:
➢ Prepare the relevant journal entries to recognize asset and profit/loss of the
above transactions based on the income recognition method determined at
the end of each period.

➢ Show how profit allocation between the Bank and the Mudarib will appear in
the respective income statements from year 1 to year 5, if the profit of
Mudarabah is determined at the end of (i) each period; and (ii) the contract.
 Dr. Mudarabah Financing 2,000,000
Cr. Cash 2,000,000
(Mudarabah Financing)
Year 1
Dr. Profit and Loss 120,000
Cr. Mudarabah Financing 120,000
SOLUTION : (Loss in 1st year)

Dr. Cash/ Receivables 250,000

a) Journal (2/3 x 375,000)
entries at the Year 2
Cr. Profit and Loss 250,000
end of each
(Profit in 2nd year)
period
Dr. Cash/Receivables 300,000
(2/3 x 450,000)
Year 3
Cr. Profit and Loss 300,000
(Profit in 3rd year)
 Dr. Profit and Loss 220,000

Year 4 Cr. Mudharabah Financing 220,000

(Loss in 4th year)

SOLUTION :
Dr. Cash/ Receivables 166,667
(2/3 x 250,000)

a) Journal Cr. Profit and Loss 166,667

entries at the (Profit in 5th year)
end of each Year 5
period Dr. Cash/ receivables 1,660,000
(2,000,000- 120,000-220,000)
Cr. Mudarabah Financing 1,660,000
(Capital repayment at the end
of the contract)
 Income Statement at the end of each period
Year 1 Year 2 Year 3 Year 4 Year 5

Mudarabah
(120,000) 250,000 300,000 (220,000) 166,667
Income
SOLUTION :
Income Statement at the end of contract
Year 5
b) Income
Mudarabah Income 490,000
Statement

Year Profit / (Loss)

Year 1 (120,000) Working :

Year 2 375,000 Total Profit & Loss = RM 735,000

Year 3 450,000
Year 4 (220,000) Bank (2/3) = RM 490,000
Shah Alam Sdn.Bhd (1/3) = RM 245,000
Year 5 250,000