WEEK 2-3

ACCOUNTING FOR
DEPOSITS AND
INVESTMENTS
CONTENT

 Islamic Deposit Taking – IFSA 2013

 Islamic Deposits Accounts
 Types of Islamic Deposit Accounts
 Recognition of Islamic Deposit Transactions & Journal Entries

 Islamic Investment Accounts

 Shariah Contracts
 Types of Islamic Investment Accounts
 Disclosure & Profit allocation methods
 Recognition of Mudarabah Investment Transactions & Journal Entries
 Specific Investment Account Metho (SIAM) vs. Pooling Method (PM)
ISLAMIC DEPOSIT TAKING – IFSA 2013

• Although funds mobilization between Islamic and conventional banks is similar, the underlying
concepts and principles are different.

• IFSA 2013 mandates Islamic banks in Malaysia to clearly segregate customers’ funds between
deposit accounts and investment accounts, based on an account’s underlying Shariah contract.

• Under IFSA 2013, all customer funds mobilized by Islamic banks using Shariah-compliant
contracts bearing profit sharing characteristics (e.g. musharakah, mudarabah and wakalah) will
be classified as investment accounts.

• On the other hand, funds mobilized on Shariah-compliant safekeeping contracts (e.g. qard and
wadiah) or that are based on sale contracts (e.g. commodity murabahah) will be treated as
deposit accounts.
 ISLAMIC INVESTMENT ACCOUNTS

• The reclassification of accounts as deposits or investments will lead to a distinction in rights and
obligations of the contracting parties (Islamic banks and depositors) in accordance with the Shariah-
compliant contracts utilized to structure the account.

• Funds placed in Islamic banks’ investment accounts under IFSA 2013 will no longer be accorded
‘principal guaranteed’ by Islamic banks nor given protection by the Malaysia Deposit Insurance
Corporation (PIDM).

• This is in conformity with the Shariah principles of profit sharing contracts, e.g. mudarabah, that their
inherent nature of supporting risk-based economic activities do not allow the invested capital to be
guaranteed by the entrepreneurial party (Islamic bank), except in an event of misconduct or negligence
by the entrepreneur.

• Customers wishing to participate in investment account products must be willing to take the risk of
losing their capital in case of unfavourable portfolio performance.
 ISLAMIC DEPOSIT ACCOUNTS

• On the other hand, funds placed into accounts that are deemed as ‘deposits’ under IFSA 2013 will continue to
be accorded ‘principal guaranteed’ by Islamic banks as well be given protection under the PIDM deposit
insurance scheme.

• These deposits will be supported by Shariah contracts of safekeeping (e.g. qard and wadiah) and sales (e.g.
commodity murabahah)  support the notion of capital guarantee on such contracts.

• The fundamental objective of these depositors is likely to be capital preservation with modest or no returns
expected on the deposited funds

• To facilitate a smooth reclassification of deposits under IFSA 2013 (which originally came into force on 30th
June 2013) and to protect the rights of relevant stakeholders, Bank Negara Malaysia has accorded a two year
transitional period until 30th June 2015 for Islamic banks to carry out the deposits segregation.

• During this transition period, all Islamic banking deposit products, including those previously structured on profit
sharing contracts, continue to enjoy principal guarantees and deposit protection by PIDM.
Malaysian Islamic Banking Deposits Structure under
IFSA 2013 & IBA 1983

Source : ISRA, 2015

 Model Islamic Banking Deposits Structure under IFSA 2013

Shariah Concepts Safekeeping Mark-up / Sales Investments

Islamic Banking Products Deposit products Deposit products Investment products
Regulatory Classification Current Accounts / Profit-Sharing Investment
Terms Deposits - i
under IFSA 2013 Savings Accounts Accounts
Safekeeping of funds for Safekeeping of funds for
Investment of funds for
Depositor objective on-going/future use on-going/future use
profits
Term Term
Shariah Contract Commodity Murabahah / Musharakah/Mudarabah/
Qard, Wadiah
Tawarruq Wakalah
Pre-agreed mark-up/ Pre-agreed profit-sharing
Discretionary Hibah (Gift)
Returns/Dividends margin on selling price of ratio. Loss borne by
by Islamic Bank
commodities investing depositors*
Subject to actual business
Capital protection with little Capital protection with
Financial Performance performance of invested
or no returns fixed returns
portfolio
* except in an event of proven negligence/misconduct by the Islamic bank under which the depositors are indemnified against the loss
ISLAMIC DEPOSITS
ACCOUNTS
Some
Current
Issues
 Wadiah Yad Amanah
SAVINGS /
 Wadiah Yad Dhamanah
CURRENT
ACCOUNT  Re-branding of Wadiah to Qard
RECOGNITION OF ISLAMIC DEPOSIT TRANSACTIONS &
JOURNAL ENTRIES

No. Transactions/Events DR CR

Deposit in current or savings Current / Savings

1 Cash
account Account

Withdrawal from current or Current / Savings

2 Cash
savings account Account

Hibah / Gift given by the Current / Savings

3 bank to the current / savings P& L Account Account
account holders
TERM DEPOSITS–i ACCOUNTS

• An Islamic deposit taking via Murabahah / Tawarruq contract

• Murabahah/Tawarruq is a transaction between three parties or more

to facilitate fixed rate of return-based instruments. Murabahah deposit
will allow the depositors / investor to earn a fixed return from his
‘deposit’.

• By virtue of the following transaction, the customer/depositor will be

getting USD 110k within 2 years for his USD 100k deposit.
Commodity Murabahah / Tawarruq in Deposits Products

Prime Broker A Prime Broker B

Payment of USD Delivery of
100k for metal of “X” at Delivery of metal
Purchase of Cash Purchase of
5 USD 100k at USD 100k
metal “ X” metal “X” at USD 100k
4 (Bank as purchase
1
agent)
2

2 year Credit sale of metal at

3 USD 110k

Customer /Depositor
Islamic Bank
Payment of metal”X” at USD 110k
in 2 years

6
ISLAMIC INVESTMENT
ACCOUNTS
INVESTMENT ACCOUNTS – SHARIAH CONTRACTS
o Any contract that carries the element of risk to the customer’s capital will be classified as Investments.

o The idea of Investment Account is not only limited to Mudarabah-type of contracts. Such contracts will
include Wakala Fi Isthihmar (Investment Agent) or Musyarakah (Partnership).

o However, Mudharabah is the common underlying contract in the Islamic investment account

o Mudharabah is a contract of profit and loss sharing whereby the customer is the investor / capital provider
and the bank is the manager

o The customer and the bank will be sharing the profit according to mutually agreed ratio at the time of the
contract

o The financial loss, if any, will be borne by the customer as capital provider
INVESTMENT ACCOUNTS – SHARIAH CONTRACTS
INVESTMENT ACCOUNTS – SHARIAH CONTRACTS

o Investment Account holders enter into a Profit Sharing Agreement with

the bank and are issued investment certificates.

o Unlike fixed deposits, there is no contracted interest expense and the

investment account is not guaranteed.

o It is neither an equity nor a liability as the depositor does not assume

the rights of the equity holders nor guaranteed as a liability.
TYPES OF ISLAMIC INVESTMENT ACCOUNTS

1. Minimum investment –small amount

GENERAL INVESTMENT ACCOUNT / 2. Rate of profit sharing is not negotiable
UNRESTRICTED INVESTMENT ACCOUNT 3. Project of investment is not negotiable

1. Minimum investment-large amount

SPECIAL INVESTMENT ACCOUNT / 2. Rate of profit sharing is negotiable
RESTRICTED INVESTMENT ACCOUNT 3. Project of investment is negotiable
 TYPES OF ISLAMIC INVESTMENT ACCOUNTS

Unrestricted Investment Restricted Investment

(General Investment Accounts) (Specific/Special Investment Accounts)

The investment account holder fully authorises the The investment account holder restricts the manner
bank to invest the funds without restrictions as to as to where, how and for what purpose the funds
where, how and for what purpose the funds should are to be invested. Additional restrictions may be
be invested as long imposed on commingling of the funds.

Commingling of funds and sharing of returns No commingling of funds.

Separate Disclosure in the financial statement Separate Disclosure in the form of statement of
restricted investments
DISCLOSURE & PROFIT ALLOCATION METHODS

o Investment Weights
 In allocating profit, higher investment weights are assigned to those
investment deposits with longer maturity periods.

o Profit Sharing Ratio

 Contracted Profit Sharing ratio could be the same for all class of
deposits
 Profit sharing arise from funds mobilized through use of investment
deposits
STEPS IN PROFIT DISTRIBUTION BETWEEN IFI AND
INVESTMENT ACCOUNTHOLDERS

1. Determine the monthly average daily balance (MADB)

2. Assigned weights to each category and determine the

weighted balance

3. Allocate distributable profit to each category

4. Apportion profit according to each category

5. Compute dividend rate based on MADB

ILLUSTRATION OF PROFIT DISTRIBUTION
RM ‘000
SHAREHOLDERS’ FUND
Paid up capital 300,000
Retained earnings 100,000

Investment Accounts 1,000,000

Savings Deposits 300,000
Current Account Deposits 300,000
TOTAL FUNDS 2,000,000

ASSETS
Jointly financed Assets 1,000,000
Self financed Assets 400,000
Other Assets 600,000
TOTAL ASSETS 2,000,000
 ILLUSTRATION OF PROFIT DISTRIBUTION

The composition of investment accounts include:

Investment period Weights RM

Less than one year 0.7 350,000,000
1-5 years 1.3 450,000,000
More than 5 years 1.5 200,000,000

The profit for the year is RM 140,000,000 from both joint and self-financed assets. The profit
sharing ratio between depositors and bank is 70:30 respectively.

Required:
Compute the return for each class of investment deposit.
 ILLUSTRATION OF PROFIT DISTRIBUTION

Deposit Average Weights Weighted Depositors’ Depositors’

Types Balance Balance Share Return
Less than one 350,000,000 0.7 245,000,000 15,177,000 4.34%
year
1-5 years 450,000,000 1.3 585,000,000 36,239,000 8.05%
More than 5 200,000,000 1.5 300,000,000 18,584,000 9.29%
years
1,000,000,000 1,130,000,000 70,000,000

Profit to be shared for jointly financed assets = 140,000,000 x 1000/1400 = 100,000,000

Profit to be shared by IAHs = 100,000,000 x 0.7 = 70,000,000

RECOGNITION OF MUDARABAH INVESTMENT
TRANSACTIONS & JOURNAL ENTRIES

No. Transactions/Events DR CR
Recognition of Mudarabah
Investments Mudarabah
1 Cash
(Being money received from Investment Account
RabbulMal)
Withdrawal of money
Mudarabah
2 (Being money repaid to Cash
Investment Account
Rabbul Mal)

Equity (retained
3 Profit share of mudarib P& L Account
earnings)

Profit share of Investment

P& L Account Mudarabah
4 Account Holders
Investment Account
 INCOME MEASUREMENT & DISCLOSURE

 Interest based financial institutions determine interest

expense to be paid to depositors.

 IFIs however distribute dividends from profits earned to

depositors.

 More disclosure is warranted from IFI in terms of income

determination.

 Nature of recognition such as pooling or separate

investment account methods are adopted in income
recognition
SPECIFIC DISCLOSURES & PROFIT ALLOCATION METHODS

• Should expenses such as provisions and administrative

expenses be incurred by Investment depositors?

 In jointly financed assets where investment deposits funds are

utilized for financing, the provision for doubtful debt should
proportionately be borne by the depositors

 As for administrative expenses and other overheads the mutual

agreement is left with the parties concerned.
SPECIFIC DISCLOSURES & PROFIT ALLOCATION METHODS

• Sharing revenue from banking operations?

 Fees earned from services rendered by IFI, if distributed to depositors
should be disclosed.

• The approved two methods of distribution :

 Separate Investment Account Method (SIAM)
 Pooling Method (PM)
 SEPARATE INVESTMENT ACCOUNT METHOD
& POOLING METHOD

SIAM PM
Sales, Investment, and Financing income Sales, Investment, and Financing income
(jointly funded) after deducting direct costs (jointly funded) after deducting direct costs

Less : Distribution to IAH Add : Fee based income

Less : Overhead Expense
INCOME TO IFI
INCOME TO IFI & DEPOSITORS
Add : Fee based income
Less : Overhead Expense Less : Distribution to IAH

NET INCOME TO THE ISLAMIC BANK NET INCOME TO THE ISLAMIC BANK
(before tax and zakat) (before tax and zakat)