Running Musharakah

Product Development & Shariah Compliance

 Presentation Outline

 Running Musharakah
 Running Musharakah Facility Limit
 Musharakah Total Investment
• Adjusted Cost of Goods
• Calculation of Musharakah Total Investment
 Bank’s Investment in Musharakah
 Customer’s investment in Musharakah
 Musharakah Profit Sharing Mechanism
 Loss Sharing and Termination of Musharakah
 Risk Mitigation in Running Musharakah
 Running Musharakah

 The Bank and the Customer will enter into Musharakah, based on
Shirkat-ul-Aqd

 The Bank and the Customer will invest in the identified primary
Operating Activities (or any identifiable segment thereof) of the
Customer’s business

 Running Musharakah will be used to finance Customer’s Operating

Activities only.

 Bank and customer will participate in the profits/(loss) generated by

the Musharakah in proportion to their respective Profit sharing
Ratios.
 Running Musharakah

 Running Musharakah is an effective Shariah Compliant alternative

to the Running Finance facility offered by Conventional Bank.

 Running Musharakah product will enable the Customer to draw and

deposit funds against a Running Musharakah finance limit offered
by MBL

 The Running Musharakah facility may be offered for a period of one

year, or any agreed term, starting from the day the facility is
sanctioned.
 Running Musharakah
Step 1:
 The Bank and the Customer will enter into Musharakah for the
operating activities of the business; which will be the Gross Profit
level of the customer’s business. Activities limited to production and
sales

 For this the Bank and the Customer will agree on the items which
are to be included in the Adjusted Cost of Goods sold for the
purpose of Musharakah.

 Adjustments for various Direct and Indirect expense components

need to be determined.

 The COGS would have to be adjusted to exclude expenses such as

 Rents Rates & Taxes
 Insurance
 Travel & Conveyance
 Repair & Maintenance
 Depreciation
 Calculation of Total Musharakah Investment

Adjusted Cost of Sales

ABC Limited
Audited Accounts
Cost of Sales "000" For Musharaka
(09)
Raw material consumed 15,518,409 15,518,409
Packaging material 470,472 470,472
Fuel and power 1,990,504 1,990,504
Chemicals & Supplies 158,370 158,370
Salaries, wages and benefits 1,074,527 1,074,527
Rent Rates & Taxes 28,359 -
Insurance(Split b/w stocks & plant) 69,671 -
Travel and conveyance 55,145 -
Repair and maintenance 979,294 -
Communication, establishment & other expenses 35,483 35,483
Depreciation 1,212,073 -
Provision for inventory obsolence 56,263 56,263
Opening Stock - work in progress 3,602 3,602
closing stock - work in progress (5,140) (5,140)
subsidiary on DAP fertilizer from GoP 0
Cost of Goods manufactured 21,647,032 19,302,490
Opening Stock - own manufactured fertilizer 5,583,460 5,583,460
Less: closing stock - own manufactured fertilizer (170,926) (170,926)
Cost of Sales '000' 27,059,566 24,715,024
 Running Musharakah
Step 2:
 The Bank and the Customer will then agree on the items of the
Musharakah Income.

 Adjusted Cost of Goods Sold will be deducted from Net Sales,

which will then be adjusted for other Direct Expenses related to the
operating business.
Running Musharakah Income Statement

For Musharaka
Net Sales xxxxxxxx
Adjusted Cost of Sales '000' xxxxxxxx
Gross Profit xxxxxxxx
Bad Debts Expense
Diminution in value of stocks
Sale of waste stocks - proceeds
Insurance claim against lost goods
Musharakah Profit xxxxxxxx
 Running Musharakah
Step 3:
 The Bank and the Customer sign the Musharakah Agreement.

 The Customer starts using the facility.

 Running Musharakah product will enable the Customer to draw and

deposit funds against a Running Musharakah finance limit offered
by MBL.

 Amount drawn by the Customer will be Bank’s investment in

Customer’s business or Musharakah.

 Hence Bank’s investment in this business will vary from time to time
subject to a maximum Running Musharakah Facility Limit (“facility
Limit).
 Running Musharakah
Step 4 (At the end of the Musharakah Tenor Qtr/S-Annual):

 Bank’s Running Musharakah Investment will be calculated.

 This will be equivalent to the average balance of the Running

Musharakah Account maintained in the name of the Customer
calculated on daily product basis over the Musharakah Facility
Tenor.

 Suppose a Customer has a limit of Rs1,568,656/= for the purpose

of this example we assume that the Customer availed this limit fully
on each day of the year and hence Bank’s Musharakah Investment
for the quarter based on Daily Product basis is Rs1,568,656/=.
 Running Musharakah
Step 5 (Calculation of Total Musharakah Investment):

 The total Musharakah Investment will be calculated based on the

actual quarterly accounts of the Customer.

 Adjusted Cost of Goods Sold (ACOGS) of the quarter would be

used to calculate Total Musharakah investment since it directly
relates to the operating activity of the business for which
Musharakah is being done and not to the whole enterprise of the
business.

 Since COGS is an income statement item, it relates to the whole

period of the business and gives a more accurate picture compared
to the Current Asset figures, which are balance sheet items and
portray only the end of period information.
 Calculation of Total Musharakah Investment

Calculation of Total Musharakah Investment

Since investment period in Musharakah would not be limited to the

purchase/production and sale of goods on cash the same day, the
considerable time period during which investment remains tied
up in inventory and receivables would have to be accounted
for.

Due to this fact the results of the following formulae would be used
to arrive at Musharkah’s Total Investment:

Musharkah’s Total Investment

=
Adjusted COGS multiplied by Inventory Turnover in Days and
divided by Musharakah tenor
+
Adjusted COGS multiplied by Average Collection Period in Days
and divided by Musharakah tenor
 Total Musharakah Investment

Calculation of Total Musharakah Investment

Cost of Goods Sold (2009) 27,059,566  

Net Sales (2009)  

36,724,920

Musharakah Tenor  Starting Jul 01, 2008 – June 30, 2009

365

Adjusted COGS  
24,715,024

Average Inventory (2006-9)  

2,073,058

Average of Trade Recievables(2006-9)  

309,301
Average Inventory (2006-9) x 365 /
Inventory Turnover in Days 27.96
COGS(2009)
Average of Trade Receivables (2006-
Average Collection Period in Days 3.07
9) x 365 / Net Sales (2009)

Musharaka Total Investment  

2,101,593
 Running Musharakah
Step 6 (Calculation of Customer’s Musharakah Investment):

 Subtracting Bank’s Musharakah Investment from Total Musharakah

Investment would give us Customer’s Musharakah Investment for
the Tenor:

Customer’s Musharakah Investment = 2,101,593 – 1,568,656

= Rs. 532,937/=
 Running Musharakah
Step 7 (Calculation of Actual Musharakah Profit):

Running Musharakah Profit

PKR as on 30/06/2009 ABC Limited
Audited Accounts For Musharaka
Net Sales 36,724,920 36,724,920
Cost of Sales '000' 27,059,566 24,715,024
Gross Profit 9,665,354 12,009,896
Bad Debts Expense
Diminution in value of stocks
Sale of waste stocks - proceeds
Insurance claim against lost goods
Musharakah Profit 12,009,896
 Running Musharakah
Step 8 (Distribution of Profit):
 Calculation of Profit Ceiling = Desired Rate x Total Musharakah
Investment
 Profit Ceiling = Desired Rate x Total Musharakah Investment
= 14.40% x 2,101,593,336
= 302,629,440
 Running Musharakah Profit upto the Profit Ceiling will be shared between
the Bank and the Customer in the proportion to their respective Investment
ratios in the Running Musharakah.
 Bank’s Profit Share =
Bank’s Musharakah Investment/ Total Musharakah Investment x Profit
Ceiling Amount
= (1,568,656,625 / 2,101,593,336) x 302,629,440
= 225,886,122/=
 Bank’s profit as a %age of Bank’s Musharakah Investment
= 225,886,122 / 1,568,656,625.
= 14.40% (Same as the required rate outlined earlier)
 Running Musharakah
Distribution of Profit above Ceiling amount:
 For profit above ceiling amount Bank will keep a very small ratio of profit.
This is required to fulfill the Shariah requirements of Musharakah
 Running Musharaka Profit Computation
(If Running Musharakah Profit is BELOW the Upper Profit Ceiling Amount)
Customer N ame: ABC Limited
Running Musharaka Sub-Tenor: July 01, 2008 to June 30, 2009

Customer's Running Musharaka Finance Limit 1,568,653,625

Desired Profit Rate (% p.a.)
- Relevant KIBOR 13.40%
- Margin 1.00%
Profit Ceiling Rate (% p.a.) 14.40%
N umber of Days in relevant Sub-Tenor 365

Total MBL Customer

Running Musharaka Investment for the relevant Sub-Tenor (PKR) 2,101,593,336 1,568,653,625 532,939,711
Investment & Profit/ (Loss) Sharing Ratio
74.64% 25.36%
(for profit amount BELOW Profit Ceiling Amount)

Sharing Ratio above ceiling amount 0.001% 99.999%

Actual Running Musharaka Profit 12,009,896,000

Running Musharaka Profit Ceiling 302,629,440

Running Musharaka Profit BELOW the Profit Ceiling Amount 302,629,440 225,886,122 76,743,318

Running Musharaka Profit ABOVE the Profit Ceiling Amount 11,707,266,560 117,073 11,707,149,487