‘Effective Profit Rate Method’ and Revenue Recognition of Islamic Banks: Risk Sharing or Risk Transfer?
By Zulkarnain Muhamad Sori PhD, CA(M), CTP (FAA-BNM), CPT (MIM)
Professor of Accounting School of Graduate Studies International Centre for Education in Islamic Finance (INCEIF) The Global University of Islamic Finance 59100 Kuala Lumpur, Malaysia
e-mail:
[email protected] Telephone: +603-76514000
Brief Vitae Dr Zulkarnain is a Professor of Accounting at the School of Graduate Studies, INCEIF, Kuala Lumpur. He earned a Bachelor of Accounting and a Master of Science from Universiti Putra Malaysia and a PhD in Audit and Corporate Governance from Cardiff University, UK. He was appointed by the Minister of Finance as a Council Member of the Malaysian Institute of Accountants (MIA) for two terms from 2008-2010 and 20102012. At the MIA, he actively involved in developing modules and conducting training for MIA Qualifying Examination and participated in the Financial Statement Review Committee and Education Committee. He is a Chartered Accountant registered with the MIA, Certified Training Professional of the Finance Accreditation Agency, Bank Negara Malaysia, Certified Professional Trainer of the Malaysian Institute of Management and a Certified Trainer of the Human Resource Development Fund. He is currently an advisor to a few of Malaysian companies and higher learning institutions. Dr Zulkarnain research interests include accounting, auditing, reporting, corporate governance and entrepreneurship.
1
Electronic copy available at: http://ssrn.com/abstract=2800437
‘Effective Profit Rate Method’ and Revenue Recognition of Islamic Banks: Risk Sharing or Risk Transfer?
By Zulkarnain Muhamad Sori (PhD) INCEIF, The Global University of Islamic Finance Kuala Lumpur, Malaysia
Abstract This paper examines the impact of using the ‘Effective Profit Rate Method’ (EPRM) in estimating revenue from the financing activities of Islamic Banks (IBs). Data for the study were sourced from audited financial statements, Islamic finance contracts (i.e. Al Ijarah Thumma Al Bai @ Islamic leasing) and interviews with three Islamic finance experts. It was found that EPRM is widely used by Islamic banks in Malaysia and the sale-based contract was found to be the single major (>75%) financing mode. Simulation of the repayment schedule for the Al-Ijarah Thumma Al-Bai (AITAB) financing arrangement indicates that IBs collected a large proportion of the revenues in the early years of the financing period and payments of principal by customers are proportionately low at the beginning of the financing period. The findings were subsequently benchmarked using the ‘Straight Line Method’ (SLM) and an equal distribution of revenues and payment of principal was observed throughout the financing period. The above results raised a concern regarding the nature of the customer-financier relationship. This concern stems from the fact that Islamic finance is built on the concept of ‘Risk Sharing’ instead of ‘Risk Transfer’. When a customer terminates their financing contract in the early years of the financing period, the IB has collected a relatively bigger portion of revenues, while the customer has made lower payments of principal. This outcome raised our concern as to whether EPRM is a ‘Risk Sharing’ or a ‘Risk Transfer’ mechanism, and whether the bank exploited their superior position by imposing EPRM that gives them advantages to shift their financing risk. Also, the customer is placed at a disadvantage, as this technique will directly or indirectly protect the IB from early termination of financing contracts. Islamic finance experts provide mixed views on the above observation. The interviewees acknowledged the importance of this issue to the industry and to the public. Regulators, bankers and other stakeholders should look critically into this matter and provide clear guidance to the market players.
Keyword: Effective Profit Rate Method, Islamic Bank, Risk Sharing, Risk Transfer, Revenue Recognition
2
Electronic copy available at: http://ssrn.com/abstract=2800437
‘Effective Profit Rate Method’ and Revenue Recognition of Islamic Banks: Risk Sharing or Risk Transfer? 1.0 Introduction Accounting for revenue recognition has been a subject of interest for regulators and other market participants. The interest stems from the fact that revenue forms the greatest single item in the financial statements (FASB, 2002, p.1). Indeed, aggressive revenue recognition has always been associated with corporate financial scandals like Enron, Worldcom and Parmalat. It has been used to mask firms’ real performance with the aim of preventing shareholders and stakeholders from scrutinizing their financial performance and other wrongdoings. The Securities and Exchange Commission in the US documented mistakes in revenue recognition as the lead issue in “financial reporting errors” (SEC, 2003, p. 6). Also, revenue is one of key financial indicators and the most scrutinized item in financial statements in assessing firms’ health and ability to continue as a going concern entity. This issue becomes more interesting when it is applied to the Islamic finance industry. The global key standard setter, i.e. the International Accounting Standards Board (IASB), did not specifically address the need of the Islamic finance industry to properly account for its revenue. Indeed, it is well recognized that Islamic financial institutions around the globe do not have clear guidelines and formulas to recognize revenue from their financing activities. In light of the speed of growth of Islamic banking assets from USD1.3 Trillion (as of the end of 2014) to a predicted USD 3 Trillion (by 2020), there is an urgent need for regulators, professionals and other market participants to acknowledge the issue and embark on debates to find a solution for the industry. The complexity of the business environment adds to the controversy in determining the method and the quantity of revenue to be recognized. Since there is little or no proper guidance on revenue recognition for Islamic financial institutions (or IBs), there is a gap between the Conceptual Framework of Financial Reporting and relevant guidance issued by the Central Bank, such as the GP8i Guidelines on Financial Reporting for Licensed Islamic Banks (2005) and BNM/RH/GL 002-23 Financial Reporting for Islamic Banking Institutions. This paper aims to examine the impact of the current practice of using the ‘Effective Profit Rate Method’ in estimating revenue (or profit share) from financing activities under various Islamic finance contracts by Islamic banks (IBs) that operate in Malaysia. The findings of this paper are important for the Islamic finance industry because, as Schipper et al. (2009) pointed out, revenue accounting has so far rested on “more than 200 pieces of literature, most of which are, literally, tied to business models, in the sense of being industry specific.” On the other hand, it is well recognized that there are no specific standards to guide revenue recognition for the Islamic finance industry and the formula to calculate revenue for IBs is borrowed from their conventional banking counterpart. IBs adopted the well-known ‘Effective Interest Rate Method’ and replaced the word ‘Interest’ with ‘Profit’ to reflect the Islamic way of financing. On the other hand, the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) has issued accounting standards to deal with revenue recognition for different financing contracts, as shown in Table 1 below. This paper is divided into six parts. The next section analyses the revenue recognition requirements by the IFRS and AAOIFI reporting regime, and also examines risk sharing concepts. This is followed by the third section on background information on IBs’ financing in Malaysia. The fourth section presents a simulation of EPRM and SLM techniques in
3
estimating revenue from Islamic financing activities. The fifth section provides a discussion on EPRM and risk sharing in Islamic finance. The final section concludes the paper. 2.0 Revenue Recognition Concept Revenue recognition is an accounting principle that defines a particular condition under which income becomes realized as revenue. The revenue recognition principle infers that a revenue should be recorded when an entity has substantially completed a revenue generation process. Thus, it should be recognized and recorded when it is realized or realizable and earned. This statement means that an entity should not defer the record until revenue is collected. The revenue should be recorded in an entity book as and when the entity has earned it. Thus, a transaction is treated as revenue when a specific event has occurred and the quantum of the transaction is quantifiable. For most business entities, revenue will be recognized when the entity delivers or performs its product or service and receives payment for it. According to the principle, revenues are recognized when they are realized or realizable, and are earned (usually when goods are transferred or services rendered), no matter when cash is received. However, controversy over revenue recognition arises at all times and standard setters and regulators are continually debating as to the best way to recognize revenue. The advent of the modern Islamic finance industry over the last few decades requires market players and other stakeholders to look into various part of the industry to make sure that they are in compliance with Shariah principles and eliminate all non-allowable conventional finance credentials like ribai, ghararii and maisiriii. One important area that needs attention is revenue recognition of Islamic financing contracts for Islamic banks and other Islamic financial institutions. Though there are no ‘hadith’ or Quranic verses specifying the formula to estimate revenue and how income is to be earned, the Shariah Committee as the gatekeeper of Islamic finance practices should evaluate and identify the best possible and most representative "income recognition formula" that reflects a fair calculation method. As well as actively participating in debate on Shariah matters relating to new and existing products, Shariah scholars should also look at accounting for revenue. The key Shariah requirement with regard to revenue recognition is that revenue should not be calculated on a compounding basis and should not match the conventional method, which conflicts with Shariah principles. The following sections provide accounting standards for revenue recognition under the IFRS and AAOIFI financial reporting regimes, and risk sharing concepts. 2.1 Revenue Recognition under IFRS Financial Reporting Regime The accounting standard on revenue recognition is contained in IAS 18/FRS 118/MFRS 118. The standard is principle-based and could be applied to various situations of sale of goods and/or rendering of services. The standard defines revenue as “the gross inflow of economic benefits during the period arising in the course of ordinary activities of an entity when those inflows result in increases in equity, other than increases relating to contributions from equity participants” (Para 7, FRS 118). Further, the accounting standard specifies five principles for classifying an event in revenue recognition for the sale of goods: (i) The risks and rewards of ownership of goods have been transferred from the seller to the buyer, (ii) The seller has no continuing managerial involvement over ownership or effective control of the goods sold; (iii) Collection of payment is reasonably assured; (iv) The amount of revenue can be reasonably measured; and (v) The costs of earning the revenue can be reasonably measured. Similarly, principles for revenue recognition of rendering services are as follows: (i) The amount of revenue can be measured reliably; (ii) It is probable that the economic benefits associated with the transaction will flow to the entity; (iii) The stage of completion of the transaction at 4
the end of the reporting period can be measured reliably, and (iv) the costs incurred for the transaction and the costs to complete the transaction can be measured reliably. Three themes emerged from the principles illustrated above, namely performance, collectability and measurability. Performance refers to event when the seller has done most or all of the activities required to be entitled to the payment. Collectability refers to a situation where the seller has a reasonable expectation of being paid. Measurability refers to the ability to reasonably measure the amount of relevant revenues and expenses. Recently, the IASB issued a new standard on revenue with the aim to remove inconsistencies and weaknesses in revenue requirements, provide a more robust framework for addressing revenue issues, and improve comparability of revenue recognition practices across entities, industries, jurisdictions, and capital markets. The new standard on Revenue from Contracts with Customer (MFRS 15) will take effect from 1st January 2018. Though the standards provide guidelines on many relevant issues on revenue recognition, one important angle that needs special attention is the determination of the quantum of revenue for financing under various Islamic finance contracts (e.g. Mudaraba, Murabaha, Musharaka, Ijarah, Istisna’a, Salam etc.). Indeed, this issue has been left to the industry norms rather than specifically evaluating its relevance and industry uniqueness, where EPRM is widely accepted as an approach to estimate the revenue amount. Paragraph 9 of IAS 39 defines the effective interest method as “a method of estimating the amortised cost of a financial asset or a financial liability (or group of financial assets or financial liabilities) and of allocating the interest income or interest expense over the relevant period.” However, as mentioned earlier, Islamic financial institutions that provide financing to their customers have copied this approach and replaced the word ‘Interest’ with ‘Profit’ to reflect their Islamic finance practices. Since there is no unique indicator to estimate income in Islamic finance, the profit rate is benchmarked to the interest rate. Figure 1 below provides an extract of guidance policy on revenue recognition issued by the Central Bank (Bank Negara Malaysia).
Figure 1: Extract of BNM’s Guidance of Accounting Policy of Shariah Contracts 2.2 Revenue Recognition under AAOIFI Financial Reporting Regime AAOIFI is a body that issues dedicated accounting, auditing, ethics, governance and Shariah standards for Islamic financial institutions. The body is supported by more than 200 institutional members that come from over 40 countries. However, the application of their standards is relatively low, although they have become mandatory regulatory requirements in Qatar, Bahrain, Syria, Sudan and Jordan. The other countries (including Malaysia) opted to adopt IFRS. To date, AAOIFI has issued 48 Shariah standards, 26 accounting standards, five auditing standards, seven governance standards and two codes of ethics. 5
Table 1: Selected Financial Accounting Standards on Revenue Recognition No 1
Financial Accounting Standard Murabaha and Murabaha to the Purchase Orderer
Code
Provision on Revenue Recognition
FAS 2
2/4/2: Profits of a credit sale which will be paid for either by means of one payment due after the current financial period or by instalments over several future financial periods shall be recognised by using one of the following two methods: (a) proportionate allocation of profits over the period of the credit whereby each financial period shall carry its portion of profits irrespective of whether or not cash is received. This is preferred method. (b) As and when the instalments are received. This method shall be used based on a decision by the Shari’a supervisory board of the Islamic bank or, if required, by the supervisory authorities. (Para. 8) 2/4/2: In the case of Mudaraba financing that continues for more than one financial period, the Islamic bank’s share of profits for any period, resulting from partial of final settlement between the Islamic bank and the Mudarib, shall be recognised in its accounts for that period to the extent that the profits are being distributed; the Islamic bank’s share of losses for any period shall be recognised in its accounts for the period to the extent that such losses are being deducted from Mudaraba capital. (Para. 15) 2/4/2: In the case of a constant Musharaka that continues for more than one financial period, the Islamic bank’s share of profits for any period, resulting from partial or final settlement between the Islamic bank and the partner, shall be recognised in its accounts for that period to the extent that the profits are being distributed; the Islamic bank’s share of losses for any period shall be recognised in its accounts for that period to the extent that such losses are being deducted from its share of the Musharaka capital. (Para. 12) 2/4/3: Item 2/4/2 shall apply to a diminishing Musharaka which continues for more than one financial period, after taking into consideration the decline in bank’s share in Musharaka capital and its profits or losses. (Para 13) Appendix (B) 1/3/3 (b) – Fuqaha opinions differ on rules of allocating profits among partners – (i) Profits should be divided among partners in proportion to their contributed capital; (ii) Profits is to be allocated according to efforts of partners in doing the work. 2/8: Upon delivery of Al-Muslam Fihi by Islamic bank to the client in a parallel Salam transaction, the difference between the amount paid by the client and the cost of Al-Muslam Fihi shall be recognised as profit or loss. (Para. 19) Operating Ijarah IMB through gift; IMB through sale for a token consideration; IMB through sale prior to the end of the lease term for a price equivalent to the remaining Ijarah instalments; 3/1/1/2: (a) Ijarah revenue shall be allocated proportionately to the financial periods in the lease term. (Para 9) IMB through gradual sale of the leased asset Ijarah revenue shall be recognised in the financial period in which it is due, taking into consideration that the revenue shall progressively decrease as the lessee acquires a greater share of the leased asset. (Para 47) 2/3/1: Istisna’a revenue is the total price agreed upon between the Islamic bank as Al-Sani’ and the client as Al-Mustasni’, including the Islamic bank’s profit margin in the contract. Istisna’a revenue and the associated profit margin are recognised in the Islamic bank’s financial statements according to either the percentage of completion or the completed contract methods as set up below… (Para. 7) 2/3/4: Parallel Istisna’a revenue and profit for each financial period shall be measured and recognised according to the percentage of completion method, since in parallel Istisna’a both costs and revenues of Istisna’a are known to the Islamic bank with reasonable certainty. (Para 16) 3/1/2: Profits from deferred payment sale shall be recognized on an accrual basis and proportionately allocated over the period of the contract, whereby each financial period shall carry its portion of the profits. Profits related to future financial periods shall be recorded in “Deferred profit account.” (Para 10)
2
Mudaraba Financing
FAS 3
3
Musharaka Financing
FAS 4
4
Salam and Parallel Salam
FAS 7
5
Ijarah and Ijarah Muntahia Bittamleek (IMB)
FAS 8
6
Istisna’a and Parallel Istisna’a
FAS 10
7
Deferred Payment Sale
FAS 20
6
As shown in Table 1 above, seven Financial Accounting Standards contained guidelines on revenue recognition for financing activities under various Islamic finance contracts. None of the standards recommended the use of EPRM in estimating revenue for IBs. In general, FAS 20 proposed the used of ‘proportionate allocation’ of revenue over the contract period in deferred payment sale. However, this general guideline should be used selectively based on the type of contract under consideration. For example, FAS 4 suggests that revenue for Musharakah contracts should be recognized based on the amount of profit distributed for the period. When it involves a diminishing Musharakah contract, the revenue to be recognized should take into consideration the decline in the bank’s share in Musharaka capital. On the other hand, revenue recognition for financing under an Istisna’a contract should take into consideration the percentage or completed method used in accounting the contract/project. 2.3 Risk Sharing in Islamic Finance Prohibition of ‘risk transfer’ and encouragement of ‘risk sharing’ have long been documented in the Islamic finance literature (see Askari and Mirakhor, 2014; Maghrebi and Mirakhor, 2015; Cizakca, 2014; Hasan; 2015; Askari, Iqbal, Krichne and Mirakhor; 2012). Indeed, the risk sharing concept was successfully adopted and resulted in economic prosperity in 13thcentury Venice, 19th-century Germany and 20th-century United States (Cizakca, 2014). Historians reported that the Islamic mudaraba concept, known locally as commenda, was borrowed and adopted into European economic, financial and political activities and resulted in a huge impact on their civilization. The risk sharing commenda contract was used in financing trades within Europe and across the Mediterranean. It was reported that Genoa and Venice had used commenda contracts in their trading with Europe and the Islamic world, and the economies of these areas were successful. Also, the commenda contract played an important role during the industrialization era of Germany and their record in overtaking England’s economy. Unfortunately, due to certain influential parties that banned the use of commenda, these economies weakened and declined (Acemoglu and Robinson, 2012; Cizakca, 2014). The evidence indicates the superior impact of risk sharing to the whole civilization of countries illustrated above as compared to their counterpart risk shifting. An array of risk sharing benefits has been documented in the literature, such as reduction in poverty, reduction in income inequality, human and economic progress, and economic growth and stability (see Askari and Krichene, 2014; Askari et al., 2014). These advantages emanated from the superior design of the risk sharing mechanism. Though it was claimed as an ideal approach in business activities, prior literature did not clearly outline the method, formula or rate of proportion or distribution of risk/asset between related parties in the transaction(s), especially in the area of our interest, namely revenue recognition from financing activities by Islamic banks. On the other hand, Askari et al. (2012) rightly pointed out that risk sharing should be undertaken with the aim to pool together various market players, such as investors, entrepreneurs, scientists and other stakeholders, that are able to jointly contribute larger resources, varied skills and technologies. Indeed, various Islamic contracts could be applied to solve various issues at hand. The literature documents that the popular commenda organization in medieval Italy had used equity financing, especially in maritime ventures, which was claimed to have been directly borrowed from Islamic sources (Brouwer, 2005; Udovitch, 1970; Mirakhor, 1983). This development continues in modern-day business structures such as ‘widely held share ownership’ and limited liability companies headed by a managing director (Weber, 2003). The risk sharing discussed above has a strong rooting in the Qur’an, where verse 2:275 spelled out that ‘…they say that indeed al-bay is like al-riba. But Allah has permitted al-bay 7
(exchange contracts) and has forbidden al-riba (interest-based debt contracts)…” This verse laid down the foundation for a properly organized economy and the way forward for human dealings. Transactions should be based upon exchange of goods or services and should not have any elements of riba. The ownership rights of goods are traded and exchanged for another at agreed terms and conditions. On the other hand, ribawi transactions involve the provision of a loan by a lender to a borrower with an agreed higher consideration in the future. In modern-day transactions, ribawi transactions discriminate borrowers in many ways, such as compounding interest and penalties to loan defaulters. In these transactions, as well as retaining ownership rights over assets under the loan agreement, lenders also apply compound interest and top up penalties on the amount due from time to time. These amounts will accumulate and wipe out the asset’s value, putting the borrower into deep financial problems. There are instances where lenders put borrowers under excessive pressure to the extent that they harm borrowers’ personal life, assets and family. The way out of this extreme negative implication of ribawi-based transactions, as Askari et al. (2014) rightly pointed out, is that the Qur’an endorses risk sharing with common rules of exchange, distribution, and redistribution of goods and services. In this context, the Qur’an promotes various qualities to support the risk sharing concept, such as cooperation (Qur’an 5:2), social unity and cohesion (Qur’an 3: 103), equality (Qur’an 4: 1), and righteousness (Qur’an 49: 13). It is important to note that the fundamental tenet of Islamic finance is the rejection of ribawi transactions, as illustrated in the Qur’an (2: 275), where Allah says “Those who devour riba will stand except as stands one who the evil one by his touch has driven to madness. That is because they say exchange is like riba; but Allah has permitted exchange and forbidden riba.” Indeed, riba could be considered as a serious crime that results in injustice in human dealings (See Qur’an 2: 276). Despite much discussion in the literature on risk sharing and risk transfer and the role played by ribawi transactions in the society, there has been a lack of attention to the micro issues, such as banking operations with the customer. It is the interest of this paper to explore issues on ‘risk sharing/risk transfer’ on gradual revenue recognition by Islamic banks from periodical instalments for financing made by individual borrowers. There are no clear guidelines on how Islamic banks should split the periodic instalment of accounts into payment of profits by customers to the bank and payment of principal amount. The current practice in Islamic banks is to borrow the formula and the way of calculating it from their counterparts in conventional banking. 3.0 Methodology To achieve the research objective, data for this study are drawn from three sources, namely: (i) audited financial statements, (ii) Islamic finance contracts (i.e. Al Ijarah Thumma Al Bai) and (iii) interviews with three Islamic finance experts. The following table sets out the details of the data described above (See Table 2 below). Table 2: Data for the Study No. 1
Source of Data Audited financial statements
2
AITAB financing contract
3
Face-to-face interview
No of Sample 16 (100% Sampling) 1 (Standard contract used by Malaysian IB) 3
8
Useable Data 14 (2 IBs did not provide financial statements online) 1
3 (Academician in Islamic Finance – 2 Shariah experts, 1 risk management expert)
The financing data from audited financial statements were manually collected and collated according to the themes of data analysis. The results are presented in Table 3, Appendix 1 (a), Appendix 1 (b) and Appendix 1 (c). An AITAB financing contract was sourced from customer of IB and a careful analysis of the contract was undertaken, with a special focus on the terms and conditions of the financing. From the data gathered, a simulation of EPRM that is benchmarked with SLM was undertaken. Subsequently, a financing table was prepared, as tabulated in Appendix 2 and the respective captions in Figures 4, 5 and 6. Estimated revenue under EPRM and SLM are tabulated in Appendix 2 and also presented in graphical format in Figure 2. Data from interviews were analysed and presented in the analysis section below. 4.0 IBs Financing in Malaysia This section provides the results of the data analysis on the audited financial statements of Islamic banks that operate in Malaysia. Data on Islamic financing according to the type of contract was collected and collated. Audited financial statements issued by Islamic banks for the financial year ending in 2015 that are available online were collected for analysis. This approach was undertaken to examine Islamic banks’ recent performance. As shown in Table 3 below, fourteen out of sixteen Islamic banks made their financial statements available online. Of the sixteen licensed Islamic banks, ten are locally owned and six are foreign owned. Although the six Islamic banks are foreign owned, they are locally incorporated, as shown by the ending of their name i.e. Bhd. The abbreviation ‘Bhd’, short for ‘Berhad’, means that the entity is a public limited company and its shares can be offered to the public with a minimum of fifty members. In general, at least five groups of Islamic contracts are used by Islamic banks in Malaysia in providing financing to the public, namely (i) Sales-based contracts, (ii) Leased-based contracts, (iii) Equity-based contracts, (iii) Construction-based contracts, (iv) Loan contracts, and (v) Others. The Islamic banking industry in Malaysia seems progressive and innovative, utilizing various Islamic finance contracts in offering banking products to the public. To examine the depth and breadth of the industry, data on financing according to type of contracts was analysed. For the year ending in 2015, the total Islamic financing issued by Islamic banks amounted to RM480 billion (USD118 billion/Exchange rate of RM1=USD0.25). The sales-based contract (75.2%) was found to be the single biggest financing mode used by Islamic banks in Malaysia. This was followed by Lease-based contracts (18.4%) and Equity-based contracts (5.6%). On the other hand, Maybank Islamic Bhd dominated the Malaysian Islamic financing market, with a 48.5% (RM283 billion/USD69 billion) share of the market, followed by CIMB Islamic Bank Bhd (8.5%) and Bank Islam Malaysia Bhd (7.3%). As shown in Appendix 1 (a), the Murabahah contract was the most popular form of sales-based contract. Al-Ijarah Thumma Al-bay was the most popular form of Lease-based contract (Appendix 1 (b)) and Musharakah Mutanaqisah was the most used equity-based contract (Appendix 1 (c)).
9
Table 3: IB’s Financing According to Type of Contract for the Year ending in 2015 No
Name
Policy on Revenue Recognition
Sale-based Contract
Leasebased Contract
Equitybased Contract
Construction -based Contract
Loan Contract
Other Islamic Financial Contract
Total
RM'000
RM'000
RM'000
RM'000
RM'000
RM'000
RM'000
%
Rank
1
Affin Islamic Bank Bhd
EPRM
3,592,781
3,498,797
1,235,369
724,333
-
225,816
9,277,096
1.9
11
2
Alliance Islamic Bank Bhd
5,807,836
767,526
-
-
292
-
6,575,654
1.4
13
3
AmBank Islamic Bhd
EPRM EPRM
16,575,281
10,950,562
40,439
-
-
456,052
28,022,334
5.8
6
34,507,579
210,391
-
168,373
-
73,883
34,960,226
7.3
3
12,086,144
1,137,313
264,685
160,631
848
46,907
13,696,528
2.9
8
34,531,544
5,910,737
-
-
17,267
115,623
40,575,171
8.5
2
4 5 6
Bank Islam Malaysia Bhd Bank Muamalat Malaysia Bhd CIMB Islamic Bank Bhd
7
Hong Leong Islamic Bank Bhd
8
Maybank Islamic Bhd
9 10 11 12 13 14 15 16
Public Islamic Bank Bhd RHB Islamic Bank Bhd Al Rajhi Banking & Investment Corporation (Malaysia) Bhd HSBC Amanah Malaysia Bhd Kuwait Finance House (M) Bhd OCBC Al-Amin Bank Bhd Asian Finance Bank Bhd** Standard Chartered Saadiq Bhd**
EPRM EPRM EPRM EPRM EPRM EPRM EPRM
12,608,029
3,533,134
-
-
-
372
16,141,535
3.4
7
191,427,471
36,166,946
4,384,781
158,480
-
716,760
232,854,438
48.5
1
11,765,526
12,050,347
8,231,267
-
-
5,610
32,052,750
6.7
4
17,243,255
6,490,631
7,024,400
-
-
366,036
31,124,322
6.5
5
5,076,798
-
-
-
1,902
-
5,078,700
1.1
14
6,170,956
233,655
5,203,159
-
-
569,358
12,177,128
2.5
9
5,193,684
1,894,939
323,751
1,500
1,147
-
7,415,021
1.5
12
4,530,188
5,354,505
275,626
-
-
435
10,160,754
2.1
10
-
-
-
-
-
-
-
0.0
15/16
-
-
-
-
-
-
-
0.0
15/16
361,117,072
88,199,483
26,983,477
1,213,317
21,456
2,576,852
480,111,657
EPRM EPRM EPRM EPRM EPRM EPRM Total %
75.2
18.4
5.6
0.3
0.0
0.5
Rank
1
2
3
5
6
4
Note: * Data was collected on 1st May 2016 ** Not available online
10
100.0
100.0
Analysis of audited financial statements reveals that all (100%) of the banks employed the ‘Effective Profit Rate Method’ (EPRM) in estimating revenue to be recognized from periodic instalments that fall in the financial year that ended in 2015. EPRM is a method of estimating the amortised cost of a financial asset or a financial liability and of allocating the financing income or expense over the relevant period. The effective profit rate is the rate that exactly discounts estimated future cash payments or receipts through the expected life of the financial instruments to the net carrying amount of the financial assets or financial liability. Indeed, Bank Negara Malaysia (the Central Bank of Malaysia) has used EPRM in their ‘Guidelines on Financial Reporting for Licensed Islamic Banks’ to illustrate the disclosure on accounting policy of Shariah contracts. Indirectly, this is a signal of industry norms and acceptable practices to the Islamic banks. Appendix 2, Figures 4, 5 and 6 contain information on payment schedules based on EPRM. The first column contains the beginning balance of financing at various points in time. The second column shows periodical instalments made (or to be made) by the borrower. The third column indicates profit/revenue for the period recognized by the bank: this is calculated by multiplying the effective profit rate (the annual effective profit rate should be converted into a single period rate for the year) by the respective beginning balance of financing (column 1). The fourth column contains payment of principal made by the customer, where the period instalment is subtracted from the profit paid to the bank (i.e. figure in column two minus the figure in column three). Finally, the fifth column shows the ending balance of the financing, which is generated by subtracting the beginning balance in column 1 from the payment of principal in column 4. It can be seen in Appendix 2, Figures 4, 5 and 6 that the profits/revenues recognized by the bank are higher in the early years of the financing period and the number declines over time until the end of the financing period (as shown by the blue line in Figure 2 below). On the other hand, payment of principal by the customer increases from the beginning until the end of the financing period. Monthly Profits Recognised by IB
1 6 11 16 21 26 31 36 41 46 51 56 61 66 71 76 81 86 91 96 101 106
400 350 300 250 200 150 100 50 0
EPRM
SLM
Figure 2: Monthly Profit/Revenue Recognised by IB over the Financing Period As a benchmark for our analysis, calculation of profits/revenues recognized by banks using a Straight Line Method (SLM) is presented side by side with the EPRM in Appendix 2. The profits/revenues recognized using the SLM are tabulated in Figure 2 above, as shown by the red line in the graph. This finding is further analysed and discussed in the next section. 11
5.0 Simulation of Revenue/Profit Recognition Using EPRM and SLM In this section, information from a genuine Al Ijarah Thumma Al Bai contract (an Islamic lease contract with an option to transfer ownership of the asset at the end of the contract) to acquire a car will be used in a simulation of IB’s revenue recognition. As a benchmark, the same data is used to simulate the financing using SLM. The name of IB and its customer are disguised to preserve their anonymity. Ijarah refers to a lease contract that consists of an exchange of usufruct or benefits of an asset or a service for rent or commission for an agreed period (BNM, 2010). In the context of Islamic finance, the ijarah concept is usually applicable in financing contracts such as in real property financing, vehicle financing, project financing and personal financing. AlTAB is a financing product that enables customers to lease assets from Islamic financial institutions with an option to acquire the leased assets at the end of the lease tenure. The following paragraph provides discussion on the simulation of revenue/profit recognition with special reference to AITAB financing. 5.1 The Simulation Mr Dan intends to purchase a car of his choice. He visits a showroom in Damansara and makes a selection after being given a detailed briefing on the car and conducting a test drive. The following are the details of the AITAB financing approved by ABC IB Berhad to finance the purchase of the car for Mr Dan. Table 4: Facts of Simulation Financing of Asset Acquisition Term Charges Financing period Effective Profit Rate Monthly Instalment (107 months) Final Instalment
RM91,000.00 2.63% Flat 9 Years (@108 months) 4.86% RM1,043.00 RM938.70
The estimation of payment of profits (revenue) and payment of principal portions from monthly instalments are given in Appendix 2. The total financing charges (or total profit) for IB is calculated by multiplying the total financing (RM91,000.00) with the term charges: i.e. 2.63% for the agreed nine-year financing period, resulting in total profits/revenues of RM21,539.70. As shown in Appendix 2, the beginning balance of AITAB financing is multiplied with the Effective Profit Rate i.e. 4.8666%, and this results in revenue for the month of RM369.06. To arrive at the payment of principal (RM673.94), the revenue for the month (RM369.06) is subtracted from the monthly instalment (RM1,043). The AITAB’s ending balance (RM90,326.06) for the month is the result of AITAB’s beginning balance (RM91,000.00) minus the payment of principal (RM673.94). This process is repeated for the next 107 monthly instalments. As shown in Appendix 2, the total revenue recognized for AITAB financing for the entire nine-year financing period is RM21,539.70. On the other hand, the total revenue recognized for AITAB financing under the SLM is the same as that under the EPRM, i.e. RM21,539.70. However, the periodical revenue recognized is straightforward, where the total profit is divided by the financing tenure, i.e. 108 months, resulting in RM199.44 per month. The payment of principal (RM843.56) is derived by subtracting the profit for the month (RM199.44) from the monthly instalment (RM1,043). The ending balance for period 1 12
(RM90,156.44) is derived from subtracting the payment of principal (843.56) from the beginning balance (RM91,000). The same calculation is applied for the entire 180-month financing period. In general, the total revenue recognized over the 180 months of the financing period under EPRM and SLM is the same, i.e. RM21,539.70. However, the approach taken in estimating revenue under EPRM is different than SLM, as EPRM discounts the estimated future cash payments and receipts through the expected life of the financial asset (where the financing period is 108 months). On the other hand, SLM prorates the revenue equally throughout the 108-month financing period. These approaches result in two different revenues being recognized in a single month. As shown in a twelve-month window (Figure 4) and a twenty-four-month window (Figure 5), the revenue paid to IB is higher under EPRM as compared to SLM. In the first twelve months, revenue for EPRM is RM4,245.81, as compared to RM2,393.30 under SLM. As a result, payment of principal by the customer under EPRM (RM8,273.19) is lower as compared to SLM (RM10,122.70).
Figure 4: Twelve-months Window of the Beginning Financing Period Further analysis is undertaken by looking at a wider window of twenty-four months (Figure 5 below). A similar pattern is found to that shown in Figure 4 above. IBs collected revenue amounting to RM8,080.04 under EPRM, while SLM accounts for revenue of RM4,786.60. As a result, payment of principal by the borrower would be higher under SLM as compared to EPRM. The total payment of principal over twenty-four months under SLM is RM20,245.40, as compared to RM16, 951.96 under EPRM. This indicates that in the early years of the financing period, IBs are more aggressive in collecting revenue using EPRM, while SLM provides stable periodic profits.
13
Figure 5: Twenty-four-month Window of the Beginning Financing Period Figure 6 below show analysis on the last twelve months of the financing period. Revenue paid to IBs under EPRM (RM318.84) during the last twelve months of the financing period is significantly lower than under SLM (2,428.73). As a result, payment of principal under EPRM (RM12,092.86) is much higher than under EPRM (RM10,018.40).
Figure 6: Twelve-months Window of the Ending Financing Period
14
5.2 Analysis of Interview Data This procedure was undertaken with the aim to gather the perceptions of Islamic finance experts on the use of EPRM and SLM in the estimation of the revenue to be recognized for financing activities by Islamic banks. Three Islamic finance experts were interviewed: the details of the interviewees are presented in Table 5 below. Responses by the Islamic finance experts are important in exploring the underlying reasons for the approach taken by Islamic banks and their expectations that they will improve these practices, which quantitative methods have failed to achieve. These interviewees were selected because they have practical Islamic banking/finance experience and strong theoretical understanding. Table 5: Details of Interviewees No. Respondent 1 Interviewee 1 2 3
Interviewee 2 Interviewee 3
Code Background A1 Academia – Specialising in Shariah, Shariah Committee Member of an Islamic Bank A2 Academia – Specialising in Islamic Law/Shariah A3 Academia – Specialising in Risk Management/Banking, previously was a member of Board of Directors and a Chairman of Audit Committee of a bank
Respondents were asked open-ended questions relating to EPRM and SLM. The interview results were analysed and the findings are reported without specifically identifying the respondents, in order to preserve their anonymity. The following paragraph presents the results of the analysis. Although EPRM has been widely used in the estimation of revenue to be recognized for financing activities of IBs, some of the industry players are not well aware of the reasons for applying this method. They accept the method as a recommendation made by their work procedures and believe that it is the best alternative for application. Interviewee A1 pointed out that research on EPRM is important and timely; however, the interviewee was unable to provide further comment on the issue of interest. A1 took some time to recall the subject matter and argued that the bank where A1 acted on the Shariah committee did not explore the issue in great detail. This reaction might have originated from the institution’s behavior in treating the issue as less important. However, A1 believed that regulators and related parties should study the issue critically and produce clear guidelines for the industry. This was further supported by interviewee A2, who said: You see… this is an important issue. The general public, especially the borrowers, do not have knowledge and information on the mechanics of EPRM. Indeed, many of them do not even bother about it… I strongly believe that something must be done. In a way, this is a weakness of our industry. We must stand up and correct it. A2 believed that the bank should be fair to their customers and should not set ‘achieving continuous improved profit’ as their objective. The matter becomes worse when the performance of Islamic banks is benchmarked to their counterparts in conventional banks. A2 argued that the objective of setting up Islamic banks is to provide alternative products/services that comply with Shariah principles. Thus, Islamic banks should not benchmark their performance with their conventional 15
counterparts. The market they serve and the customers that utilize their services are different. This argument was not shared by A3. This interviewee made the following statement to show his disagreement: If you use the Straight Line method, what is there to protect the bank? They might lose customers if you impose the SLM. The customer’s outstanding balance would reduce rapidly and this might attract the customer to make early full settlement. A3 pointed out that the bank’s estimated revenue under SLM will be lower than EPRM. As a result, the customer’s outstanding balance would be lower than those under EPRM due to more money from the periodic instalments to pay the financing principal (lesser revenue: higher payment of principal, lower outstanding balance). A2 rejected this argument and believed that banks should share the risk instead of transferring the risk to their customers by collecting higher revenues/profits in the early years of the financing period. A2 strongly disagreed with the current practice and wanted to see changes in the industry. A2 pointed out that Islamic banks should not blindly accept the conventional banks’ approaches, such as using the EPRM. A2 believed that what is right for the Islamic finance industry must be held up and what is wrong should be discontinued. On the other hand, A3 pointed out that the use of SLM might result in higher payment of principal by customers and reduce the outstanding balance much faster than using EPRM. Thus, banks will recognize a lower amount of revenue in the early years of the financing period. A3 pointed out that although the periodic revenue and payment of principal by the customer are different between the two methods, the aggregate amount is the same (refer to Appendix 2). A3 pointed out that: …the customer will see lower outstanding balance and this might encourage them to terminate the contract by making full settlement earlier than the planned maturity period. The bank will be at a disadvantage…. Of course, if you look at it from a different perspective you will see that the bank will be more competitive. They might get more customers from those who migrate from conventional finance… The interviews reveal that the use of EPRM would only benefit the banks by enabling them to collect more revenue in the early years of the financing period. This would put the banks in a better position than their customers, as they would be well prepared for any unwanted events or situations that might face the customers, such as the customers encountering financial difficulties. In the event where the bank needs to auction the assets under financing for a lower market price or a forced sale price to cover the principal balance, they can reduce their potential losses. The whole process of revenue recognition and determining the amount for payment of principal is beyond the customers’ control, as they are unable to decide them from the beginning of the contract. Indeed, the used of EPRM is a market norm, long practiced by conventional financial institutions. On the other hand, shifting from EPRM to SLM in revenue recognition of financing activities would result in a significant drop in aggregate revenue to be reported by banks. This might make Islamic banks’ financial information less attractive compared to their counterparts in conventional banks. Indeed, the EPRM has gone through a major rebranding process in which the word 16
‘Interest’ in the original Effective Interest Rate Method was dropped and replaced with ‘Profit’. This resulted in a new term in current Islamic finance practices, namely the Effective Profit Rate Method. Finally, the interviewees believed that the regulators and players in the Islamic finance industry should discuss the matter and develop proper guidelines to solve the issue of interest. 6.0 Discussion on EPRM and risk sharing in Islamic finance Risk sharing has been acknowledged in the literature as a powerful approach in human dealings, especially in the finance and banking industry. The approach could bring stability to the industry and treat all parties with justice and fairness. The above analysis indicates that the EPRM would allow Islamic banks to book higher revenue in the early years of the financing period, resulting in a lesser portion of periodic instalments for payment of principal. The revenue portion would gradually decrease and the principal portion would gradually increase throughout the financing period. When the revenue recognized under EPRM was benchmarked with SLM, it was found that the SLM method produces an equal amount of revenue to be recognized by the bank and an equal amount of payments of principal throughout the financing period. The total revenue recognized by the bank and the total amount of payment of principal are the same under both EPRM and SLM. A quick analysis of the AITAB financing document (i.e. loan agreement) reveals that the use of the EPRM approach in revenue recognition has not been mandated in any clause of the agreement between the bank and the borrower. The use of EPRM in revenue recognition is more to do with industry practices rather than a guide by scholars, the literature, the hadith, the Qur’an and Ijma Ulama. The issue of interest is when the borrowers from Islamic banks terminate their financing contracts in the early years of financing, e.g. in the third year of finance. Referring to Appendix 2, line 36, the ending balance of financing under EPRM is RM64,934.21, while the balance of financing under SLM is RM60,631.90 (i.e. financing balance under EPRM is higher by RM4,302.31). In this context, when the bank has collected more revenue in the early years of the financing contract, this might indicate that the bank is trying as much as it can to minimize the risk of financing: i.e. the risk that the borrower will default on the repayment. In the event that the borrower defaults their payment of instalments to the extent that the bank repossesses the asset (car) pledged, the bank is still in a safer situation when the repossessed asset has a lower market price. The above argument is merely an act of the bank’s transferring the financing risk to the borrower instead of sharing the risk with the borrower. Furthermore, the act of collecting higher revenues at the beginning of the financing period indicates that the bank did not trust or was skeptical that the customer would proceed until the end of the financing contract. Thus, EPRM would act as ‘protection’ from a customer terminating their financing contract. Since the payment of principal is much lower in the early years of financing, this situation will put the borrower at a disadvantage, especially when the market price of the asset is low. Through this approach, the bank can keep the customer for a longer period to serve their contract. When a customer terminates the financing contract before it reaches maturity, the bank will lose its potential income: the accounting term for this is ‘unearned revenue’. The counter-argument for a bank to adopt the SLM is that the practice will promote justice and fairness to the borrower as well as the bank. The borrower will benefit 17
from a much lower outstanding balance of financing. They can make better economic decisions at any time they prefer. On the other hand, Islamic banks would become more attractive, as they provide a better and fairer stream of payment of principal. When a customer pays an instalment, the payment of principal would be higher than those under EPRM. It is expected that there would be a major shift from those who use conventional finance to Islamic finance services. Indeed, the issue of payment of principal under EPRM has been a major concern among well-informed borrowers. Among the main concerns is that their payment of principal is very low and payment of profit from the instalment is larger. Thus, this has raised a question as to how Islamic banks differ from conventional banks when they both use the same approach in the distribution of profits/interests. When the analysis turns to the type of financing contract, the use of EPRM might be a fairer profit distribution method for equity-based financing such as Musharakah Mutanaqisah (MM). Under MM, the bank will hold high equity at the beginning of the financing period and this will reduce throughout the financing period. Thus, it might be fair for the bank to charge a reducing pattern of revenue, as indicated by the EPRM, to reflect their equity in the asset financed. Their level of ownership will justify the amount of profit they claim. Conversely, another mode of financing, like murabahah (cost plus profit), might not be justified in using the EPRM due to the bank’s position, which marks up the cost of assets with profit for the transaction. The question is, on what grounds does the bank collect higher profits/revenues at in early years of financing? The use of EPRM is still accepted by the authorities in Malaysia because there is no hadith or Quranic verse that specifically determines the way in which banks should treat their revenue. However, IBs should inform the borrower about the approach taken in splitting the periodic instalment into payment of revenues to the bank and payment of principal. The current practice leaves the borrower unaware of what will happen to their periodic instalments, and some borrowers believe that the whole sum of instalments would reduce their principal of financing. It is highly recommended that the Islamic banks consider SLM or some other approach to replace the current EPRM, to give banks more advantages in managing their customers’ financing accounts. 7.0 Conclusion This study has examined the use of EPRM in revenue recognition by Islamic banks in Malaysia. It created a simulation of AITAB financing over 108 months using the EPRM and benchmarked with the SLM. The paper compares revenue/profit recognition, payment of principal and balance of financing under EPRM for the initial twelve-month and twenty-four-month windows of the financing period and the last twelve-month window of the financing period. It showed that the EPRM generated higher revenues to be recognized by the bank as compared to those under SLM. Accordingly, the payments of principal are relatively lower under the EPRM as compared to the SLM in the early years of the financing contract. On the other hand, the reverse situation happens in the final part of the financing period. The SLM produces equal profits (or revenue) to be recognised and payment of principals throughout the financing period. These patterns raise questions about the fundamental issue of Islamic finance, namely risk sharing.
18
The paper draws attention to the possibility of risk transfer instead of risk sharing when Islamic banks use EPRM. Banks might transfer the risk of the customer terminating the financing in the early period by collecting higher revenues and lower payment of principal in the customer’s monthly instalment. The potential problem of lower market prices for assets that are repossessed and auctioned is transferred using the EPRM. The protection would protect the banks from losing potential revenue to be collected from their customers in future years. However, the counter-argument of using more a conservative form of revenue recognition like the SLM is that Islamic banks will become more attractive compared to their counterparts in conventional finance. This will attract more new customers and those from conventional banking to use Islamic finance services. However, it was argued that the use of EPRM might be justifiable according to some contracts such as Musharakah Mutanaqisah, where the bank’s ownership is higher at the beginning of the financing period and gradually decreases throughout the financing period. Finally, since there are no fatwas, hadiths or Quranic verses to guide such revenue recognition, the use of EPRM is not against any Shariah ruling unless the Shariah authority makes a clear decision that the practice is merely a risk transfer rather than a risk sharing.
19
Reference Acemoglu, D. and Robinson,J. A. (2012). Why Nations Fail. New York: Crown Business. Askari, H. and Krichene, N. (2014). Islamic Finance: An Alternative Financial System for Stability, Equity and Growth. PSL Quarterly Review, 67 (268), 9-54. Askari, H., Iqbal, Z., Krichne, N. and Mirakhor, A. (2012). Risk Sharing in Finance. Singapore: John Wiley & Sons Askari, H., Krichene,N. and Mirakhor, A. (2014). On the Stability of an Islamic Financial System. PSL Quarterly Review, 67 (269), 131-167. Askari, H. and Mirakhor, A. (2014) Risk Sharing, Public Policy and the Contribution of Islamic Finance. PSL Quarterly Review, 67 (268-271), 345-379. Bank Negara Malaysia (2016). Financial Reporting for Islamic Banking Institutions. Available at BNM: http://www.bnm.gov.my/guidelines/01_banking/02_ financial_reporting/Financial_Reporting_for_Islamic_Banking_Institutions.pdf Biondi, Y., Bloomfield, R. J., Glover, J. C., Jamal, K., Ohlson, J. A., Penman, S. H. and Tsujiyama, E. (2011). Accounting for Revenues: A Framework for Standard Setting. Accounting Horizons, 25 (3), University of Alberta School of Business Research Paper No. 2013-690. Available at SSRN: http://ssrn.com/abstract=1792494 or http://dx.doi.org/10.2139/ssrn.1792494 Brouwer, M. (2005). Managing Uncertainty through Profit Sharing Contracts from Medieval Italy to Silicon Valley. Journal of Management and Governance, 9 (3-4), 237-255. Cizakca, M. (2014). Risk Sharing and Risk Shifting: A Historical Perspective. Borsa Istanbul Review. 14 (4), 191-195. Colson, R. H., Bloomfield, R. J., Christensen, T. E., Jamal, K., Moehrle, S. R., Ohlson, J. A., Penman, S. H., Previts, G., Stober, T. L., Sunder, S. and Watts, R. L. (2009). Response to the Financial Accounting Standards Board's and the International Accounting Standard Board's Joint Discussion Paper Entitled, 'Preliminary Views on Revenue Recognition in Contracts with Customers'. Accounting Horizons, 24 (1) University of Alberta School of Business Research Paper No. 2013-682; Johnson School Research Paper Series No. 37-09. Available at SSRN: http://ssrn.com/abstract=1429041 or http://dx.doi.org/10.2139/ssrn.1429041 FASB (2002) Proposal for a New Agenda Project Issues Related to the Recognition of Revenues and Liabilities. Available on-line: https://www.csun.edu/~hfact004/352/recognitionrev&liab.pdf Accessed on 1st May 2016. Hasan, Z. (2015). Risk Sharing Versus Risk Transfer in Islamic Finance: A Critical Appraisal. ISRA International Journal of Islamic Finance, 7 (1), 7-24. Maghrebi, N. and Mirakhor, A. (2015). Risk Sharing and Shared Prosperity in Islamic Finance. Islamic Economics Studies, 23 (2), 85-115. McCann, E. and Holmes, K. (2010). The Classification of Capital and Revenue in Accounting and the Definition of Income in the Market-Place. Victoria University of Wellington – Centre for Accounting, Governance and Taxation Research Working
20
Paper No. 73. Available at SSRN:http://ssrn.com/abstract=1883966 http://dx.doi.org/10.2139/ssrn.1883966.
or
Mirakhor, A. (1983). Muslim Contribution to Economics. Seminar Paper presented at the Midwest Economic Association Meeting, April 7-9, and reprinted in Baqir AlHassani and Abbas Mirakhor, Essays on Iqtisad: The Islamic Approach to Economic Problems (New York: Global Scholarly Publications). Mohd Nazri C. (2016). Shariah in Islamic Finance. Bank Islam Malaysia Berhad Slides. Available online http://www.bankislam.com.my/en/Documents/shariah/ ShariahInIslamicFinance-MohdNazriChik.pdf Accessed on 1st May 2016. Procházka, D. (2009). New Approaches to Revenue Recognition and Common Sense. Available at SSRN: http://ssrn.com/abstract=1518378 or http://dx.doi.org/10.2139/ssrn.1518378 Roszaini H. and Mohammad H. (2010). Islamic finance: from sacred intentions to secular goals? Journal of Islamic Accounting and Business Research, Vol. 1 Iss: 2, pp.85 – 91. Saiful A. R. and Mohd Afandi A. B. (2003). Performance of Islamic and mainstream banks in Malaysia, International Journal of Social Economics, Vol. 30 Iss: 12, pp.1249 – 1265. Schipper, K., Schrand, C., Shevlin, T. and Wilks, T. (2009). Reconsidering Revenue Recognition. Accounting Horizons, 23, 55-68. SEC (2003). Report Pursuant to Section 704 of the Sarbanes Oxley Act of 2002. Available on-line: http://www.sec.gov/news/studies/sox704report.pdf Accessed on 1st May 2016. Shahid M. K. G. (2015). Why interest-rate cannot benchmark for Islamic financial product pricing? Benchmarking: An International Journal, Vol. 22 Iss: 7, pp.1417 – 1428. Uddin, M. A. (2015). Principles of Islamic Finance: Prohibition of Riba, Gharar and Maysir. MPRA Paper No. 67711. Available on-line https://mpra.ub.unimuenchen.de/67711/1/MPRA_paper_67711.pdf Accessed on 1st May 2016. Udovitch, A. L. (1970). Commercial Techniques in Early Medieval Islamic Trade. In D. Richards (ed.), Islam and the Trade of Asia, 37–62. Weber, M. (2003). The History of Commercial Partnerships in the middle Ages. Oxford: Rowman & Littlefield Publishers Inc.
21
Appendix 1 (a) IB’s Financing According to Type of Sale-based Contract for the Year ending in 2015 No
Name
BBA
Bai-Inah
Bai AlDayn
Total Bai
Murabahah
Tawarruq
Total Salebased Contract
RM'000
RM'000
RM'000
RM'000
RM'000
RM'001
RM'002
%
Rank
1
Affin Islamic Bank Bhd
1,490,718
-
-
1,490,718
2,102,063
-
3,592,781
1.0
14
2
Alliance Islamic Bank Bhd
4,553,189
497,277
75,904
5,126,370
459,687
221,779
5,807,836
1.6
10
3
AmBank Islamic Bhd
4,377,251
8,175,819
-
12,553,070
4,022,211
-
16,575,281
4.6
5
4
Bank Islam Malaysia Bhd
7,540,774
339,794
-
7,880,568
1,847,525
24,779,486
34,507,579
9.6
3
5
Bank Muamalat Malaysia Bhd
3,403,062
539,553
755,149
4,697,764
-
7,388,380
12,086,144
3.3
7
6
CIMB Islamic Bank Bhd
-
34,531,544
-
34,531,544
-
-
34,531,544
9.6
2
7
Hong Leong Islamic Bank Bhd
8,215,911
-
-
8,215,911
4,392,118
-
12,608,029
3.5
6
8
Maybank Islamic Bhd
-
-
-
56,905,766
134,521,705
-
191,427,471
53.0
1
9
Public Islamic Bank Bhd
9,650,943
2,037,228
11,688,171
77,355
-
11,765,526
3.3
8
10
RHB Islamic Bank Bhd
594,689
3,313,922
-
3,908,611
13,334,644
-
17,243,255
4.8
4
11
Al Rajhi Banking & Investment Corporation (Malaysia) Bhd
5,076,798
-
-
5,076,798
-
-
5,076,798
1.4
12
12
HSBC Amanah Malaysia Bhd
27,152
32,559
-
59,711
6,111,245
-
6,170,956
1.7
9
13
Kuwait Finance House (M) Bhd
-
-
-
-
5,193,684
-
5,193,684
1.4
11
14
OCBC Al-Amin Bank Bhd
250,474
1,717,087
78,655
2,046,216
430,203
2,053,769
4,530,188
1.3
13
15
Asian Finance Bank Bhd**
-
-
-
-
-
-
-
0.0
15/16
16
Standard Chartered Saadiq Bhd** Total
45,180,961
51,184,783
909,708
154,181,218
172,492,440
34,443,414
361,117,072
0.0
15/16
%
42.7
47.8
9.5
Rank
2
1
3
22
100.0
Appendix 1 (b) IB’s Financing According to Type of Lease-based Contract for the Year ended in 2015
No 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16
Name Affin Islamic Bank Bhd Alliance Islamic Bank Bhd AmBank Islamic Bhd Bank Islam Malaysia Bhd Bank Muamalat Malaysia Bhd CIMB Islamic Bank Bhd Hong Leong Islamic Bank Bhd Maybank Islamic Bhd Public Islamic Bank Bhd RHB Islamic Bank Bhd Al Rajhi Banking & Investment Corporation (Malaysia) Bhd HSBC Amanah Malaysia Bhd Kuwait Finance House (M) Bhd OCBC Al-Amin Bank Bhd Asian Finance Bank Bhd** Standard Chartered Saadiq Bhd** Total % Rank
Ijarah/IMBT
AITAB
Total Leasebased Contract
%
Rank
788,404 81,223 62,866 5,910,737 65,629 527,534 6,490,631
2,710,393 767,526 10,950,562 129,168 1,074,447 3,467,505 35,639,412 12,050,347 -
3,498,797 767,526 10,950,562 210,391 1,137,313 5,910,737 3,533,134 36,166,946 12,050,347 6,490,631
4.0 0.9 12.4 0.2 1.3 6.7 4.0 41.0 13.7 7.4
8 11 3 13 10 5 7 1 2 4
4,103 4,799,511 18,730,638 21.2 2
229,552 1,894,939 554,994 69,468,845 78.8 1
233,655 1,894,939 5,354,505 88,199,483 100.0
0.0 0.3 2.1 6.1 0.0 0.0 100.0
14/16 12 9 6 14/16 14/16
23
Appendix 1 (c) IB’s Financing According to Type of Equity-based Contract for the Year ending in 2015 No 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16
Name Affin Islamic Bank Bhd Alliance Islamic Bank Bhd AmBank Islamic Bhd Bank Islam Malaysia Bhd Bank Muamalat Malaysia Bhd CIMB Islamic Bank Bhd Hong Leong Islamic Bank Bhd Maybank Islamic Bhd Public Islamic Bank Bhd RHB Islamic Bank Bhd Al Rajhi Banking & Investment Corporation (Malaysia) Bhd HSBC Amanah Malaysia Bhd Kuwait Finance House (M) Bhd OCBC Al-Amin Bank Bhd Asian Finance Bank Bhd** Standard Chartered Saadiq Bhd** Total % Rank
Mudharabah
Shirkah Al Milk
Musyarakah Mutanaqisah
155,370 -
20,000 -
1,235,369 40,439 89,315 4,384,781 8,231,267 7,024,400
77,816 233,186 0.9 2
-
5,203,159 245,935 275,626 26,730,291 99.1 1
20,000 0.1 3
24
Total Equitybased Contract 1,235,369 40,439 264,685 4,384,781 8,231,267 7,024,400 5,203,159 323,751 275,626 26,983,477 100.0
%
Rank
4.6 0.0 0.2 0.0 1.0 0.0 0.0 16.4 30.8 26.3
5 10/16 9 10/16 8 10/16 10/16 4 1 2
0.0 19.5 1.2 1.0 0.0 0.0 100.9
10/16 3 6 7 10/16 10/16
Appendix 2 Simulation of Profit Recognition for AITAB Financing
25
Appendix 2 (Continue) Simulation of Profit Recognition for AITAB Financing
26
i
Riba is defined as excess, increase, expansion, growth. Technically, riba is every excess in return of which no reward or equivalent counter value is paid. It also could be defined as predetermined excess above the loan received by the creditor conditionally in relation to a specified period (Mohd Nazri, 2016). ii Gharar is defined as deceit/fraud (khid’ah), uncertainty, danger/risk, and peril/hazard (khatar) that might lead to destruction and loss. Technically, gharar is an uncertainty and ignorance of the contracting parties over the substance or attributes of the object of sale, or of doubt over its existence and availability at the time of contract (majlis al-’aqd) (Mohd Nazri, 2016). iii Maysir is defined as gambling. Maysir refers to an easy acquisition of wealth by chance, whether or not it deprives the other’s right (Uddin, 2015). Maysir is defined as gambling. Maysir refers to an easy acquisition of wealth by chance, whether or not it deprives the other’s right (Uddin, 2015).
27
