Appendix to Resolution
No.2021-П-12/75-2-(RLA) of the
of the Kyrgyz Republic Board
dated December 29, 2021
For Murabaha Transaction
1. General Provisions
1. The Procedure for Murabaha Transaction Accounting (hereinafter referred to as the Procedure) applies to the banks that conduct transactions under the Principles of Islamic Banking and Finance, including through the “Islamic Window” (hereinafter referred to as the bank).
2. This Procedure determines the rules for accounting a Murabaha transaction by a bank and for recognizing income under a Murabaha transaction in accordance with the Accounting, Auditing and Management Standards for Islamic Financial Institutions developed by the Accounting and Auditing Organization for Islamic Financial Institutions (hereinafter referred to as AAOIFI standards).
3. The Bank is responsible for the development and implementation of internal procedures for Murabaha transaction accounting, internal control systems that ensure compliance with this Procedure.
2. Terms and Definitions
4. This Procedure applies the following terms and definitions:
Arbun - the amount of earnest money paid by a customer to the bank, which, after the conclusion of the Murabaha transaction, is credited to the repayment of part of the debt of the bank’s customer.
If the Murabaha transaction did not take place, the bank has the right not to return the Arbun to a customer;
Murabaha - installment sale of an asset (goods) acquired by the bank at the request of a customer or owned by the bank at the time of the customer’s request;
Markup - the bank’s profit under the Murabaha contract, established as a fixed amount or a share of the net cost of an asset (goods);
Initial cost - the amount of receivables on Murabaha, based on the price agreed between a customer and the bank, and consisting of the value of the asset and the bank’s markup on the transaction;
Hamish Jiddiya - the amount paid by a customer to the bank as evidence of the seriousness of the customer’s intention to conclude a Murabaha contract. If the Murabaha transaction did not take place, the bank has the right to reimburse the amount of losses incurred at the expense of Hamish Jiddiya, the remaining amount after the reimbursement is returned to a customer;
Fair value is the estimated amount of an exchange of property at the valuation date between a willing buyer and a willing seller in a commercial transaction after due marketing, in which each party acted competently, prudently and without coercion.
3. Recognition and Subsequent Valuation of the Asset Held for Sale
Under a Murabaha Contract
5. Assets acquired by the bank for subsequent sale under a Murabaha contract are recognized at the net cost with an increase in the balance sheet item “Assets/Inventory for Subsequent Transfer under Murabaha”.
6. The net cost of an asset shall include all costs of acquisition and other costs incurred in supplying and bringing it to working condition, insurance costs and any other agency costs and commissions.
Any additional indirect costs should be reflected in the bank’s profit and loss account in the relevant period.
7. The discount received by the bank when purchasing an asset for further resale cannot be considered as the bank’s income. The bank shall reduce the cost of goods for a customer by the amount of discount, unless there is a corresponding decision of the Sharia’h Board.
If the bank does not reduce the cost of the asset (goods) intended for transfer to a customer under the Murabaha contract by the amount received by the bank for this product of the discount, then such a discount is reflected in the bank’s balance sheet under the item “Deferred income”.
8. After initial recognition, an asset (good) held for sale under Murabaha is measured as follows:
1) In cases where the bank’s customer has an obligation to purchase an asset at a cost equal to or greater than net cost, the bank shall account for the asset at the net cost, regardless of fluctuations in their fair value, if any.
The bank’s customer is considered to bear the obligation to acquire the asset and it is obligatory for him if the bank, waiting for the fulfillment of such an obligation, has incurred the related costs;
2) In cases where the bank’s customer is not obligated to acquire an asset:
- Real property is accounted for at the lower of the net book value (value less depreciation and impairment loss) and fair value, in accordance with the Regulation “On Certain Real Property Transactions/Operations of Commercial Banks and Microfinance Companies of the Kyrgyz Republic”, approved by Resolution No.36/2 of the National Bank of the Kyrgyz Republic Board dated August 29, 2012;
- Movable property is accounted at fair value.
The property described in this subparagraph is classified in accordance with the Regulation “On the Classification of Assets and Corresponding Deductions to the Loan Loss Provision in the Course of Transactions Under the Principles of Islamic Banking and Finance”, approved by Resolution No.51/6 of the National Bank of the Kyrgyz Republic Board dated December 28, 2009.
9. If a customer refuses to conclude a Murabaha contract, the bank’s expenditures related to the acquisition of an asset (goods) may be covered by previously received amounts of Hamish Jiddiya or Arbun, in accordance with the AAOIFI standards.
4. Recognition and Subsequent Valuation of Murabaha Receivables
10. The Bank records receivables and markup in its financial statements after the sale of assets under the Murabaha contract.
11. Murabaha is recognized on the balance sheet of the bank at the initial cost:
1) The value of the sold asset is reflected in the balance sheet item “Murabaha receivables”/ “Murabaha financing”;
2) The markup on the asset is reflected in full for the entire period of financing under the balance sheet items “Markup on Murabaha” in other assets and “Deferred profit on Murabaha” in other liabilities.
12. After initial recognition, receivables from a Murabaha transaction is accounted at the amount outstanding, less Loan Loss Provision.
13. Operating costs associated with the negotiation and conclusion of the Murabaha contract, less any reimbursement from the buyer, are accounted for in the relevant period.
14. After conclusion of the Murabaha contract:
1) Hamish Jiddiya is not subject to offset against receivables, except as agreed with a customer in the contract;
2) Arbun must be deducted from the customer’s receivables.
5. Recognition of Murabaha Profit
15. Profit from a Murabaha transaction is recognized as a reduction in the balance sheet item “Deferred Murabaha Profit” in the period in which it occurred, regardless of the actual cash receipts.
16. According to the AAOIFI standards, the bank shall apply the effective interest rate to calculate the rate of return on the transaction, regardless of the term of Murabaha financing in accordance with the Regulation “On Calculation of the Effective Interest Rate when Distributing Information on the Amount of Remuneration for Banking Services”, approved by Resolution No.33/4 of the National Bank of the Kyrgyz Republic Board dated August 27, 2008.
17. If the bank has provided a discount to a customer in case of early repayment of the debt under the Murabaha contract or for any other reason, the amount of the discount should be reflected in the balance sheet with a decrease in the items “Deferred Murabaha profit” and “Markup on Murabaha”.
6. Loan Loss Provisioning and Information Disclosure
18. Murabaha receivables are assessed at the end of the reporting period and are equal to the amount of debt minus loan loss provision created in accordance with the Regulation "On the Classification of Assets and the Corresponding Deductions to the Loan Loss Provision in the Course of Transactions Under the Principles of Islamic Banking and Finance”, approved by Resolution No.51/6 of the National Bank of the Kyrgyz Republic Board dated December 28, 2009.
19. Accrual and recognition of income should be suspended under the Murabaha contract in cases provided for by the Procedure for Granting the Status of Non-accrual of Interest Income, approved by Resolution No.11/2 of the National Bank of the Kyrgyz Republic Board dated April 28, 2004.
20. For the purpose of classifying assets and creating loan loss provision, the overdue part of the markup is understood to be the amount of the markup outstanding within 30 days, calculated as the difference between the balance sheet items “Markup on Murabaha” and “Deferred profit on Murabaha”.
21. The asset that is the object of the Murabaha contract should be transferred to the category of other property of the bank in accordance with the Regulation “On Certain Real Property Transactions/Operations of Commercial Banks and Microfinance Companies of the Kyrgyz Republic”, approved by Resolution No.36/2 of the National Bank of the Kyrgyz Republic Board dated August 29, 2012, in case of:
1) The customer’s refusal to conclude the Murabaha contract after the acquisition of the asset by the bank;
2) The customer’s refusal to fulfill obligations or the customer’s insolvency - to pay off the full or partial debt under the Murabaha contract.
22. The bank needs to disclose the financing information on the Murabaha transaction in the financial statements in order to understand the impact of assets placed under the Principles of Islamic Financing on the financial position and performance of the bank. The bank should disclose the size, quality, concentration and restructuring of the Murabaha loan portfolio, the amount of assets (goods) to be transferred under the Murabaha transaction, the amount of deferred profits from the Murabaha transaction and any information that is material to the bank’s activities.