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Contracts and Deals in Islamic Finance: A User s Guide to Cash Flows, Balance Sheets, and Capital Structures by Hussein Kureshi, Mohsin Hayat

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Chapter 5Deferred Payment Sale or Credit Sale

In the previous chapter, we referred to the bona fide murabahah transaction when a bank actually owns the asset to be the subject of sale on its books. We demonstrate in this section how a deferred sale transaction can be recorded in the books of an Islamic bank. A deferred payment sale is referred to as bai mu'ajjal. For illustration purposes we work through a simple example involving Bank A and Customer B, starting with the data in Table 5.1.

Table 5.1 Islamic Bank A's Balance Sheet

Islamic Bank A's Balance Sheet
Asset
Cash $100
Asset subject to buy and sale $100
Liability $0
Equity $200

Islamic Bank A has capital of $200, and no deposits at this stage. The Bank purchases an asset for $100 from its capital and keeps $100 in cash on its balance sheet with the remainder. Islamic Bank A is approached by Customer B, who wishes to purchase the asset from A for a credit price of $120, payable in 90 days. Islamic Bank A would earn a profit of $20 on the sale. Customer B contracts to make monthly payments to Islamic Bank A of $40, which would include a partial principal repayment of $33.33 and a partial profit payment of $6.66 (Table 5.2).

Table 5.2 Accounting Entries for Deferred Sales Transaction

Islamic Bank A
Contract Initiation DR CR
Islamic Bank sells asset to B Balance sheet Asset $100
Islamic Bank A books a Murabahah financing asset for $120 Balance sheet Murabahah financing $120
Islamic Bank ...

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