Distribution of Profit in Mudarabah-Based Investment Accounts - Scope Of The Standard

Transcription

1. Shari ’ah Standard No. (40): Distribution of Profit in Mudarabah-Based Investment Accounts Statement of the Standard 1. Scope of the Standard This Standard covers investment accounts managed on the basis of Mudarabah and the principles and conditions of realization and entitlement to profit. The Standard also covers how profits are to be distributed between the institution as a Mudarib and the holders of investment accounts as Arbab al-Mal, and to discuss the procedural aspects of profit realization such as determination of the expenses to be charged to investment accounts and the allocations and reserves to be deducted from the profits. The standard does not cover the accounts managed on the basis of investment agency because such accounts require a separate standard. 2. Investment Accounts (Demand Deposits) 2/1 Definition and types of investment accounts These are the amounts which the institution receives from investors on the basis of participatory Mudarabah (al-Mudarabah alMushtarakah). The holders of such accounts delegate the institution to invest their funds through Mudarabah. Investment accounts can be divided into two types. The first type is investment accounts that are managed on the basis of unrestricted Mudarabah where the Mudarib is delegated to invest the Mudarabah funds in any field of investment he deems suitable. The second type is investment accounts which are managed on the basis of restricted Mudarabah, where the Mudarib has to invest the Mudarabah funds in a specific type of investment to be determined by Rab al-Mal (owner of the capital). The relationship between the holders of these accounts and the institution is the typical relationship between the Mudarib (the work provider) and Rab alMal. 994
2. Shari ’ah Standard No. (40): Distribution of Profit in Mudarabah-Based Investment Accounts 2/1/1 Unrestricted investment accounts These are the amounts received from investors who authorize the institution to invest their funds on the basis of Mudarabah without restricting the investment of such funds to a specific project or investment program. The holders of the accounts and the institution share the profit, if any, according to the ratio specified for each of them either in the Mudarabah contract or in the application for opening the account. The holders of the accounts bear all the losses in proportion to their respective shares in the capital, except losses arising from transgression, negligence or breach of the contract, which have to be borne by the institution. 2/1/2 Restricted investment accounts These are the amounts whose owners authorize the institution to invest them on the basis of Mudarabah in a specific project or investment program(2). The holder of the account and the institution share the profit, if any, according to the ratio specified for each of them either in the Mudarabah contract or in the application for opening the account. The holder of the account bears all the losses in proportion to his share in the capital, except losses arising from transgression, negligence or breach of contract, which have to be borne by the institution. 2/1/3 Equality in investment opportunities In principle, equality in investment opportunities should be ensured between shareholders’ funds and the funds of the holders of the investment accounts in participatory Mudarabah. In case a different policy is to be adopted, the institution should disclose that before disposition, with due consideration to the relevant regulatory restrictions and the conditions of opening the accounts. (2) Restricted investment accounts can be managed on the basis of investment agency. 995
3. Shari ’ah Standard No. (40): Distribution of Profit in Mudarabah-Based Investment Accounts 2/2 The difference between an investment account and a current account and its likes 2/2/1 The current accounts are the amounts which the institution receives from clients who are not seeking investment. Such amounts represent loans which the institution has to guarantee their repayment on demand without any increment. The institution has the right to dispose of such amounts and invest them for its own benefit and under its own responsibility, preferably after indicating this in the application for opening the account.(3) As regards investment accounts, these are the amounts deposited with the institution on trust basis, and hence the institution is not committed to guarantee their repayment, except in case of transgression, negligence or breach of the contract. 2/2/2 The institution should guarantee full repayment of the amounts of the current accounts to their holders, whereas it should not assume the commitment to pay any fixed or variable increment on the principal amounts of such accounts, because such payment constitutes usurious interest. The institution is not committed to guarantee investment accounts. It is only committed to distribute their profit or loss among their holders as per the ratios agreed upon. 2/2/3 Saving accounts which carry no authorization for investing them to the benefit of their holders shall become subject to the rulings on current accounts, whereas those which carry such authorization shall become subject to the rulings on investment accounts. 2/2/4 The institution may charge fees (commissions) for the services of opening investment accounts. Such fee has to be a lump (3) For more rulings on current accounts as regards, for instance, charging fees for keeping such accounts or distribution of prizes to them see Shari’ah Standard No. (19) on Loan (Qard). 996
4. Shari ’ah Standard No. (40): Distribution of Profit in Mudarabah-Based Investment Accounts sum amount which should preferably not exceed the average actual cost, and should be charged once at the time of opening the account. 2/2/5 In case of depositing coins or paper money by handing them over to the cashier the institution may charge a fee for transportation, storage and counting of the deposited amounts. This, however, does not include amounts transferred to the account of the institution. 2/2/6 In transference of money between accounts constructive possession is sufficient, whether for the same currency or different currencies, because the process involves exchange and transference. [see Shari’ah Standard No. (1) on Trading in Currencies] 2/2/7 The funds which the institution fails to transfer to owners because of change of address shall be kept in a suspended account for the specified period before being added to the charity account. If the addresses of the owners of such funds came to be known later on the funds should be paid out to them from the charity account. In this regard, a clause should be added to the conditions for opening the accounts indicating that the holders of the accounts agree to donate for charitable purposes any amounts which could not be transferred to them within a specific period due to change of address. 2/2/8 In principle, the institution should resort, through exchange of correspondence, to holders of the accounts when there is any change in the conditions or profit sharing ratios. However, due to the difficulty and cost involved in such process the institution may send notifications, or advertise the new changes in its website so that the implicit acceptance of the concerned parties is obtained if no protest is received from them within a specific period. The changes in question, which shall become effective starting from the beginning of the next period, should be incorporated in the conditions of the 997
5. Shari ’ah Standard No. (40): Distribution of Profit in Mudarabah-Based Investment Accounts accounts, with due reference to the procedure followed for their adoption. 2/2/9 It is permissible to stipulate the authoritative status of the documents and financial statements of the institution, unless such documents and statements are proved to be wrong by the accountholder. If dispute arises the two parties should resort to experts, arbitration or law. 2/2/10 The cost of proving the accusation shall be borne by the accountholder when he files the claim against the institution. 3. Realization of Profit Realization of distributable profits should be subject to the following: 3/1 Safety of the capital 3/1/1 Realization of profit in investment accounts does not take place before protecting the capital. Any amount of profit distributed before ensuring such protection is considered as an advance payment, rather than realized profit [see item 5/3]. The profit authorized for investment at the end of the investment period is considered as part of the capital in the next period. 3/1/2 Actual and constructive liquidation Realization of profit in investment accounts does not take place before the following steps: 3/1/2/1 Liquidation of Mudarabah assets, which can be either actual liquidation where all the assets are converted into cash and all debts are collected, or it can be constructive liquidation where, in addition to cash amounts, noncash assets are valued by experts, along with valuation of all debts with regard to possibilities of collection and appropriate allocations for bad debts. 3/1/2/2 Covering of the following expenses: a) Expenses relating to utilization of the balances of the investment accounts by charging each operation with the direct expenses incurred in its execution. 998
6. Shari ’ah Standard No. (40): Distribution of Profit in Mudarabah-Based Investment Accounts b) The share of the balances of the investment accounts from shared expenses, excluding expenses relating to the institution’s own activities. Investment accounts should also not be charged with the expenses of the tasks which have to be performed by the Mudarib. Such expenses include the expenses of the investment departments and the bodies which endorse their decisions as well as the expenses of the follow-up and accounting departments. It is also permissible to specify a ceiling for the expenses above which all the expenses are to be borne by the Mudarib. 3/1/2/3 Deduction of the allocations and reserves relating to the investment, from investment income so as to arrive at distributable profit. In this case, allocations for bad debts and reserve for rate of returns have to be deducted from gross profit, whereas reserve for investment risks has to be deducted after deduction of the Mudarib’s share. 3/2 In realization of the profit the following should be observed 3/2/1 When loss is incurred in one Mudarabah operation it can be covered from the profits of other operations, and if it exceeds the profits it should be covered from capital. What should really matter is the final result of liquidation at the end of the financial period specified by the institution. The loss of a certain financial period should not be covered from the profits of another period, except in the case of covering losses from reserves. 3/2/2 Due to the fact that unrestricted investment accounts of continuous participatory Mudarabah lack coincidence in the beginning and end of the process of depositing funds in the accounts, the profit from the operations which extend to succeeding periods has to be distributed over the whole period of such operations in proportion to the duration of each operation. 999
7. Shari ’ah Standard No. (40): Distribution of Profit in Mudarabah-Based Investment Accounts 4. Entitlement to Profit 4/1 The method of profit distribution should be well known so that no room is left for uncertainty and dispute. Distribution of profits should also be in terms of ratios, and not at all by specifying a lump sum amount or a percentage of the capital for any party, or any other method that could lead to avoidance of sharing of the profit between the two parties. 4/2 Specification of profit ratios for the two parties should not be postponed beyond the time of signing the contract. When the two parties do not specify such ratios at the time of signing the contract normal practice can be sought - if any - as when, for instance, profit is normally shared on equal basis. If there is no normal practice to resort to the Mudarabah contract becomes null and void, the Mudarib is entitled to the wage normally paid for similar work, and the whole profit goes to Rab al-Mal. 4/3 The institution can specify different ratios for distribution of profits between itself and different categories of holders of investment accounts, or it can specify a unified ratio for all. The ratios for distribution of profits among the holders of the investment accounts can also be unified or varying on the basis of certain weights. 4/4 When one of the two parties stipulates a lump sum amount for himself the Mudarabah contract becomes null and void. This restriction, however, does not include the case when the two parties agree that if the profit exceeds certain limit or index the excess amount should be taken by one of them. If the profit is at that limit/index or below it shall be shared as agreed upon between the two parties. 4/5 It is impermissible to earmark the profit of a specific type or portion of the capital or the assets into which capital is converted, for one of the two parties. It is also impermissible to allocate the profit of a certain financial period or a specific transaction for one party, and the profit of another financial period or a specific transaction for the other. 1000
8. Shari ’ah Standard No. (40): Distribution of Profit in Mudarabah-Based Investment Accounts 4/6 The method agreed upon for distribution of profit can be fixed for the whole period, or variable according to specific sub-periods of partial liquidation. 4/7 When the Mudarib mixes the Mudarabah funds with his own funds, he becomes a partner by subscribing his funds and a Mudarib for the Mudarabah funds of the other party. In this case the profit has to be divided between the two amounts of capital, so that the Mudarib can get the profit of his work as well as the profit of his funds as a partner. The profit share of the Mudarib as a partner shall become subject to the same treatment of the shares of the holders of investment accounts. [see item 4/3] 4/8 In principle, the profit belongs to the institution and the holder of the account, yet the two parties can agree on allocation of a certain part of the profit to the benefit of a third party. [see Shari’ah Standard No. (13) on Mudarabah, item 8] 4/9 It is permissible for the accountholder to exit from the Mudarabah with all his funds or part of them. Such exit represents the desire of the accountholder to redeem his share in the Mudarabah assets without withdrawing the total amount deposited in his account or part of it. It is permissible for the institution in this case to specify the amount relating to the exit so that it can earn no profit, or less than the profit it would have earned in the absence of exit. Such arrangement constitutes exit on the basis of supply and demand, rather than deprivation from profit. 4/10 The ratios of the amounts deposited in the investment accounts which the institution retains for liquidity purposes – may be stated in the conditions of the accounts - has to be treated as follows: 4/10/1 The case could be that the bank never invests such amounts because they are withheld in the accounts of the central bank or the bank’s treasury for the sake of meeting requests for withdrawal from investment accounts, hence there is no return for which a ruling can be indicated here. 1001
9. Shari ’ah Standard No. (40): Distribution of Profit in Mudarabah-Based Investment Accounts 4/10/2 Or the case may be that the bank utilizes such funds in short term or easy-to-liquidate investments so as to cater for applications for withdrawal from investment accounts although the bank sometimes stipulates in the conditions of the accounts that such funds are allocated for liquidity purposes. In this case it is permissible for the bank to invest such funds without obtaining the consent of the holders of the accounts, because the bank is authorized for any disposition that serves the interest of the two parties of the unrestricted Mudarabah contract. When a return is earned from such investment it should be added to the investment base. The holders of the account will be entitled to a share in this profit in their capacity as Arbab al-Mal, and the bank is entitled to its share as a Mudarib, subject to the ratios agreed upon. If, instead, a loss is incurred from investment of the amounts, without any transgression or negligence from the side of the bank, it should be borne by the holders of the accounts in their capacity as Arbab al-Mal. 5. Distribution of Profit 5/1 Application of scoring method of profit distribution: With due consideration to items 4/3 and 4/4, the scoring method for distribution of profit among the participants of general investment accounts can be used. Such method takes into account the amount contributed by each investor and the period of its stay in the investment (currency unit x time unit). Each account is given a certain number of scores depending on its amount and the period of stay of that amount in the investment even if depositing and withdrawal have repeatedly been done and the amount varied from time to time. The holders of the accounts are considered to have implicitly exchanged mutual relief from commitment (Mubara`ah) for any aspects that practically cannot be catered for. 5/2 There is no prohibition against setting an expected rate of return which is not considered to be binding if not achieved, even if it is 1002
10. Shari ’ah Standard No. (40): Distribution of Profit in Mudarabah-Based Investment Accounts reached through a feasibility study. However, final distribution of profits should be based on realization of profit after actual or constructive liquidation, rather than on such expected rate of return. 5/3 It is permissible to pay advance amounts to the holders of the accounts before actual or constructive liquidations so that final settlement can be made later on. After actual or constructive liquidation the institution is committed to make necessary additions to, or deductions from, the advanced amounts so that each holder of an investment account receives his exact share of the profit. 5/4 Mutual relief from commitments (Mubara`ah) in case of exit should be stipulated in the contracts of the Mudarabah-based investment accounts. The stipulation should indicate that the exiting party reliefs the holders of the accounts (the depositors) from commitment towards his rights in any undistributed or non-apparent profit, as well as his rights in the remaining part of the reserves for investment risks and rate of return, and the remaining part of allocations for debts. Similarly, the stipulation should state that the holders of the accounts relief the exiting party from commitment towards any losses that have not yet become apparent. The stipulation should also indicate that on liquidation of the investment base the remaining parts of the above mentioned reserves and allocations shall be devoted to charitable purposes. 5/5 Institutions should liquidate Mudarabah and distribute the realized profit between the Mudarib and the holders of the investment accounts according to the conditions of the Mudarabah contract. 5/6 When the shareholders in their capacity as the Mudarib, decide after liquidation of the Mudarabah and preparation of the profit and loss account - to relinquish part of their profit share to the benefit of the accountholders, the institution should disclose that. 6. Other Rulings on Investment Accounts The rulings which have not been stipulated in this Standard can be seen in Shari’ah Standard No. (13) on Mudarabah. 1003
11. Shari ’ah Standard No. (40): Distribution of Profit in Mudarabah-Based Investment Accounts 7. Date of Issuance of the Standard This Standard was issued on 26 Jumada II, 1430 A.H., corresponding to 19 June 2009 A.D. 1004