Group Members

Mahmood Umar Taufiq G1018071 Sharique Rahman G1014803

Refer to the article by

Abdul Rahim and Roz Azina.

Objectives
Differentiate between the accounting practices of AITAB in Malaysia and IMBT of AAOIFI What are the problems from Shariah point of view in Malaysia Practice.

Reference: Article by Abdul Rahim and Roz Azina.

Presentation Outline

Introduction -Differences of Definitions : -Core difference between the principle of Lease vs. Ijarah -What is Ijarah Muntahia Bitamleek (IMBT) of AAOIFI? -Conventional Lease vs. IMBT

-What is Al-Ijarah Thumma Al-Bai (AITAB)?

-Conventional HP vs. AITAB -Operational Procedure of AITAB and IMBT -Major Differences between AITAB &IMBT

-Analysis on Accounting Principle

-Reporting Implications on IMBT of AAOIFI -Differences in Accounting Perspective -Why AAOIFI standards has lower level of acceptability by the Malaysian Financial Institutions? -Issues on Accounting treatment -Shariah Issues in the operation of AITAB practiced in Malaysia CONCLUSION

Differences of Definitions : AAOIFI FAS 8 : Define IJARAH as Ownership of the right to the benefit of using an asset in return for consideration. IAS 17: Define LEASE as an agreement whereby the lessor conveys the lessee in return for rent the right to use an asset for an agreed period of time MASB 10: Define LEASE as an agreement whereby the lessor conveys to the lessee in return for a payment or series of payments the right to use an asset for an agreed period of time

Fundamental Principle

I. It has to be asset-based financing: The first fundamental principle of Shariah is that as opposed to conventional financial dealing, profit is generated when something having intrinsic utility is sold or offered for use. Money has no intrinsic value. As such dealing in money cannot generate profit unless converted into real assets. II. There has to be an element of risk: The second basic element of Shariah is that one cannot claim a profit or fee for a property/transaction, the risk of which was never borne by him.

 AAOIFI Classifies Ijarah as: -Operating Ijarah: The Lease which doesnt include a promise that the legal title in the leased asset will pass to the lessee at the end of the lease term. IMB- The Lease which includes a promise that the legal title in the leased asset will pass to the lessee at the end of the lease term. Methods of transferring of ownership by means of: -token consideration -gift -prior to the end of a lease -gradual transfer

The Islamic alternative to conventional hire purchase in Malaysia is called Al-Ijarah Thumma Al-Bai (AITAB). Bank Islam Berhad Malaysia (BIMB) was the first bank to launch AITAB in Malaysia. AITAB consist of two different contracts, one followed by the other i.e. lease contract and subsequently purchasing contract, executed in one contract and in one day. Thus, the Asset is transferred immediately to lessee on the day of contract. It makes lessee the beneficial legal owner of the asset as well as gained the benefit of using the asset.

IMBT
Contract Transfer of Ownership Finance Lease At the end either by: Gift Token Gradual Transfer

AITAB
Hire Purchase At the Beginning (via Lease and purchase Contract duly signed with in one day) But control by the Bank

Repair Cost

Borne by the Lessor

Borne by the Lessee

Substance over Form issue Valuation of Leased Assets

Recognition of Asset
Maintenance costs and related risks Revenue Recognition Fair Rental Value

Historical Cost

Revenue Recognition

Provision of Doubtful Debt

Residual Value

Why AAOIFI standards has lower level of acceptability by the Malaysian Financial Institutions?
According to the article survey , 11 out of 13 institutions adopted the MASB in their practice. The reasons are as follows: As MASB is the only standard for the Malaysian financial institution to conform with, as a regulatory body. No support from the regulatory bodies (e.g. central banks). AAOIFI standards are targeted to the Islamic banks, where as in Malaysia most institutions are conventional in nature. Compliance of AAOIFI Standard is not mandatory in Malaysia. Lack of power to impose islamic banks to implement AAOIFIs proposed standards. Lack of promotion or concern given by the higher authorities responsible for Islamic Banking Products in Malaysia

Six main issues were raised in the interview according to the article: -Valuation of Assets -Recognition of Income -Repair of the Leased assets -Depreciation

-Initial Direct Cost

-Valuation of Ijarah Account Receivable

Legal Treatment

Maintenance

Ownership

Penalty in Case of Default

Transfer of Ownership

Deposit Payment

Insurance Responsibility

THANK YOU! & Selamat Hari Raya