ACCA FM/F9 Islamic Finance #Finance

APC Accounting for your future hi my name is Steve from APC and I’m the course director so now let’s look at the Islamic Finance in your paper F9 as well

as your paper P4 so Islamic Finance that means you can get this money from the Islamic Bank so that’s the whole idea behind it but the question is where not you can get

those money from the Islamic Banks well that would depend upon quite lots of things for example the risks of your uh company or perhaps your activities that you’re undertaking so for example if you’re selling Alcohol Tobacco and also uh in the for example the porn

href="https://cashnews.co/industries" style="font-weight: bold; color: #1a73e8; text-decoration: none;">Industries I mean those activities are not allowed according to the Sha I mean sha is just to be the laws regul ations in in those I mean Islam countries and of course if you want to raise

href="https://cashnews.co/finance" style="font-weight: bold; color: #1a73e8; text-decoration: none;">Finance from the Islamic Bank of course uh those activities that you’re undertaking should be allowed according to Sharia laws and regulations so that’s the idea behind it so in this

particular presentation we are going to focus upon two particular issues first of which we’re look at the differences between the traditional bank and also the Islamic Bank bank and secondly we’re going to look at the financial instrument I mean what do I mean by financial instruments

it’s nothing fancy you’ve studied before the source of Finance for your business entity you can either get the Debt

style="font-weight: bold; color: #1a73e8; text-decoration: none;">Finance or the Equity Finance I mean that’s the same idea behind the Islamic

href="https://cashnews.co/finance" style="font-weight: bold; color: #1a73e8; text-decoration: none;">Finance of course we deta that when we come to it don’t worry now first of all let’s see the differences between the traditional bank and the Islamic Bank so traditionally if you

want to borrow some money from the bank let’s say $1 million of course Bob approached to a bank and the bank led a million dollars at 5% of in to Bob and that means from Bob’s perspective Bob is obliged to pay for this 5% of Ines payment to the bank in each and every year and from A

bank’s perspective of course the bank is entitled to those inches Income of 5% each and every year from Bob so from that perspective then after Bob has got this money which is at 5% of interest of course Bob simply lend his money to Jim for example let’s say at 10% of

Interest so by doing so without doing anything from Bob’s perspective Bob can immediately earn 5% of in’s Income by both money from the bank and lending this money to Jim directly at the higher interest rate but you might have a question well Steve uh why gim is not

going to oppose to the bank and bow at 5% so you can think about it this way perhaps gim is in the high-tech industry Jim is a startup company hasn’t got many of these T buets to back up the uh the back up the Loan and hence of course the bank refuses to lend his money to Jim

for example and hence from that perspective then J of course he’s very very risky has to borrow the money uh from others or other alternative at high inches fight and of course Jim surely can borrow this money from Bob at 10% and also lend this money to Tony at 15% of interest and also you

can see the money compounding again and again traditionally at 5% of Interest but now at 10% and finally 15% as you can see when increasing the interest rate from 5% up to 15% it will also increase the cost of Capital from Jim and Tony’s perspective in this case from

Tony’s perspective his cost of Capital of raising the Finance is extremely high in asate what if Tony finds it very difficult to pay back this money to

Jim in the first first place because Tony can’t make any puy out of it and of course it has to go bankrupt and if that’s the case then of course Jim does not have enough money to pay back to Bob so Jim also has to go bankrupt as well and finally the bad deth occurred between Bob and the

bank so that’s how economic crisis happened in 2008 because interest is allowed in those traditional Banks but from the Islamic bank’s perspective then the interest is not allowed because from the Islamic bank’s perspective we view those interests is just to be a compounding tool

of course you can get this money without doing anything you can earn the game by lending this money to others yes you can absolutely fine can do that but this is quite risky and that’s the reason why from the Islamic Banks perspective if Bob oppos to the bank and borrows the money from the

bank and the bank lend womaning do to Bob of course first of all the Islamic Bank has to um scrutinize uh Bob’s activity whether not your business activities are allowed according to shria so for example if Bob is in the porn industry or perhaps he’s selling alcohol tobacco of course

those are not allowed according to Sharia so Bob cannot get this money from the Islamic Bank and second instead of charging the interests each and every year what the Islamic Banks going to do is to share the Profit together with you so that’s the that’s the idea behind

it okay so uh when talking about the summary related to the Islamic Bank or the Islamic Finance first of all in chest is not allowed of course according to shria in chest is called rer R IBA

for short okay so inest is not allowed and secondly the Islamic Bank is entitled to share the Profit losses together with you uh so that’s very very important stuff and thirdly um the activities that you are undertaking are restricted by the Sharia so that’s very very

important stuff as well so um we know the difference between the traditional bank and the Islamic Bank so now let’s take a look at the different sources of Finance from a business

entities perspective so that’s uh we’re going to focus upon the Islamic financial instruments so basically it will be divided into two modes they will be the same as you can think about in this way we can either raise the Islamic bold; color: #1a73e8; text-decoration: none;">Finance either using Debt or Equity so that’s what I mean by fix Income mode which means the Debt #1a73e8; text-decoration: none;">Finance the Equity mode which means the Equity Finance and there would be five instruments that we are

going to learn in this particular section so when looking at the Debt Finance we focus upon for example the moraba contracts which means if you want to buy something B some

money from the bank and buy something you have to sign a Rob contract with the Islamic Bank secondly the least contract is Jara and thirdly sukuk which means the Debt none;">Finance that Debt instruments that your compan is going to issue for Equity Finance first of all we look at the muda contract and second

name was Shaka contract so let’s detail first of all for the Debt Finance so moraba contract so that means for the moraba contract um if you were to buy something thing

for example if you want to buy a Ferrari sports car traditionally what you need to do then is for example you a bob you go to the bank and then the bank lend you $1 million after uh assessing your Credit status and after you’ve got that money what you can do perhaps you can

use this money in somewhere else and perhaps you will buy this car directly from the seller or the dealer in this case it’s gy and then the ownership of the car transfer from a seller to you that’s from a traditional perspective but from the Islamic bank’s perspective if you sign

the Raba contract with the Islamic Bank so first of all then um you sign a contract with the Islamic Bank for the muraba contract uh you want to buy a car for example so after you sign this contract with the bank the bank will approach to a dealer which is J to purchase the car on behalf of you

rather than allowing you to purchase the cars directly and then of course the ownership of the car will transfer from the seller to the Islamic Bank and finally the Islamic Bank transfer the car to you and of course Accord to the muraba contract the bank is entitled or is obliged to disclose the

cost related to this car and also the Profit that the Islamic Bank has made the result of it so that means of course this n bank has to disclose both this cost and uh the PO element to you which is the cost plus Profit basis or you can call it as the market basis

okay so that’s the uh moraba contract techly let’s look at the lease contract is Java so that means if you uh lease the asset so first of all if you want to enter into this Jaa contract first of all this asset must be tangible and secondly the L Bears all of the risks and Revol related

to this asset so that means um if you uh lease the asset from Le’s perspective we are not uh bearing the risks and rewards of this asset for example the asset is stolen by somebody else or alternatively uh I mean I canot sell this asset to somebody else to generates the reward or return so

from that perspective then yes that’s the a contract so from L Source perspective I have all of these risks and rewards uh related to the asset okay so thirdly sukuk which is the Debt instrument so that means uh if you issue thatb instrument traditionally uh what you need to

do then is for example from the issuer’s perspective I sell this de instrument to somebody else and the buyer buys it and from the issuers perspective that means in effect we are boring some money from a buyer and as a result of it we have to pay for the interest expenses each and every year

to that buyer so of course from a buyer perspective they’re entitled to those interesting commission every year but when you are entering into the sukuk um I mean contract with the Islamic Bank so what that means is first of all the from a buyers perspective if you buy that bond from the

issuer the asset attached to that Bond belongs to you and surely you’ve got that right to earn the poverty most the Cash Flow of that particular asset if it enter into s k chart from a buyas perspective so that’s the Suk K chat accy Islamic

href="https://cashnews.co/finance" style="font-weight: bold; color: #1a73e8; text-decoration: none;">Finance so now let’s look at the Equity Finance on the right

hand side first of all M chat so in essence you want to start a business or you want to do a project for example and hence you enter into the muda contract so that means both of these investor who provides the money into project or business also management so management uh is only responsible for

the day-to-day running of the business is not responsible for providing a money into that project or business entity so uh the the investor provides the money and management provides the expertise in that b entity and if you earn the Profit after running your business for example

of course the Profit needs to be distributed according to the pre-agreed ratio into that muda contract for example coin to maaba contract invest is entitled to 70% of the Profit management is entitled to 30% of Profit yes if you earn $10 $7 need to

be distributed to the investor and $3 uh distributed back to the management team but what if that business entity incurs some losses so if he incurs some losses we cannot distribute it according to the pre-agreed ratio because According to Islamic

style="font-weight: bold; color: #1a73e8; text-decoration: none;">Finance contract for this maaba contract is said only for the investor will Bears the losses only that means the investor is entitled to that 100% of the losses so management is not responsible for it that’s what I mean bya

contract and the final contract that we are look at is the musaka contract so in essence it’s like the join Venture so that means very very similar to before two investors would cooperate with each other and set to a business entity put his money into that entity or the project and sign him

with shka contract at the end of it if the business entity X Profit of course it would be distributed on the pre-agreed ratio according to the mushaka contract for example 40 to 60% so for example if you earned $10 of course I’m going to distribute $4 to master a and $6 to

master B alternatively you’ve got make Profit it can be distributed on the cap basis or cap proportion basis so that means in this case as you can see we put three and seven into the business and hence if we make $10 I’m going to distribute $3 to master a and $7 to the

master B okay so that’s the idea behind it but what if you incur some losses of course the loss will be distributed according to the Capal contribution into the business venture in this case of course is 30 to 70% only okay right so that’s it so that’s the Islamic

href="https://cashnews.co/finance" style="font-weight: bold; color: #1a73e8; text-decoration: none;">Finance uh I hope you’re happy with it just a recap in this section we talked about first of all for the difference between the conventional

style="font-weight: bold; color: #1a73e8; text-decoration: none;">Finance and also the Islamic Finance we know that rer or interest is not allowed and secondly we’ve talked

about the Debt Finance as well as the Equity none;">Finance related to Islamic Finance I hope you found this very very useful from uh to exam uh so hope to seeing you uh in the latest studies a Accounting for your

future