Murabaha with a Rebate Clause and a Late-Payment Donation
Bank Noor books a murabaha receivable of 1,200,000 over 24 months (cost 1,000,000 plus a 200,000 profit markup). The sale contract states that if the customer prepays the full remaining balance, the bank 'shall waive 40% of the unearned profit as a goodwill rebate.' The customer also signs a separate undertaking to pay 0.1% per day of any overdue instalment into a charity account. In month 9 the customer offers to settle early. The product manager wants to (a) record the 40% waiver as a contractual liability at inception so the receivable is discounted, and (b) recognise the charity donations as bank income because 'the bank administers the account.'
1. Is the 40% early-settlement rebate a contractual obligation that should reduce the murabaha receivable at inception? Advise the product manager.
Read the worked answer
No. Under Shari'ah rules for murabaha, the rebate (ibra') on early settlement is a voluntary act of the financier, not a binding contractual entitlement of the customer. The bank may commit to a policy of granting it, but it cannot be treated as a guaranteed price reduction that discounts the receivable at inception.
Reasoning:
- The murabaha price (1,200,000) is fixed and known at contract. Profit is recognised over the term, not netted against a contingent waiver.
- A promise to waive if the customer prepays is conditional and discretionary in nature; it does not create a present obligation to transfer cash or reduce the receivable.
- Accounting treatment: carry the receivable at 1,200,000 and recognise profit on a time-apportioned basis. When and if the customer actually prepays, record the waived profit as a reduction of profit at that date - not as a liability at inception.
- The product manager's proposed discounting would understate the receivable and front-load a loss that has not occurred.
Advise: remove the waiver from the initial measurement; disclose the rebate policy as a voluntary practice. Recognise the effect only on actual early settlement.
2. How should the late-payment charity donations be classified and presented, and can the bank recognise them as income?
Read the worked answer
No - they cannot be bank income.
Reasoning:
- The 0.1%/day charge is structured as a charitable donation (tabarru'), not as compensation for the time value of money. Shari'ah prohibits treating a penalty on a debt as riba-based income to the financier.
- Because the bank acts as a conduit, the amounts collected are held on behalf of charity. They are not revenue, not profit, and not an asset of the bank beyond a fiduciary balance.
- Presentation: recognise a payable/charity liability when the amount becomes due; derecognise when disbursed to the designated charity. Disclose the policy and amounts collected/distributed.
- The bank may recover only actual, documented enforcement costs where the Shari'ah standard permits - and only to the extent of real cost, not a margin.
Advise the manager: reclassify all such amounts out of income; if any were recognised as income in prior periods, correct them as a prior-period adjustment and disclose.