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TEMENOS APPLICATION

MANAGEMENT SERVICES

R11 Integrated Islamic Banking

Corporate Murabaha

ODR-2011-12-0236

User Guide

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User Guide

Amendment History

Version Date Author Status Description

0.1 29 Feb 2012 Senthilkumar M Initial Document USER_GUIDE.doc

1.0

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User Guide

Table of Contents

1. Assumptions .................................................................................................................................... 4

2. Functionality Overview ..................................................................................................................... 4

3. Work Flow ........................................................................................................................................ 5

4. Prerequisites .................................................................................................................................... 6

5. Detailed Navigational Steps ............................................................................................................. 9

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User Guide

1. Assumptions It is assumed that the reader of this guide has knowledge of the following.

Fair knowledge in TEMENOS T24 TM

Basic knowledge in LD.LOANS.AND.DEPOSITS Module

2. Functionality Overview

Murabaha

The Murabaha contract revolves around the purchase of an asset by the Bank and the onward sale of the same by the Bank to a customer. The purchase may involve commodities, real estate, vehicle etc.

Murabaha Processing

The operations of the Murabaha Finance will be managed through the following activities.

Basic Setup (IS.H.PARAMETER, IS.H.PRODUTS, IS.H.COMMODITY)

Define Corporate Customer (CUSTOMER,CUS.OR.BANK')

Asset Request (ISB.ASSET.REGISTER)

Murabaha Purchase and acquisition (IS.H.CONTRACTS)

Murabaha down payment (FUNDS.TRANSFER)

Murabaha Sale (Finance Contract) (LD.LOANS.AND.DEPOSITS)

Murabaha Enquiries Reports and Accounting entries

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3. Work Flow

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4. Prerequisites

Following Set up need to be done for Corpoprate Murabaha

IS.H.PRODUCT.TYPES,ISB

IS.H.PRODUCTS,ISB

IS.H.PARAMETER,ISB for respective ID like 1, 2 mentioned above to be set up.

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Define Corporate Customer (CUSTOMER,CUS.OR.BANK')

LIMIT.PARAMETER

LIMIT setup is needed for each of the products and customers. It means there should be the LIMIT setup for all brokers involved in the transaction.

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The above screenshot shows how the LIMIT.PARAMETER is setup for Corporate Murabaha. The Customer Limit ID will be changed based on the sub asset type used in the asset.

Hence before doing the transaction, we need to have the LIMIT entry XXXXXX.000YYYY.01, where XXXXXX denotes Customer ID and YYYY denotes the LIMIT.REFERENCE id. LIMIT reference will be changed based on the sub asset type defined. Otherwise there will be an error during transaction level.

Limit to be set up for the Corporate Customer

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Define Appraiser to effect Appraiser Payments

5. Detailed Navigational Steps

The following screenshot shows the menu for all processes concerning a Corporate Murabaha contract

Asset Request

The First Stage in Murabaha Processing is the corporate customers will apply to the bank for purchase of asset or service for their business or personal needs. Customer will provide the details of the asset such as Supplier Name and account, Quantity of the asset, Total Purchase amount of the asset, and other details regarding the asset.

The Islamic Murabaha module comes with options to define assets belonging to one of the following categories:

The following screenshot shows a sample Asset Request record

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User Guide

Asset Details Tab

The following screenshot shows the Asset Request transaction‟s basic details and vehicle details. Through Vehicle details tab we can capture the details of the commodity like make, model, color, etc.

Asset Purchase The Bank will capture the details of the assets and it will approve the customer‟s request and give an acceptance to initiate the transactions by purchasing the asset from the supplier. This is the stage where the customer will sign on the PTPS (Promise To Purchase and Sale).

The Purchase transaction may be done in two ways

1. Pre Approval

2. Purchase

(Or)

It is also possible to do the Purchase transaction directly which means the Preapproval is an optional case.

Supplier‟s Internal Account which will be defaulted based on the category given in the parameter record

Total purchase amount calculated based on the purchase price and quantity

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The following screenshot shows the Asset Purchase options available in the menu

During Purchase a Funds Transfer record will be created to credit the amount supplier‟s account. It is also possible to do Multiple Asset Request under a Single purchase transaction.

Once purchase is done, the table IS.L.ENT.SUM will get updated with the accounting entries. Hence the Accounting enquiries will fetch records from this application.

Asset Pre-approval

Before the Purchase Transaction, the pre approval stage is used to approve the purchase of the asset. But however, this stage is an optional one. We can set this as mandatory or as optional by setting „Y‟ or „N‟ to the Field “SKIP.PRE.APPROVAL” in the corresponding IS.H.PRODUCT.TYPES record.

The following screen shows the Pre-approval transaction

It will hold the value „Yes‟, if Multiple Asset requests are done under a single purchase transaction.

After giving this asset request id, the appraiser details, expenditure details and all other details will be defaulted

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After the Pre approval done, the following 2 FT entries are captured through the local template IS.L.ENT.SUM and will be displayed via the enquiry IS.ENTRIES.SUM.

Both the FT entries will be credited and debited to the internal account and it will be reversed and credited to the Supplier account during Purchase stage.

CR: Murabaha Purchase order Account

DR: Goods in Transit Account.

Asset Purchase

After the pre approval, the purchase has to be done for the same ISH contract. When you are clicking the new deal icon in the purchase window it will throw an error message if SKIP.PRE.APPROVAL for the corresponding product is set as N.

During the Purchase the ACTION field will be changed from „APPROVAL‟ to „PURCHASE‟ automatically.

There is an option available to capture the Finance Contract details while purchasing. This option has been made available by setting „Y‟ in the field “FIN.DET.IN.PURCHAS” of the corresponding IS.H.PRODUCT.TYPES record “MUR”

If this field is set as Y, then the fields related to Finance Contract will be mandatory and those details has been captured and will be defaulted during the Sale contract of the corresponding ISH contract.

The following screen shows the purchase transaction of the above ISH contract.

The following screenshot shows the Basic details captured during the purchase.

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After giving the asset id, the purchase details tab and the other fields in the following screen will be defaulted automatically.

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Purchase Details Tab

Appraiser Details Tab

The following appraiser details are defaulted from the Asset request record.

These are the values getting defaulted from the IAR‟s Expense details tab

If this is set as YES then the Cost amount will be added with the Net cost amount

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The values of the tab Asset Details, Appraiser details and other expenses will be defaulted from the asset request screen.

The Accounting entries after Purchase transaction is as follows

There are 4 entries (2 FT contra entries of the Preapproval and 2 FT entries for the Purchase) will be raised for purchase, if SKIP.PRE.APPROVAL is set as „N‟ and 2 IS entries will be raised if the SKIP.PRE.APPROVAL is set as „Y‟. The other 2 entries will be raised if the cost details have been given during the purchase. (Additional Costs entries)

2 FT entries are the contra entries of the Pre-approval transaction and 2 FT entries for Purchase,

DR: Murabaha Inventory Account

CR: Multi Supplier Account (May be internal account or the supplier account)

Payments Services

There are some options in the menu like Down payment and to pay the other expenses like Payment to Supplier, Cost counter party, etc.

The following screen shows the other services menu which contains all these payment details

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Down Payment

The customer can pay some amount as a Down Payment during the purchase stage. So that the sale loan amount will be adjusted with the amount paid in the down payment. This down payment operation happens always prior to the sale operation. The Down payment operation is done through the localised version of Funds Transfer.

The following screen shows the Down payment

After Down Payment the accounting entries are,

DR: Customer Account

CR: Murabaha Inventory Account

After giving the IS id all the fields will defaulted except the down payment amount field

The amount given here will be reduced with the purchase amount and the sale contract will be take over for the remaining amount

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After the Down payment the Sale contract will be for the amount that is Purchased Amount-amount paid during down payment

Payment to Vendor

This is the place where the actual payment done to the supplier through the Islamic localised FT.

If there are multiple suppliers for a single transaction then we have to use the “Payment to Vendor – Multiple” Screen which uses the application FT.BULK.CREDIT.AC.

If the supplier is from the International market (i.e.) the supplier account should be a Nostro, and the payment should be done via “Payment to Vendor (External)” option from the menu.

The amount will be defaulted automatically after giving the Asset Request ID. The credit account (Supplier Account) should be selected from the drop down menu.

The following screenshot shows the “Payment to Vendor (Multi Supplier/Internal) Screen

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The following screenshot shows the “Payment to Vendor (External) Screen (the credit account should be a Nostro)

The following entries will be raised after this supplier payment.

DR: Murabaha Inventory Account

CR: Supplier‟s Account / Nostro Account

Payment to Cost Counter party

Payment to Cost counter party refers to the payment of expenditures which are specified during asset request. This is also done through the localised FT version. There are three option Payment to Internal, Payment to External and Multiple Payment.

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If there are multiple suppliers for a single transaction then we have to use the “Payment to Cost Counter Party – Multiple” Screen which uses the application FT.BULK.CREDIT.AC.

All the fields (Debit Information )will be getting defaulted once after giving the Asset Request Id.

The following screenshot shows the “Payment to Cost Counter party - Internal” Screen.

The following screenshot shows the “Payment to Cost Counter party - External” Screen. (Credit Account should be nostro A/c)

The following entries will be raised after the payment to cost counter parties.

DR: Corporate Murabaha Expense Payable Account

CR: Corresponding Cost Counter Parties account / Nostro A/c

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Miscellaneous Charges

Additional charges which will not be linked to the Purchase / finance contract can be captured using this option. These charges can be captured during any stage up to the end of the contract. This will be done through the Miscellaneous Charges option available in the menu.

The following screenshot shows the Miscellaneous charges Screen

The following entries will be raised after doing the Charges payment.

DR: Customer Account

CR: PL Category Account

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Payment to Appraiser

Payment to Appraiser refers to the payment of expenditures which are specified during asset request. This is also done through the localised FT version. There are two option Payment to Internal and Payment to External.

Input Appraiser Payment (Single)

Input Appraiser Payment (Multiple)

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The following entries will be raised after the payment done to the Appraiser.

DR: Corporate Murabaha Valuation Payable Account

CR: Appraiser Account

Asset Sale

The purchased commodity is sold using the customized LD screen. The Purchase contract ID needs to be entered. The sale counterparty name needs to be specified in the Broker record. Then only the counterparty can buy from the bank. Here the down paid amount will be adjusted with the LD amount to be paid to customer.

Murabaha Sale – Customized screen of LOANS AND DEPOSITS

IS.H.CONTRACTS

Purchased Contract

LD.LOANS.AND.DEPOSITS

Murabaha Sale

IS.H.BROKER.CPARTY

Broker

CUSTOMER

Sale Counterparty

PROFIT.RATE

Profit Rate

Checking the Customer is a valid sale Counterparty for the Broker

FUNDS.TRANSFER

Down payment

LD Amount will be adjusted

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The following Screen will show a sample sale contract. After giving the IS id all related finance details will be defaulted based on that ISH contract.

Sale contract amount which is reduced with the down payment amount

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The following entries will be raised after the sale contract

DR: LIVE DB (Principal + Interest)

CR: Murabaha Inventory Account (Principal + Interest)

DR: Murabaha Inventory (Interest)

CR: CAP Account (Interest)

Third Party Sale (Outright sale)

The asset can be sold to the third party customer as finance customer signed a power of attorney to the bank. Either the purchased asset could be sold to a customer (or) to a 3rd party customer. Bank cannot sell the same asset to both. The application used for the third party sale is IS.H.CONTRACTS.

We cannot do an outright sale for a sold contract.

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The following Screen shows a sample Third Party sell transaction

Tab-resale details

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Tab-Purchase details

Entries after selling to third party

CR: Murabaha Inventory (Resale amount + Profit)

DR: Corporate Murabaha Outright Sale Account (Resale amount)

DR: PL Category Account (Profit)

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Amend Sale

The Amend Sale module specifies the amendments or changes that are made to the existing sale contract which contains options like,

1. Reschedule 2. Partial Payment 3. Postpone Contract 4. Early Maturity 5. Amend Settlement A/C‟s

Reschedule

The Reschedule option in the Amend sale module defines amendment of LD schedule details by changing Final pay date. According to the new Final Pay date the LD schedule already defined will be changed automatically and new schedules are defined. During the Reschedule, the Interest amount cannot be changed as per the Shariah‟s rule. (i.e.) the total MB.PROFIT.AMOUNT should be same before and after the reschedule.

The following is a sale contract for which we are going to perform Reschedule.

The following explains the rescheduling of Murabaha contract.

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The schedules will be redefined like the below,

LD Schedule Balances summary

The following is the schedule balance summary for the rescheduled Murabaha contract.

Final pay date has been changed

LD schedules are defined depending upon the final pay date.

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Partial Payment

In the Partial Payment option the customer has the choice to make payment in advance and at any time of the contract period. After specifying the no of Instalments to pay, whether it may be reduced or extended. The Profit amount is calculated and the schedules will be redefined automatically according to the no of instalments given. Also accounting entries got generated for the corresponding accounts.

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Partial Payment will happen

for the two schedules

August repayment has been made

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Accounting Entries after Partial payment

The following entries are raised after partial payment,

DR: Customer account with principal amount

CR: CONTRACT REPAYMENT Account

DR: CAPITALISATION account

CR: Murabaha purchase account with profit amount

Postponement of Contract

The Postpone Contract allows the user to extend the contract by postponement of the instalments to pay. Also the user has to specify the reason for the postponement of instalments; LD schedules are redefined for new instalments.

During the Postponement of the contract, the Interest amount cannot be changed as per the Islamic base rule. (i.e.) the total MB.PROFIT.AMOUNT should be same before and after the postponement.

Depending upon the No of Instalments to be postponed, the final maturity date field value is changed. No of Instalments the

contract to be postponed

The Reason for the Postponement of the Contract is specified in this field

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Schedules will be redefined like below,

Before postpone of the LD contract

After postpone of the LD contract

As the contract is postponed for 1 months the schedule dates and final maturity date are changed

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Early Maturity

The Early Maturity option provides the customer to close the contract before the actual Maturity date. In this stage the bonus amount will be given by the bank to the customers. The bonus amount can be calculated according to the bonus percentage specified by the bank.

After closing the contract the predefined schedules which already exist for the contract will be removed and accounting entries will be generated for the corresponding accounts.

The following entries are raised during the early mature of the contract.

DR: Customer Repayment Account (Principal only)

CR: CONTRACT MATURITY Account

DR: Customer Interest Liquidation Account (Profit amount)

CR: PL account

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Amend Settlement A/C’s

The Amend Settlement A/C‟s option provides the user to change the repayment account from which the repayments done at any time of the contract period. The LD schedules are redefined for the new repayment Account.

RE-Possess OPS

Repossession is generally used to refer to a financial institution taking back an object that was either used as collateral or rented or leased in a transaction. The Re – POSSESS Operation here is used by the bank to take back the financed contract because of the customer defaulted some months without paying their past dues.

• This operation can be used to repossess the asset financed to Customer

• This option will be used when the customer cannot repay his installments due to various reasons.

• Bank can repossess the asset from the customer and sell it to a different customer

• Both Profit and Loss cases are handled

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Repossess Flow

• Bank To Settle Customer PD Payments

• Re-Possess The Asset

• Re-Sale Asset in Market ( To a different Customer)

• Re-purchase Asset

Bank Settle PD payments

The bank will settle the outstanding PD payments and take over the corresponding finance contract during this stage. The bank settles the entire PD outstanding amount here.

The following screenshot shows the PD record before doing the bank settlement.

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The following screenshot shows the PD record after doing the bank settlement.

Accounting Entries

The following entries are raised during the Bank settlement.

DR - MURABAHA.REPOSSESS.ACCT

CR – REPAYMENT OF OVERDUE Account

Re – POSSESS Murabaha Contract

This is the second step of the Repossession of a contract. After the Outstanding PD amount settled by the bank, the Repossess will be done for the same LD ID. The only thing should be noted down here is, the LD ID which given as input should be present in SALE.LD.ID field of the corresponding IS.H.CONTRACT ID.

The following screenshot shows the Murabaha Repossess operation

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Accounting Entries

The following entries are raised during the Repossess operation.

DR - MURABAHA.REPOSSESS.ACCT (with outstanding LD Amt)

CR – CONTRACT MATURITY Account

DR – CAPITALISATION Account

CR – MURABAHA.REPOSSESS.ACCT

Resale Murabaha Asset

This is the 3rd

step in doing Repossession of a contract. After the Repossess of an LD contract, the corresponding IS.H.CONTRACT of that particular LD can be either Resold or Repurchased.

Only after the Repossession, we can Resale a contract. We cannot do Resale and Repurchase for the same contract.

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Purchase Details Tab

The following screenshot shows the Purchase details of the corresponding ISH contract.

Sale Details Tab

This tab shows the Sale Cparty and the corresponding sale contract id.

Accounting Entries after Sale

DR: Customer Account

CR: Murabaha Inventory Account

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Repurchasing Murabaha Asset (Pre Approval)

After the Repossess of an asset, the bank can also do the repurchase for the same contract. This is done using the following option.

Re-Possessed Purchase ID: Enter purchase contract id in this field.

Customer Sale Cparty: Enter new Ijara Customer id.

Asset ID: Choose appropriate asset id from the dropdown menu.