Posts Tagged ‘Bank’
Islamic Banking – Key Differences of Components Within a Financial Statements of an Islamic Bank
Posted by admin in Financial Management on January 6th, 2010
Let us look at the key differences in presentation of financial statements between conventional an Islamic banking.
Statement of Financial Position (Balance Sheet)
In conventional accounting, the balance sheet has these few components, namely assets, liabilities and owners’ equity. In Islamic banking, there is one additional component called “equity of unrestricted investment account holders”.
In conventional banking, an asset is defined as an item with future economic benefit attached to it regardless whether there is legal control by the reporting bank. For Islamic banking, however, an item can be taken as an asset only when the Islamic bank has legal right to hold, use or dispose of the item.
The other unique feature is the “equity of unrestricted investment account holders”. This additional component is to satisfy the set of customers who invest on the basis of mudarabah which calls for any losses to be borne by the investors (the customers themselves). It is therefore, important to disclose sufficient information to demonstrate the measures taken by the bank to ensure that the interests of this set of customers are considered as part of the strategy of the bank. In conventional banking, they will be treated as liabilities instead.
There are 2 forms of mudarabah contracts:-
Mudarabah Mutlaqah – This is the “unrestricted” mudarabah contract whereby the capital provider/owner allows total freedom to the bank to use the capital for its projects without conditions, specifications, restrictions or limits. The bank is free to enter into any trade agreements, whether normal or deferred or leasing basis, using the owners’ capital. This form of mudarabah is typically used in replacement of the conventional fixed deposit product for retail customers. Mudarabah Muqqayadah – This is the “restricted” mudarabah contract. The bank is given certain parameters (restrictions and conditions) on how to use the capital provided by the owners.
Statement of Changes in Restricted Investments and Their Equivalent
This is the statement to report the use of mudarabah muqqayadah investments whereby the bank is to undertake to use the funds for specific investments. This pool of fund must be separated from other funds as the returns from this fund will be shared among this particular group of investors.
Apart from the returns or losses for the group of restricted investors, the statement should also report profits or losses before deducting the investment manager’s share of investment profits/losses. The bank’s share of compensation as the investment agent is also known as mudarib.
Statement of Sources and Uses of Zakat and Charity Fund
This is required only when the bank established a zakat and charity fund whereby the bank acts as a fiduciary of that fund. The bank is responsible for collection and distribution of all or part of zakat and charity funds.
A Non Bank Debtor in Possession Financing Option
Posted by admin in Corporate Finance on December 5th, 2009
It’s a known fact that companies that obtain bankruptcy financing have a much higher chance of emerging out of chapter 11 as a viable company than those that don’t secure debtor in possession financing. However, obtaining DIP financing has always been a challenge. There is the obvious reason that insolvent companies can be risky investments for commercial finance companies, so not many companies offer the product. And for the most part, DIP financing has only been offered by banks and corporate finance companies to large companies. Because of this, many small and medium sized companies were never able to secure financing and went out of business.
Recently, the trend has been reversing and a growing number of finance companies have begun offering specialized forms of bankruptcy financing to small and medium sized companies. Although still not widely available, a number of small businesses have been able to secure DIP financing and emerge from bankruptcy.
One of the biggest challenges that bankrupt companies have is that they lose control of all their bank accounts as soon as they declare for bankruptcy. Most assets up to the point of filing for bankruptcy have to be used to satisfy past debts. If your customers take 30 to 60 days to pay their invoices, that means that you may have to go without much liquidity for a number of weeks, unable to pay employees or buy new supplies. Factoring financing is a form of DIP financing that can help in these situations. Factoring accounts receivable provides you with an immediate advance on your slow paying invoices, supplying the needed funds to pay employees and suppliers. Factoring receivables provides you with the liquidity and breathing room to run your business while you navigate the chapter 11 bankruptcy process.
Qualifying for factoring is relatively easy. The biggest requirement that factoring companies have is that you sell products/services to credit worthy commercial customers who pay in less than 90 days. Factoring works best if your customers pay in 30 to 45 days and if your profit margins are at least 15%, but is flexible enough to work in other situations.
One substantial advantage of accounts receivable factoring is that is readily available to small and midsized companies. Like any form of debtor in possession (DIP) financing it will need to be approved by the court. And, it is best to apply for DIP financing and bankruptcy at the same time since it will give you a better footing on the critical weeks immediately following a bankruptcy.