Islamic Profit Share
Mudarabah products follow a very well defined process of profit calculation and distribution. The products have been developed by Absa Islamic Banking for members of the Muslim community who wish to operate financially in line with Shari’ah Law.
Mudarabah products through which customers can participate in profit and loss include:
How does it work?
- Absa Islamic Banking has well defined profit sharing ratios defined in the terms and conditions of each product. For instance, Islamic TargetSave account holders get 30% profit share allocated to the Islamic TargetSave book
- Profits are realised or received from Shari’ah compliant investment activities
- Once realised or received, profits are shared between the customer and the bank at the pre-agreed profit sharing ratio
- The customer portion of profit shares are distributed among customers based on the weighted average balance in each customer’s account for the financial period selected for Mudarabah investments
The following data and assumptions are used to illustrate the process of calculation:
|Start of financial period:||01 January 2X01|
|End of financial period:||31 December 2X01|
|Profit distribution date:||25 January 2X02 (as per the terms and conditions of a specific product)|
|Amount of investment:||R100 000 (assuming the amount is deposited on 01 January 2X01 and there are no withdrawals and no deposits during the financial period)|
|Number of days of deposit:||365 days|
|Number of days of financial year:||365 days|
|Type of product:||Islamic TargetSave|
|Profit Sharing Ratio:||30% to customer 70% to bank|
|Profit for the financial period:||R15 000|
Calculation for the weighted average balance:
- (R100 000 X 365 deposit days) / 365 financial year days = R100 000
Calculation for the profit share:
- R15 000 total of Mudarabah profit X 30% = R4 500 (Bank’s share R15 000 – R4 500 = R10 500)
Therefore the return on investment on a R100 000 weighted average balance is:
- [ R4 500 (from B) / R100 000 (from A) ] *100 = 4.5%
Once the profit calculations have been performed and approved by the AIB management and Shari'ah Supervisory Board, the profit amounts are deposited into customers’ respective accounts on 25 January 2X02.
Any accounts opened after the financial period (31 December 2X01 as per the example) receives their profit share from the next financial period. Any accounts closed after 31 December but before 25 January do not receive any profit share.