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| Profit Distribution
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| Last article we talked about various deposit products and Al-Mudharabah General
Investment Account (MGIA), the popular equivalent Shariah version of the
conventional fixed deposit. Unlike conventional fixed deposits where interest
rates are fixed on placement of deposits, profits for MGIA are declared on
actual profit made on a monthly basis. In addition, it shall be distributed
based on an agreed profit-sharing ratio between the customer and the bank,
determined prior to the placement of deposits. An important question that
arises from this is how the bank shares its profits with its customers.
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| We believe that since there has not been any article published pertaining to
this topic, we will take this opportunity to educate our customers and
especially potential users of Islamic banking services. Here, we will
demonstrate and highlight two (2) common profit distribution methods adopted by
Islamic banks in Malaysia. This subject is quite technical but we will try to
explain in the simplest way.
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The two (2) methods on profits distribution commonly used here in
Malaysia are:-
1. Weightage Method (AM)
2. Profit Sharing Ratio Method ( PSR)
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| Weightage
Method (WM) |
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| For this method, the bank will use various ratios known as the
Weighted Average Ratio (WAR) for each deposit placement tenure (e.g. 3,6,9
months and so on) to represents the importance of one deposit tenure in
comparison to another e.g. a 12-month deposit is considered much more stable
for the operation of an Islamic bank when compared to a 1-month deposit. If a
customer places a deposit for 1 month tenure, the bank needs to monitor the
deposit movement closely as it does not have assurance that the 1 month deposit
will not be withdrawn on maturity compared to 12-months deposit tenure. Thus,
to ensure fairness in term of profit distribution; depositors who place fund
under longer deposit tenure should be paid higher profits compared to those who
place under shorter tenure. Due to this, higher WAR will be assigned to longer
deposit tenure. As an example, the profit distribution WAR (column iii) is as
shown in Table 1 below:- |
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*the WAR shown in column (iii) is just an example. |
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| To understand Table 1, let’s pick 18 month deposit tenure as an
example. |
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| Under column (v) and row total, total profit to be distributed
between the customer and the bank is say, RM5,800 and the agreed profit sharing
ratio (PSR) is 50% to customer and 50% to the bank or 50:50 as normally written
in the deposit placement receipt. |
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| Although the monthly average balance (column ii) for 18 months is
RM100,000 but for profit distribution purposes, the balance is assumed as
RM110,000 (RM100,000 x WAR of 1.10). Incidentally, the monthly average balance
is calculated on a total daily balance over no. of days in the month. |
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| To determine the gross profit in column (v), take balance in column
(iv) divide it by the total of column (iv) times profit of RM5,800 (in column
v) and that will entitle all customers under the 18 months tenure a gross
profit of RM 708.89 |
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| Gross profit percentages in column (vi) are calculated by dividing
the profits of RM708.89 over original deposit amount in column (ii) times 100
times 365 days in a year and divide by no. of days in the month, say 31 days.
That will gives us a percentage of 8.35 |
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| Customers’ profit is calculated by taking the gross profit amount
of RM708.89, then times that profit sharing ratio of 50% to give a return of
RM354.44 (4.17%). Similar formula mentioned earlier is used to calculate the
effective return to the customer. |
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| Profit
Sharing Ratio Method
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| It is the simplest method of profit distribution. The bank will
assign a different profit sharing ratio for the various deposit tenures. For
example, for same 18 month tenure, profit sharing ratio offered may be say,
80:20 in favour of depositors. |
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| As mentioned in our earlier article, there is no penalty imposed
for pre-matured withdrawal for MGIA. Based on the earlier example, if a 24
month deposit placement is prematurely withdrawn on the 20th month, profits due
to the deposits shall be RM354.44 per month for a complete 20 months.
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It should be noted that since profit is calculated on a monthly
basis, the monthly profit can be higher or lower depending on the overall
profit and deposit strategy of the bank.
This article is brought to you, courtesy of Asian Finance Bank (AFB). AFB is
the latest, full-fledged Islamic bank to operate in Malaysia. Backed by a
consortium of some of the most prominent names in the Middle East, Malaysia
shall serve as AFB’s regional hub, as it expands into neighbouring countries
and other parts of the region.
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