How is profit calculated and distributed to depositors?
The bank calculates the profit to be distributed to depositors, attached document based on the profit available for distribution for the week. The Profit available for distribution is determined by adding the income earned from the bank's financing activities and, investment in equity deals less any valid provisions for doubtful debts for the week.
The Net Profit for distribution against the deposit pool is derived after firstly deducting the Bank's share as a partner (Shareholder's funds) and secondly after deducting the Bank's share as a Mudarib (Investor of the Capital).
This is explained further: The Bank participates in profit sharing on two levels. Firstly, the Bank is entitled to a share of the profits as a partner due to it having also made a contribution to the deposit pool in the form of Shareholders' funds. The percentage the Bank is entitled to at this stage is calculated by working out the percentage of Shareholders' funds as a percentage of the total funds in the deposit pool.
For example let us assume that the Bank earned a profit of R100 000 on the financing transactions during a particular week. If the current Capital Structure of the Bank is as follows
R 90 000 000
Shareholders Funds R 10 000 000
Total Capital Employed R 100 000 000
The available profit will be distributed as follows:
a) Calculation of % of Banks contribution to pool:
10 000 000 / 100 000 000 * 100 = 10%
b) The Bank is therefore entitled to 10% of the profits as a partner:
10 % of 100 000 = R 10 000
c) The remaining profit available for Mudhaaraba distribution is calculated as follows,
100 000 – 10 000 = R 90 000
Secondly, the remaining income of the deposit pool (as per point d below) is shared between the Bank as an Investor of the capital (Mudarib) and depositors as investors (Rab ul Mal) on the basis of a pre-determined profit sharing ratio.
This profit sharing ratio is currently fixed as follows:
The Bank's share is 40%
Depositors share 60%
d) This R 90 000 is distributed as follows
40% to the Bank ( Mudhaarib) = R 36 000
60% to the Depositors = R 54 000
e) Total profit due to the Bank = R 36 000 + R 10 000 = R 46 000
f) The R 54 000 due to depositors is shared amongst depositors using the points system.
As mentioned above, the 60% of profit accruing to depositors is distributed on the basis of the points system. The points system takes into account the amount of the investment and its duration or type of account in the investment pool. The reason for this is that the deposits of the investors as a whole participate in the production of income in accordance with their respective amounts and duration- this is the most equitable method of delivering the respective entitlements (to investors) and is in accordance with the Islamic Fiqh Academy of Jeddah's resolution no 13/5.
The profit ratios defined on Al Baraka Bank's deposit products are in fact weighting ratios to allow deposits of a longer term or those of a specific type of account to have a greater share in the available profit.
Therefore, based on this principle, if Ahmed has deposited R 1000 in a 32 Day Participation Account which has a weighting of 65% and Ebrahim has also deposited R1000 but in a Haj account which has a weighting of 80% then even though the amounts are the same, Ebrahim could expect to receive more profits because of the higher weighting on the type of account his deposit lies in. The weightings on the deposit products have been structured to allow for longer term deposit accounts to have a higher weighting. Similarly, due to the type of certain accounts, they are given a greater weighting eg. Haj has a higher weighting of 80% compared to some other accounts.
Profit Distribution Information