24 - Profit For Distribution

Before we deal in depth on the profit distribution table, let's look at two (2) examples on how profits are extracted for income recognition purposes prior distribution.

Let's take Account No. 1 (Chart 1) where income is calculated using Monthly Rest formula (or reducing balance method). Details of Account 1 are as follows:

# Financing period = 12 months
# Profit rate = 10.0% per annum
# Unearned income = RM550.40
# Sale price [ RM10,000  + RM550.40) ] = RM10,550.40
# Monthly installment = RM879.20
# Profit for Month-1 = RM83.81 [Formula RM10,000 x 10 divided by 1200 ]

Chart 1

Based on simple calculation as above, profit for the first month is RM83.81 (actual calculation using system, the calculation shall be principal balance x profit rate % x no. of days in the month divided by 365 days).

Account No. 2 (Chart 2) is based on Flat profit rate commonly used for hire purchase financing or Ijarah Thumma Al-Bai as offered in Malaysia. For flat rate financing, even though the pricing is quoted at 5.50% flat, effectively (when we convert to Monthly rest calculation) the rate is about 10.0% per annum.

Now, let's look details of Account 2:

# Financing period = 12 months

# Profit rate = 5.50 Flat per annum

# Unearned income = RM550.00. In chart noted as RM465.38 (RM550.00-84.62)

# Sale price [ RM10,000 + RM550.00) ] = RM10,550.00.

# Monthly installment = RM879.20

# Profit for Month-1 = RM84.62 [ profit higher by 0.81 compared to Chart 1]

From the examples, you will notice that the installments are the same but the profit due under Rule 78 formula, is higher i.e. RM84.62 compared to the profit calculated using Monthly Rest formula. This means, under Rule 78, the profit portion will exhaust faster compare to the normal monthly rest profit rate. In other words, when you take up financing using Rule 78 and decide to prepay the facility, it's worth settling the same early because towards maturity, more amount will be used to pay-off the principal portion.

Chart 2

From the above two (2) examples, the profits are extracted as follows:

Chart 3

Chart 3 is the simplest example on how profits are shared.  Profits from both Chart 1 & 2 when combined, will give us a gross profit amount of RM168.43. Based on straight forward profit sharing ratio of 70:30 [Customer: Bank], profits payable to the Customer is RM117.90 while the balance RM50.53 is payable to the Bank.

To calculate the effective profit rate, let's assume the bank's total deposit is RM20,000. Based on simple formula above, the profit rate that the Bank will declare is 7.07% p.a. but normally, bank will use effective rate by multiplying the same by 100 times 365 days over no. of days in the month.

In our next session, we shall discuss on more technical topic on profit distribution table i.e. how to use the Profit Distribution Table where various income are captured for distribution purposes.

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