Introduction to Profit Distribution System

Profit Distribution System (PDS) provides the mechanism for Islamic banks to calculate and distribute profits for,

• Mudaraba deposits
• Wakala deposits
• Mudaraba savings accounts

The module manages various pools with finance or deposit products linked to those pools. Banks pool funds from customers and these funds are used to perform business activities such as, investment, financing, purchase and lease using Islamic principles. Profit earned from business activities is distributed for deposit and account holders.

Defining Product Features

The following are the product features:

• Automatic allocation of pool ID based on the conditions parameterised. Islamic finance, deposit and account products assigned to a particular pool ID during booking.
• Multiple pools can be created with,
  • Profit and expense categories setup for each pool
  • Manual addition of additional income or expense
  • Routine based modification of the calculated net profit amount
  • Ability to setup profit calculation order (IRR, PER, Mudarib share and routine based calculation) for each pool. This can be set in any order at the pool level.
  • Profit distribution frequency for each account or deposit type linked to the pool
• Setting up of special weightages for priority customer at customer or account level
• Amendment of pool ID assigned to the deposit or account from the last PDS end date +1
• Profit Equalization Reserve (PER) can be defined for each pool ID and can be utilised in the subsequent months, when needed
• Defines Investment Risk Reserve (IRR) for each pool ID and can be utilised in subsequent months, when needed
• Pay Hiba using special spread as additional profit
• Ability to accrue profit for Mudaraba deposits or Mudaraba accounts by using the provisional rate. Posting of accrual adjustment accounting entries on the date of PDS distribution based on the actual profit rate. The banks can set an option to use the last distributed profit rate as provisional accrual rate for the next period.
• Ability to add shareholder contribution to the pool calculation by using manual or automatic method
• Provisions to run simulation before profit distribution
• Customised enquiries to see the results

Configuration

This section explains the various parameters and system core table setup that need to be set for operation of the profit distribution.

ID.SYSTEM.PARAMETER

This table specifies the system level attributes for setting up profit distribution process. The key parameters  are listed below:

• Allowed ID is SYSTEM
• Defines profit distribution frequency for paying profit amount to Mudaraba deposits or accounts. It can be setup at pool or system level. During profit distribution, calculated profit amount is paid to the customer based on Distrib Freq field from ID.POOL.PARAMETER table. In case, Distrib Freq  field is not set in ID.POOL.PARAMTER table, then the system uses the distribution frequency set in Distrib Freq field from ID.SYSTEM.PARAMETER table.
• Defines transaction types to raise accounting entries
• Defines the number of days after which the pool tracker file records are moved to history files
• Defines the user activities that can be run during distribution process for arrangements

After the system level configuration, the banks set-ups the model parameters as explained below:

Model Parameters

The parameter files and system tables are setup to support the Islamic profit distribution operations. This section provides a brief overview of the system and parameter setup for holding the static data.

PARAMETER	DESCRIPTION
ID.POOL.PARAMETER	This table is used to define pool and setup parameter details for each pool. The following key parameters are defined: Available date of pool Pool currency, currency market and profit basis Various income and expenses categories Profit distribution frequency Profit calculation order for IRR, Mudarib and PER calculation Local routine to calculate net profit amount Reserve utility order from PER, IRR and shareholder accounts Mudarib fee category, Mudarib adjust category Shareholder calculation related fields Wakala deposit adjustment related fields Expenses category for early maturity processing of Mudaraba deposits NOTE: ID is a numeric value from 1 to 999
ID.PDS.WEIGHT	This table is used to define weightage and other parameters used during PDS simulation process. The following key parameters are defined: The ID comprises of < Pool ID >.< Category >. <Currency>.<Profit Distribution Frequency>. The ID accepts the record ALL for Pool ID and Category Amount from and Amount to range, supports to define distinct weightages for different amount ranges Weightage in percentage used to arrive PDS calculation balances IRR, PER and Mudarib share in percentage Default profit rate used for Mudaraba deposits
ID.PDS.CATEGORY	This table is used to define balance types and other exclusion conditions to be used during PDS simulation process. The following key parameters are defined: ID comprises of < Pool ID. Category > or < Category >. It is possible to provide ALL for Pool ID and Category Allows different balance types such as, Daily, Average or Minimum. Based on balance types, participation balance for deposits or accounts is calculated Exclusion criteria for Mudaraba accounts: Defines minimum balances to be maintained for Mudaraba accounts. Otherwise, underlying account is excluded from simulation calculation. Exclusion criteria for Mudaraba deposits: Minimum deposit period in days attached to particular pool. Otherwise, underlying deposit is excluded from simulation calculation.
ID.CUSTOMER.PREFERENCES	This table is used to setup special weightage at the customer or account level. This table provides special weightages for the specific customers offering more business value for bank. During simulation calculation, the weightage for each pool condition is picked from the weightage setup in ID.PDS.WEIGHT. The special weightage setup at the customer or account level is used if available, for PDS calculation. The key parameters details are listed below: ID is valid customer number Weightage in terms of percentage to be applied on balance amounts Different weightages for different accounts for same customer
ID.POOL.CONDITION	This table is used to setup the conditions for defaulting pool ID in relevant applications. When the asset or liability transaction is created, the pool ID should be captured. The user can enter the pool ID manually or automatically by setting up the conditions in this table The key parameters details are listed below: Allowed IDs are valid application names. For example, AA.ARRANGEMENT, ACCOUNT, SEC.TRADE, LD.LOANS.AND.DEPOSITS, MM.MONEY.MARKET and LETTER.OF.CREDIT. Defines the conditions to identify the pool ID based on Appl Field Name, Field Operator, Value From and Value To fields. Defaults pool, when other defined conditions failed to identify the pool.
ID.POOL.DEFINE	This table is used to link pool to a particular contract manually. The user can enter the date from which contract is assigned to particular pool.

Model Products

Product Group	Product Name	Features
	Pool Linking	Linking finance or deposit or account to pool with manual or automatic process
Islamic Deposits	1 Month Mudaraba Deposit 12 Month Mudaraba Deposit 2 Year Mudaraba Deposit 3 Month Mudaraba Deposit 6 Month Mudaraba Deposit Long Term Mudaraba Deposit	Creates Mudaraba deposit for different currency or tenor  using AA - Deposits product line. Books deposits for different tenor with or without rollover. The user defined property class and product condition features are used to capture the pool ID, deposit conditions, and early maturity recalculation options. Mudaraba deposit can be booked with the notional profit rate setup in ID.PDS.WEIGHT.
	Wakala Deposit	Wakala deposit for different currency or tenor is created by using AA – Deposits product line. Books deposits for different tenor with or without rollover. The user defined property class and product condition features are used to capture the pool ID. Wakala deposit can be booked with the notional profit rate setup in ID.PDS.WEIGHT.
Islamic Savings Accounts	Mudaraba Accounts	Mudaraba accounts for different currency can be opened by using AA – Accounts product line. Profit rate used for daily accruals defaulted from the notional profit rate setup in ID.PDS.WEIGHT. The user defined property class and product condition features are used to capture the pool ID.
	PDS Process – Simulation	The net profit amount is calculated from the income or expenses of the pool during the specified period. When net profit amount is derived, it is split based on the weighted average balance, (which takes into account the contributions to the pool, from each Mudaraba Deposit, Mudaraba Account, Wakala Deposit and share holder contribution). The weighted average calculation is based on the weightage setup during the parameter configuration. Applies IRR%, PER%, Mudarib share% calculation to reduce the net profit for each deposit before arriving at the distributable profit amount. Distributable profit rate is calculated from the profit amount.
	PDS Process – Distribution	Applies identified profit rate to the underlying Mudaraba deposits or Mudaraba accounts. Based on the profit pay method available in Mudaraba deposits, profit amount is paid to the customer account on distribution date or at later date. For Mudaraba accounts profit amount is paid by using profit distribution frequency. For Wakala deposits profit adjustment accounting entries are generated.