## Chapter 26: Islamic Finance (BPM7 Chapter 17)

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### A. General overview
- Islamic finance is governed by Shari’ah principles including prohibitions on Riba (interest), Gharar (excessive uncertainty), Maysir (gambling), and short sales or socially harmful financing; Islamic insurance is based on mutual assistance.
- Islamic financial standard-setting bodies include the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) and the Islamic Financial Services Board (IFSB).
- Rapid growth of Islamic finance (as suggested by studies and the Islamic Finance Development Indicator (IFDI)) is significant enough to affect the quality and international comparability of macroeconomic statistics.
- Chapter structure:
  - Part B: financial institutions and sectoring;
  - Part C & D: measurement of output and income;
  - Part E: Islamic financial arrangements mapped to macroeconomic financial instruments;
  - Part F: economic ownership.

*Source: International Monetary Fund.*

### B. Islamic financial institutions and sectoring — key features and subsectors
- Fundamental Shari’ah principles (26.5):
  - prohibition of collection and payment of interest or other predetermined returns;
  - encouragement of investment in real economic activities or trading in goods and services for profit;
  - sharing rewards and risks between parties;
  - avoidance of profiting from trading in financial assets or “using money to make money”;
  - discouragement of excessive uncertainty limiting many derivatives;
  - prohibition on financing activities forbidden by Islam (e.g., alcohol, drugs);
  - emphasis on charitable giving via Zakah or Sadaqah and Waqf endowments.
- Institutional implications:
  - Islamic windows and Shari’ah-compliant activities must be segregated from non-compliant activities (26.7).
  - Off-balance sheet restricted investment accounts complying with Islamic finance accounting standards are classified as separate institutional units and typically included among investment funds (26.12, 26.17).
  - Waqf Funds: beneficiary is economic owner; donor’s purchase recorded as D75 miscellaneous current transfer; Waqf Funds are captive financial institutions (26.8, 26.21).
  - Hajj Funds: market enterprises for long-term Hajj savings; treated as institutional units if legally established and with complete accounts; may be non-MMF investment funds (26.9, 26.16–26.18).
- Subsectors and typical classifications:
  - Central bank (S121): not extensively discussed but investment by central bank noted.
  - Deposit-taking corporations except the central bank (S122): Islamic banks, conventional banks with Islamic windows; restricted investment accounts usually off-balance-sheet and treated as investment funds (26.11–26.15).
  - Investment funds (S123 and S124): MMFs invest primarily in Islamic bank deposits; non-MMF invest across Islamic securities; off-balance sheet restricted investment accounts classified as non-MMF (26.16–26.18).
  - Other financial intermediaries except insurance corporations and pension funds (S125): Islamic investment banks and companies (26.19).
  - Financial auxiliaries (S126): Takaful operators, fund managers, administrators of Takaful funds (26.20–26.22).
  - Captive financial institutions and money lenders (S127): Waqf Funds, Shari’ah-compliant money lenders (26.21).

### C. Islamic insurance (Takaful/Retakaful) — contractual forms, models, and measurement
- Two contractual relationships (26.24–26.26):
  - Participants’ mutual contract: members donate portion of contributions to a collective fund (Tabarru’), contributions belong to the collective fund.
  - Contract between participants and Takaful operator: operator manages/invests funds on behalf of participants; operators usually in financial auxiliaries and maintain separate accounts; Light Takaful may consolidate.
- Business types (26.27–26.28):
  - General Takaful: short-term protection (non-life equivalent).
  - Family Takaful: protection plus long-term savings (composite unless separated by regulation).
  - Retakaful: Islamic reinsurance; cross-border trade common where domestic markets are small.
- Underwriting surplus and disposition (26.29):
  - Underwriting surplus = excess of total premium contributions of policyholders-participants during the financial period over total indemnities in respect of claims incurred during the period, net of Retakaful and after deducting changes in technical provisions.
  - Surplus may be allocated to reserves, reduced contributions, charity, or distribution to participants depending on model.
- Main Takaful business models (26.30–26.31):
  - Mudaraba-based: operator receives share of investment profits.
  - Wakalah-based: operator paid a fee as percentage of contributions.
  - Wakalah-Mudaraba (hybrid): operator receives fee plus profit share.
  - Waqf Takaful: surplus retained in fund; participants do not receive underwriting surplus.
  - Family Takaful often split into Participants’ Risk Fund (PRF) and Participants’ Investment Fund (PIF).
- Output measurement of Islamic insurance (26.45–26.47):
  - Takaful operators: output measured as Wakalah fees and/or operator’s share of profits from fund investments.
  - Takaful/Retakaful funds: output measured as sum of costs (Wakalah fees/share of profits payable to operators plus intermediate consumption).
  - Takaful windows: output measured as sum of costs.
  - Light Takaful treated like conventional insurance per SNA2025 methods (paragraph references xx.xx in source).

### D. Measurement of output and income for Islamic financial institutions (excl. insurance)
- Output measurement principles (26.32–26.38):
  - Methods depend on institutional sector allocation: explicit fees, sum of costs, FISIM, or combinations.
  - Financial auxiliaries (S126): output = explicit fees (e.g., Wakalah fees, fund-manager fees).
  - Deposit-taking corporations (S122): output = explicit fees/commissions + FISIM for implicit intermediation services.
  - Investment funds (S123/S124): output treated as for conventional funds (fees); Hajj Funds and off-balance sheet restricted investment accounts measured as sum of costs except where FISIM applies to underlying loans.
  - Other financial intermediaries (S125) and money lenders (S127): output includes explicit and implicit fees; IFS formula provided below.
  - Captive institutions and Waqf Funds: output as sum of costs; fees are payable by beneficiary.
- FISIM formula for deposit-taking corporations (S122):
  - FISIM = (r_L – rr) × Y_L + (rr – r_D) × Y_D
    - r_L - the lending return rate
    - r_D - deposit return rate
    - rr - reference rate
    - Y_L - average stock of loans
    - Y_D - average stock of deposits
- IFS formula for Shari’ah-compliant money lending services (S125 / S127):
  - IFS = (r_L – rr) × Y_L
    - r_L - the lending return rate
    - rr - reference rate
    - Y_L - average stock of loans
- Reference rate considerations (26.35–26.37):
  - A service-free reference rate can be determined for Islamic FISIM.
  - Different reference rates may be required for conventional vs. Islamic Shari’ah-compliant finance.
  - At least two groups of currencies (national and foreign) should be considered for cross-border transactions.
  - Islamic FISIM applies to total loans and total deposits rather than instrument-by-instrument.

### E. Classification of Islamic financial instruments to SNA/BPM instruments and income
- Broad mapping principles:
  - Use contract-defining characteristics and institutional form to classify instruments; do not assume a single mapping.
  - Equity classification requires recipient to be a corporation and holder to have claim on residual value and governance.
  - Negotiability, on- or off-balance-sheet status, and whether the investment account holder bears investment risk determine classification.
- Selected instrument classifications and income treatment (preserve terminology):
  - Currency and deposits (F2):
    - Qard, Wadiah, Amanah: transferable (F22) or other deposits (F29); often no returns or gift (Hibah); nominal value guaranteed.
    - Qard-Hasan: other deposits (F29); return-free.
    - Restricted and Unrestricted Mudaraba: usually Other deposits (F29) when on-balance-sheet; off-balance sheet restricted Mudaraba may be Shares (F5) if part of own funds.
    - Wakalah deposits: Transferable deposits (F22) or Other deposits (F29); Wakalah fee typically in the 1.5 to 2 per cent range.
    - Profit and loss sharing certificates: Other deposits (F29) if non-negotiable; Debt securities (F3) if negotiable.
  - Debt securities (F3) and Sukuk:
    - Sukuk represent undivided ownership in tangible/monetary assets, right to use assets, services, debts, pool of assets, or ventures.
    - Sukuk types include Sukuk Ijarah, Sukuk Musharaka, Sukuk Murabaha.
    - Sukuk may be recorded as Debt security (F3) or Equity security (F5) depending on whether holder has claim on residual value; fixed-income sukuk normally Debt security.
    - Variable profile and hybrid sukuk classification depends on contract nature.
  - Loans (F4):
    - Murabaha, Tawarruq, Bai Muajjal, Bai Salam, Istisna’a, Ju’alah, Ijarah (financing), Qard-Hasan: typically classified as Loans (F4) or Trade credit and advances (F81) where applicable.
    - Ijarah Wa-iktina (financial lease): classified as Loans (F4); Ijarah Muntahia Bittamleek (operating lease): treated as operating lease services (no financial account entry).
    - Mudaraba, Musharaka, Mushtarakah: may be Loans (F4) or Equity (F5) depending on residual claim characteristics.
  - Equity and investment fund shares (F5):
    - Restricted Mudaraba off-balance sheet, Mudaraba certificates, participation term certificates, Musharaka: classified as Shares (F5) when considered part of own funds and holders have residual claims.
- Income recording:
  - Generic term “Interest and similar returns” (D41) used to accommodate Islamic returns in SNA/BPM.
  - Dividends (D421/D42) applied where instruments are equity-like.
  - Mapping examples (Annex II) preserve precise FA and income classifications for instruments such as Qard, Wakalah deposits, Murabaha, Sukuk, Istisna’a, Ijarah, Musharaka, Ju’alah, Istijrar, etc.

### F. Economic ownership of non-financial assets under Islamic arrangements
- Legal vs economic ownership:
  - Legal owner: unit entitled by law to claim benefits.
  - Economic owner: unit entitled to claim benefits by virtue of accepting economic risks over relevant period.
  - Assets should be allocated to sector of economic owner where legal and economic ownership differ.
- Islamic accounting practice vs economic-owner interpretation:
  - Islamic finance accounting standards often record legal ownership of underlying non-financial assets on Islamic financial institutions’ balance sheets even if held briefly.
  - Alternative interpretation consistent with SNA/BPM: economic ownership generally rests with users of assets who bear risks and rewards; brief or facilitative ownership by institutions should not necessarily be treated as economic ownership.
  - Constructive possession (Qabd Hukmi) or physical possession (Qabd Fe'eli) by an Islamic financial institution for a brief period should not be considered economic ownership in many cases.
- Ownership under contract types and timelines:
  - Shorter-term financing: purchaser/user typically economic owner early; institution holds a financial claim (examples: Murabaha, Bai Salam, Bai bil Wafa).
  - Operating lease (Ijarah Muntahia Bittamleek): lessor legal and economic owner; risks/rewards borne by lessor.
  - Longer-term financing (Istisna’a, construction, project finance): institution may be legal and economic owner during construction; once asset complete, economic ownership shifts to user though claim on borrower remains until debt extinguished.
  - Mudaraba and Musharaka: economic ownership generally with asset user even if legal title temporarily with institution.
  - Financial lease (Ijarah Wa-iktina): lessee is economic owner; lessor legal owner but risks/rewards largely transferred to lessee over lease term.
- Economic ownership on default (26.110–26.111):
  - Default may lead to change in economic ownership if institution repossesses assets (e.g., borrower acted in bad faith), if borrower cannot repay and loan is written off, or if asset shortage/neglect justifies reallocation.
  - For financial leases or Ijarah Wa-iktina, lessor likely to seek another lessee upon default.

### G. Derivatives, other payables/receivables, and external sector functional treatments
- Derivatives (F7):
  - Derivatives are limited in Islamic finance by prohibitions on gambling and excessive uncertainty; forward sales sometimes permitted but not always derivative-like.
  - Derivatives used for hedging purposes may be permissible and are used in some jurisdictions; treatment varies across jurisdictions and regulators.
- Other accounts payable/receivable (F8):
  - Istijrar: framework agreement for repeated commodity purchases; treated as single agreement when terms finalized.
  - Istisna’a financing for institution’s own-use goods: classified as trade credit and advances.
  - Bai Muajjal, Bai Salam: can be trade credit if for institution’s use.
- External sector functional classification (BPM7) — selected treatments:
  - Qard, Wadiah, Amanah deposits: other investment under currency and deposits (F22 or F29); related income under Investment income: Interest and similar returns.
  - Mudaraba funds: classification depends on on-/off-balance-sheet status; fixed arrangements with certificates can be Debt (F3) or Equity (F5) under portfolio investment with corresponding investment income as Interest and similar returns or Dividends.
  - Sukuk: Debt security (F3) or Equity security (F5) under portfolio investment depending on type; income as Interest and similar returns or Dividends.
  - Murabaha, Tawarruq, Bai bil Wafa, Bai bil-Istighlal: Loans (F4) under other investment with income as Interest and similar returns.
  - Ijarah Wa-iktina: Loans (F4) with investment income as Interest and similar returns; operating Ijarah treated as services.

*Source: International Monetary Fund.*

### Chapter 26:  Islamic Finance

### Chapter 26: Islamic Finance (BPM7 Chapter 17)

### A. General overview

- 26.1: Islamic finance is distinguishable from traditional finance in several ways, in relation to both financing and insurance activities. Islamic financial institutions, as well as financial institutions with Islamic windows that offer both conventional finance and Islamic finance, are bound by Shari’ah principles. The principles and rules of Shari’ah (or Islamic law) include prohibitions on Riba (usually translated as interest), Gharar (excessive uncertainty), Maysir (gambling), as well as short sales or financing activities that are considered harmful to society. Islamic insurance follows these same principles and is further based on the notion of mutual assistance.

- 26.2: In economies in which Islamic finance is prevalent, financial corporations have developed specific forms of financing arrangements that are consistent with these principles. Islamic financial standard setting bodies, including the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) and the Islamic Financial Services Board (IFSB), have developed standards on accounting, auditing, and related regulatory standards and frameworks, to promote greater harmonization of Islamic finance reporting practices across countries.

- 26.3: The historical development of the System of National Accounts, external sector statistics, and other macroeconomic statistics have largely reflected the predominance of conventional financial structures and terminology. Given the rapid growth of Islamic finance in recent years, as suggested by studies and the Islamic Finance Development Indicator (IFDI), it is significant enough to affect the quality of different areas of macroeconomic statistics in several countries and to affect the international comparability of these statistics. This chapter provides guidance on the statistical treatment of Islamic finance focusing on the national accounts and external sector statistics.

- 26.4: The chapter elucidates, by instrument, special types of financing arrangements (sales-based contracts, lease-based contracts, equity-based contracts, or profit/loss sharing) that characterize Islamic finance; reviews distinct operations of Islamic finance and insurance; addresses the nature of income on certain Islamic financial instruments (included among deposits, loans, debt securities); addresses sector classification of Islamic financial institutions; measurement of output, including FISIM; treatment of Islamic insurance-like business; instrument classification of select Islamic financial arrangements; and clarifies the concept of economic ownership in the case of Islamic finance. Structure: Part B reviews financial institutions and sectoring; Parts C and D provide guidance on the measurement of output and income, respectively; Part E presents Islamic financial arrangements and how these are reflected in macroeconomic financial instruments; Part F covers economic ownership.

### B. Islamic financial institutions and sectoring

#### 1. Some basic features of Islamic finance

- 26.5: General principles of Islamic finance:
  - prohibition of collection and payment of interest or other predetermined returns on investments;
  - encouragement of investment in real economic activities or trading in goods and services for profit;
  - sharing rewards and risks between parties involved;
  - avoidance of profiting from trading in financial assets or “using money to make money”;
  - discouragement of excessive uncertainty, which may prohibit the use of many types of financial derivatives;
  - prohibition on financing for activities forbidden by Islam, such as alcohol or drugs;
  - emphasis on charitable giving via Zakah (mandatory welfare due) or Sadaqah (voluntary charity), which can be implemented through an endowment trust known as a Waqf.

- 26.6: Islamic financial corporations have developed financing arrangements mapped to generic financial instruments, often based on trading models or profit and loss sharing models involving underlying real non-financial assets. Economic ownership of non-financial assets and changes in economic ownership are fundamental to macroeconomic statistics and may be reflected on the Islamic financial institution’s balance sheet when legal ownership is acquired, though allocation to users can change rapidly.

- 26.7: Shari’ah-compliant activities should be segregated from non-compliant activities and funds. Consequences:
  - Financial statements of Islamic windows of conventional financial institutions are separated from regular financial activities.
  - Off-balance sheet restricted investment accounts of banks and other depository corporations which comply with Islamic finance accounting standards are to be classified as separate institutional units.

- 26.8: Charitable institutions can contract with fund managers to establish dedicated, open-ended asset Waqf Funds managed according to Shari’ah principles. Features:
  - public can make donations by “purchasing” units of the fund;
  - charitable institution is the beneficiary and economic owner of all units;
  - fund reinvests or distributes specified amounts of profits to the beneficiary and charges fund management fees;
  - donor’s investment constitutes an irrevocable donation to the beneficiary;
  - fund keeps a complete set of accounts and constitutes an institutional unit.

- 26.9: Hajj Funds:
  - market enterprises that manage long-term savings for individuals intending to undertake the Hajj pilgrimage in compliance with Shari’ah principles;
  - considered institutional units if legally established with autonomous management and a complete set of accounts;
  - for Hajj savings to meet the conditions of deposits, the fund would likely be a regulated deposit-taking entity with principal typically protected to some degree, though in many countries they are treated as non-money market investment funds;
  - Hajj Funds may undertake non-financial activities (travel, accommodation), but these are expected to be less significant than financial activities.

#### 2. Islamic banking and other financial activity, including sectoring

- 26.10: Guidance focuses on subsector classification of Shari’ah-compliant financial institutions within the financial corporations’ sector. Subsectors may include conventional financial institutions as described in Chapter 29. Central bank (S121) and pension funds (S129) are not explicitly discussed except for some investments.

- Deposit-taking institutions except the central bank (S122)

  - Organizational considerations (26.11–26.13):
    - 26.11: Subsector dominated by banks; includes Islamic banks, other depository corporations, and conventional banks with Islamic windows. Operations sometimes described as Mudarabah transactions where the customer is capital provider and the financial institution is the entrepreneur (Mudarib). Main inflows include unrestricted funds commingled with other bank funds; unrestricted funds are invested in Islamic financial instruments.
    - 26.12: Restricted funds are managed separately, typically off-balance sheet and excluded from this subsector. Contracts do not give the bank authority over use/distribution decisions; bank’s role is administration and management. The bank’s only link to off-balance-sheet restricted investment accounts is the share of investment income from these accounts (as Mudarib), recorded as a single item in the bank’s income statement. Restricted funds are almost always treated as a separate institutional unit and included among investment funds.
    - 26.13: Islamic windows of conventional banks that accept deposits must invest deposits in Islamic financial instruments only. Funds under such contracts have the characteristics of deposits and provide financing to borrowers using Islamic instruments. Conventional banks must maintain a full set of accounts for their Islamic windows, have a Shari’ah Supervisory board, and may have independent management. Islamic windows are considered institutional units independent of the conventional banks, but within the depository corporation’s subsector.

  - Basics relating to sources and uses of funds (26.14–26.15):
    - 26.14: No common interest rate applicable to Islamic deposits. Islamic banks and windows offer deposit accounts parallel to conventional accounts and also accounts where returns/losses are shared (participation accounts). Under a profit-sharing model, an Islamic bank can withhold part of depositors’ net profits as a profit equalization reserve; under SNA accrual rules, these profits should be treated as distributed and subsequently reinvested into the reserve. Depositors in these arrangements acquire a component of the bank’s equity or a different type of bank liability.
    - 26.15: Diverse financial instruments are sources and uses of funds (financing of sales, leasing, fees, equity participation, investment). Some instruments lack conventional equivalents. Returns to Islamic banks and windows on financing and investments are not guaranteed but depend on venture success; returns (and sometimes losses) are divided between the bank and the depositors/investors based on instrument type.

- Investment funds (S123 and S124)

  - 26.16: Islamic Investment funds are collective investment schemes issuing shares or units to the public and are split into Money market funds (MMFs) and Non-money market investment funds (non-MMF). MMFs invest primarily in Islamic bank deposits; non-MMF invest in a wider range of Islamic securities.

  - 26.17: Off-balance sheet restricted investment accounts complying with Islamic finance accounting standards are classified as non-MMF investment funds because:
    - clients’ cash is placed in an investment fund managed independently of the Islamic bank;
    - investment fund maintains a complete set of accounts including financial position showing equity of account holders;
    - clients’ money is held in segregated investment funds with losses borne by providers of funds except for breach of trust or misconduct by fund managers;
    - these accounts distribute profits to investors in proportion to the value of their investments.

  - 26.18: Collectively organized Hajj Funds are allocated to the non-MMF subsector provided general conditions for classification are met: legally established entities with autonomous management and a complete set of accounts. Their long-term saving character and that savers bear risks and rewards of investment performance are noted.

- Other financial intermediaries except insurance corporations and pension funds (S125)

  - 26.19: Islamic investment banks and investment companies are classified as other financial intermediaries. Activities include Shari’ah-compliant advisory investment banking services, structured finance, financial leasing (Istisna’a or Ijarah), investment placement, raising funds in equity and debt markets (often from joint Mudaraba), trade finance (often Murabaha), and installment sales (such as Bai Ajel).

- Financial auxiliaries (S126)

  - 26.20: Takaful operators often constitute the main Shari’ah-compliant business classified as financial auxiliaries. These entities manage and administer Takaful funds on behalf of participants by charging fees to cover costs and do not take economic ownership of assets and liabilities of these funds. Financial auxiliaries may also be managers of investment funds (but not owners of the assets).

- Captive financial institutions and money lenders (S127)

  - 26.21: Waqf Funds are religious/charitable endowments with donated assets held by a charitable trust. Features and classifications:
    - beneficiary is the sole client and economic owner of the fund’s assets;
    - financial instrument classification: beneficiary has an Other equity (F519) claim on the assets of the fund;
    - purchases of units in the fund by donors are recorded as miscellaneous current transfers (D75) by donors to the beneficiary;
    - these funds are classified as captive financial institutions;
    - subsector can include any Shari’ah-compliant money lenders.

#### 3. Insurance Corporations (S128)

- 26.22: Takaful and Retakaful funds are included in the insurance corporations’ subsector alongside conventional insurance companies and Islamic windows of conventional insurance companies. Takaful and Retakaful funds collect contributions (equivalent of premiums) from participants and have reserves that belong to them. Islamic windows are included as separate institutional units if they maintain segregated financial statements. In Light Takaful, arrangements are less complex and do not have to be based on Tabarru principles; where segregation of operators from funds does not occur, Takaful operators with segregated financial statements are included among financial auxiliaries.

- Some basic features of Islamic insurance (26.23):
  - Takaful means “mutual guarantee”.
  - Takaful is defined as a process in which participants who face certain risk(s) agree that each contributes a specific amount (based on cooperation) to a non-profit fund to compensate anyone of them and/or their beneficiaries for potential loss if the risk materializes.
  - Contractual basis is mutual assistance (Ta’awun) and reciprocal donation (Tabarru’), rather than a conventional commercial insurer-policyholder relationship.
  - Participants are simultaneously insurer and insured; contributions into the Takaful fund belong to the participants and the operator manages the fund on their behalf.

*Source: Chapter 26: Islamic Finance (BPM7 Chapter 17).*

### 26.24 Islamic insurance  is  distinguished  by  two  types  of  contractual  relationships.  The  first  is  the  underl

### 26.24 Islamic insurance  is  distinguished  by  two  types  of  contractual  relationships.  The  first  is  the  underl

### Nature of contractual relationships in Islamic insurance (Takaful)
- 26.24: Two types of contractual relationships:
  - Underlying contract among a group of participants based on cooperation and solidarity: members renounce a portion of their contribution to a Takaful fund as a donation to provide mutual indemnity to any participant suffering a covered loss. Contributions are made to a collective fund rather than premiums paid to insure individually.
  - The fund is the account established by the company (Takaful operator) to receive (own) contributions and to oversee reserves and returns on investment.
- 26.25: Contractual relationship between participants and the appointed Takaful operator:
  - The operator manages and invests funds but is not a typical insurer taking on liability; operator/manager corporations are usually classified in financial auxiliaries rather than the insurance sector.
  - Operators and funds normally maintain separate accounting records to conform to Islamic finance accounting standards.
  - Exception: Light Takaful presents consolidated financial statements and resembles conventional insurance arrangements.
- 26.26: Ownership and allocation of contributions and returns:
  - Contributions, returns on investment and resulting surplus belong to participants collectively (policyholders as a group) after deduction of administrator’s share.
  - Surplus can be distributed to participants, given to charity, or retained according to the adopted business model.
  - If claims paid from the fund exceed premiums, participants should increase contributions.
  - Policyholders make contributions, receive indemnities against insured risks, and can receive a share of surplus.

### Takaful business types and Retakaful
- 26.27: Takaful business types:
  - General Takaful: protection against material loss or damage on a short-term basis (akin to non-life insurance).
  - Family Takaful: combination of protection and long-term savings, usually covering more than one year; generally deemed composite unless regulation requires separate registration of life and non-life schemes.
- 26.28: Retakaful:
  - Retakaful is reinsurance based on Islamic finance principles to mitigate Takaful business losses and expand direct insurance capacity, in particular for high value properties.
  - Relatively small domestic Retakaful markets in many Islamic economies can lead to significant cross-border trade.
  - Domestic Takaful and Retakaful industries are likely to provide services to non-residents and resident units can purchase such services from non-resident providers; these transactions need to be accounted for in external sector statistics.

### Underwriting surplus and surplus disposition
- 26.29: Definition of underwriting surplus:
  - Underwriting surplus = excess of total premium contributions of policyholders-participants during the financial period over total indemnities in respect of claims incurred during the period, net of Retakaful and after deducting changes in technical provisions.
- 26.29: Disposal of surplus:
  - Surplus may be used for accumulation of reserves, reduction of contributions, charitable donations, and/or distribution among participants.
  - Disposal depends on the adopted business model (whether surplus is transferred only to participants, shared with operators, or retained in the fund).

### Takaful business models
- 26.30: Four main business models (operator compensation defined by underlying contracts):
  - Mudaraba-based Takaful: operator receives a share of profits generated from investments of takaful funds.
  - Wakalah-based Takaful: operator is paid a fee as a percentage of participants' contributions.
  - Wakalah-Mudaraba-based Takaful (hybrid): operator receives both a fee as a percentage of contributions and a share of profits.
  - Waqf Takaful: surplus is not transferred to participants but is retained in the Takaful fund by the operator.
- 26.31: Family Takaful model distinctions:
  - Disaggregation of fund into Participants’ Risk Fund (PRF) and Participants’ Investment Fund (PIF):
    - Portion invested as PIF for investment/savings.
    - Portion allocated to PRF to meet claims, settle Retakaful charges, or allocated to reserves.

### Measuring output of Islamic financial institutions (excluding Islamic insurance)
- 26.32–26.33: Output measurement methods depend on institutional sector allocation of activities and may include explicit fees, sum of costs, FISIM, or combinations.
- 26.34: FISIM for Islamic depository institutions parallels conventional FISIM; it measures implicit service compensation embedded in return differences between borrowers and depositors relative to a service-free reference rate.
- 26.35–26.37: Reference rates and scope:
  - A reference (service-free) rate can be determined for Islamic FISIM; different reference rates may be required for conventional vs. Islamic Shari’ah-compliant finance and at least two groups of currencies (national and foreign) should be considered for cross-border transactions.
  - Islamic FISIM applies to total loans and total deposits rather than instrument-by-instrument approaches.
- 26.38–26.44: Measures of output by institutional sector (high-level summaries)
  - Central bank (S121): collective services (monetary policy, supervision, payments) calculated as sum of costs; central banks do not undertake intermediation in the traditional sense.
  - Deposit-taking corporations except the central bank (S122): include Islamic banks and Islamic windows; output = explicit fees/commissions + FISIM for implicit services. FISIM formula provided below.
  - Money market and non-MMF Investment funds (S123 and S124): output treated as for conventional investment funds (fees). Hajj Funds and off-balance sheet restricted investment accounts measured as sum of costs, except where FISIM on loans (e.g., Murabaha, Ijarah) may be required.
  - Other financial intermediaries except insurance corporations and pension funds (S125) and Sharī`ah-compliant money lenders (part of S127): output includes explicit and implicit fees. IFS formula provided below for Shari’ah-compliant money lending services.
  - Financial auxiliaries (S126): output measured as explicit fees charged to clients (e.g., Wakalah fees, fund-manager fees); Takaful operators included here measure output as Wakalah fees and/or share of profits depending on structure.
  - Captive financial institutions and money lenders (S127): output measured as explicit fees or sum of costs. Waqf Fund output typically measured as sum of costs; fees shown as payable by beneficiary because they are payable out of profits.

- FISIM formula for deposit-taking corporations (S122):
  - FISIM = (r_L – rr) × Y_L + (rr – r_D) × Y_D
    - r_L - the lending return rate
    - r_D - deposit return rate
    - rr - reference rate
    - Y_L - average stock of loans
    - Y_D - average stock of deposits

- IFS formula for Shari’ah-compliant money lending services (S125 / S127):
  - IFS = (r_L – rr) × Y_L
    - r_L - the lending return rate
    - rr - reference rate
    - Y_L - average stock of loans

### Output measurement of Islamic insurance (Takaful and Retakaful)
- 26.45–26.47: Output measurement principles for Islamic insurance:
  - The services provided diverge from conventional insurance; the Islamic service component is identified under the Takaful contract and depends on the business model.
  - Takaful operators: output measured as Wakalah fees charged to administer Takaful funds and/or the operator’s share of profits earned from investing these funds.
  - Takaful/Retakaful funds (family and general plans): output measured as the sum of costs (Wakalah fees to operators and/or share of profits payable to operators plus other intermediate consumption).
  - Takaful windows: output measured as the sum of costs, reflecting similar economic features to Takaful funds.
  - Light Takaful (no distinction between operators and funds): treated like conventional insurance and measured using the methods described in SNA2025 (paragraph references xx.xx in source).

### Nature and classification of returns on Islamic instruments
- 26.48–26.49: Terminology and treatment in allocation of income:
  - Prohibition of 'riba' means providers cannot impose fixed or unconditional finance charges independent of borrower’s use of funds; terminology such as profits, gifts or returns replaces interest in Islamic accounting.
  - To integrate with SNA/BPM, the generic term “Interest and similar returns” is used to accommodate Islamic returns (the “similar returns” concept) alongside conventional interest.
- 26.50 and table: Benefits of using “Interest and similar returns”:
  - Preserves universality of international statistical standards.
  - Accommodates economies with significant Islamic financial activities and incorporates investment income for relevant Islamic instruments.
- Table excerpt mapping SNA and BPM primary income accounts to Islamic instruments (selected items):
  - SNA: D4. Property income → D41. Interest and similar returns → D412 Similar returns (Islamic deposits; Islamic loans-financings; Islamic debt securities; Other liability instruments subject to Islamic conventions).
  - BPM: Investment income → Interest and similar returns (D41D, D41P, D41O, D41R) and treatment of investment income attributable to policyholders in insurance, standardized guarantees, and pension funds.

*International Monetary Fund*

### 1. Background

### 1. Background

### Mapping Islamic finance to SNA/BPM instruments
- Numerous types of Islamic financial arrangements can be broadly mapped to SNA and BPM financial instruments; some arrangements may apply to more than one SNA instrument depending on contract characteristics.
- Islamic financial corporations often generate income through financing of sales, leasing of underlying goods, and equity financing; these items can generate returns under Interest and similar returns (Part D).
- Compilers should use contract-defining characteristics to determine classification rather than assuming a single mapping for all instruments.

### Factors for instrument classification
- Institutional form of recipient: an equity classification for an instrument is only possible if the recipient is a corporation.
- Whether the instrument is designed to provide a profit that has a comparatively high reliability relative to its magnitude.
- Whether the financial instrument is recorded on the balance sheet of the Islamic financial institution.
- Whether the investment account holder has a claim on ventures or funds offered by the issuing institution (institutional unit behavior).
- Whether the investment account holder has a claim on the residual value of the issuing institution.
- Whether the lender is the supplier of the goods or services being financed (implications for trade credit or loan classification).
- Whether the financial instrument provides negotiable securities (e.g., participation term certificates).
- The list of instruments discussed is not exhaustive; compiling agencies can apply the above factors to classify other Islamic financial instruments.

### Currency and deposits (F2)
- Qard, Wadiah, and Amanah deposits:
  - Withdrawable on demand, at par, without penalty or restriction.
  - Usable for payments by check, draft, giro order, or other direct payment facilities.
  - Not linked to profit-making ventures or profit-and-loss sharing schemes.
  - Islamic financial institutions may use the funds but must guarantee nominal value.
  - Usually offer no returns or very small returns by gifting (Hibah).
  - May be classified as Transferable deposits (F22) or Other deposits (F29).
- Qard-Hasan:
  - Return-free deposits for needy individuals or social purposes; may be specific-purpose.
  - Interest-free; treated as Other deposits (F29).
- Restricted Mudaraba funds:
  - Investor restricts where/how funds are invested; no mixing of funds allowed.
  - Islamic financial institution manages funds as Mudarib (risk-sharing) or Wakil (intermediation for fixed fee).
  - Only Restricted Mudaraba held on-balance sheet should be classified as Other deposits (F29).
- Unrestricted Mudaraba funds:
  - Investor fully authorizes investment; mixing with other sources permitted; separate disclosure required.
  - Types:
    - Mudaraba not fixed deposits: accepted without time frame; investors can withdraw anytime; analogous to saving deposits; classified as Other deposits (F29).
    - Mudaraba fixed deposits: accepted for a fixed period; analogous to time deposits; classified as Other deposits (F29).
    - A third type discussed under Shares (see Shares section).
- Wakalah deposits:
  - Bank acts as agent for investing depositor’s funds in exchange for a fee, usually in the 1.5 to 2 per cent range.
  - Depositors are offered an indicative or nominal return; actual return determines final payout; bank may keep excess as “incentive fee”.
  - Can be classified as Transferable deposits (F22) or Other deposits (F29).
- Profit and loss sharing certificates:
  - Resemble shares but do not provide claim on residual value or governance.
  - Classified as Other deposits (F29) if non-negotiable.

### Debt securities (F3)
- Mudaraba fixed with Mudaraba certificates:
  - Fixed-term, negotiable instruments (investment deposit certificates or Mudaraba certificates).
  - Similar characteristics to conventional market securities; typically classified as debt securities if not part of own funds.
  - Off-balance sheet positions require separate disclosure.
- Sukuk (plural of Sakk):
  - Investment certificates representing proportional undivided ownership in tangible assets, monetary assets, right to use others’ assets (Usufruct), services, debts, a pool of predominantly tangible assets, or a business venture (such as Mudaraba or Musharaka).
  - Assets must be clearly identifiable and Shari’ah-compliant.
  - Frequently provide a securitization wrapper around an underlying contractual arrangement.
  - If an intermediate legal structure such as an SPE is involved, consideration of whether the SPE is an institutional unit may be required.
  - Three prominent sukuk contract types: (i) Sukuk Ijarah; (ii) Sukuk Musharaka; and (iii) Sukuk Murabaha. All are negotiable instruments, though Murabaha-based arrangements may be negotiable only when certain conditions are met.
  - Different sukuk types may have fixed income properties, equity-like properties, or more complex return arrangements.
  - Sukuk subtypes:
    - Fixed Income Sukuk: normally sale or lease based.
      - Sale-based contracts represent a debt and may not be bought/sold in secondary market other than at par value.
      - Lease-based contracts (Ijarah) do not have secondary market restrictions; revenue streams based on tangible underlying assets.
      - Ijarah Sukuk typically have a redemption payment representing return of beneficiary’s share in the underlying tangible asset back to the issuer.
      - Examples include Murabaha, Salam, Istisna’a, and Ijarah.
    - Variable profile Sukuk or Wakalah Sukuk: agency arrangement where holder delegates responsibility to issuer to carry out Shari’ah-compliant revenue-generating activity; aggregate return may be fixed or variable.
    - Hybrid Sukuk: form may vary through life cycle (e.g., Istisna’a plus Ijarah used to construct then lease an asset).
- Profit and loss sharing certificates:
  - Resemble shares but do not provide claim on residual value or governance.
  - Classified as Debt securities if negotiable.
- Participation term certificates:
  - Long-term investment instruments entitling holder to a share of an Islamic financial institution’s profit.
  - Classified as Debt securities if the certificates concern debt liabilities of the institution.

### Loans (F4)
- Qard-Hasan financing:
  - Return-free financing to needy individuals or social purposes.
  - Debtor repays only principal; may voluntarily pay an extra amount without promise.
- Murabaha financing:
  - Islamic financial institution purchases goods at client’s request; client makes deferred payments covering costs plus agreed return.
  - Resembles collateralized loans; underlying goods registered in customer’s name and used as collateral.
  - Disclosure of cost of underlying goods required; operating expenses of the financial institution are not included.
  - Defined as sale of goods at cost plus profit margin.
- Tawarruq financing (commodity Murabaha):
  - Buyer purchases a commodity from Islamic financial institution on deferred payment basis, then sells same commodity to third party on spot basis.
  - Extension of Murabaha where institution arranges sale of item; buyer borrows cash via these transactions.
- Mudaraba financing:
  - Partnership where institution provides capital (Rab al-Mal) and client provides labor/skill.
  - Profits shared per agreement; losses borne fully by capital provider except when due to client misconduct, negligence, or violation.
  - Has features of equity but fixed-term nature represents a fixed-term claim on the client rather than claim on residual value.
- Musharaka:
  - Partnership with both institution and enterprise contributing capital (Rab al-Mal).
  - Profits shared per pre-agreed ratio; losses shared according to contribution ratio.
  - Can be structured as a loan where the institution provides working capital but has no claim on residual value.
- Mushtarakah:
  - Combination of Musharaka and Mudaraba.
  - Can be treated as loans if there is no residual claim on value of the debtor entity.
- Bai Muajjal:
  - Financing by supplying commodities or services with deferred payments.
  - Classified as loans if supplied commodities or services are from third parties.
- Bai Salam:
  - Short-term financing: full prepayment for future delivery of specified goods on specified date.
  - Generally spot price is less than future price, ensuring a return to the institution.
  - Classified as loans only if goods/services produced are not for the institution’s own use.
- Istisna’a financing:
  - Partnership where institution places an order and provides financing to manufacturer/construction enterprise to produce supply.
  - Institution may enter a contract with an ultimate purchaser at a higher price to generate profit.
  - Classified as Loans if produced goods or constructed buildings are for the use of the ultimate purchaser.
  - Ju’alah is an Istisna'a contract applicable for services; may be a Loan if services are not for the financial institution.
- Bai bil wafa or Bai bil-istighlal:
  - Sales where seller has contractual right to repurchase underlying property from buyer by refunding purchase price.
- Ijarah (leases):
  - Islamic financial institution purchases capital equipment or property and leases it to an enterprise; institution may rent or receive share of profits from use.
  - Two types:
    - Ijarah Muntahia Bittamleek (operating lease): title not transferred to lessee; ownership risks borne by institution; treated as conventional operating lease and does not give rise to a financial instrument.
    - Ijarah Wa-iktina (financial lease): two stages — lease over majority of economic life, then transfer of ownership of residual value at end; financing ijarah resembling conventional financial lease should be classified as loans over lease period.

### Equity and investment fund shares (F5)
- Restricted Mudaraba held off-balance sheet:
  - Should be classified as Shares (equity) if considered part of own funds of the financial institution.
  - Off-balance sheet positions require separate disclosure.
- Mudaraba fixed with Mudaraba certificates:
  - Unrestricted Mudaraba through negotiable instruments with characteristics similar to market securities.
  - Classified as Shares if considered part of own funds.
- Participation term certificates:
  - Long-term instruments entitling holder to a share of a corporation’s profit.
  - Treated as Shares if considered part of own funds.
- Sukuk:
  - Classified as Shares only where owner has a claim on residual value of the issuing entity.
  - Equity-like sukuk are normally based on partnership arrangements with pre-agreed risk/reward sharing; impermissible for one party to provide guaranteed fixed payment to the other.
  - Examples include Musharaka (pure partnership) and Mudaraba (silent partnership or ‘Commenda’).
- Musharaka:
  - Classified as Shares when the financial institution acquires a claim on the residual value of the enterprise.
- Mushtarakah:
  - Combination of Musharaka and Mudaraba.
  - Can be treated as Shares if there is a residual claim on the value of the debtor entity.

*International Monetary Fund*

### 6. Islamic financial arrangements identified as insurance related financial instruments

### 6. Islamic financial arrangements identified as insurance related financial instruments (F6)

### Mudaraba Takaful model
- Based on the Islamic financial instrument Mudaraba that relies on profit sharing principle.
- The Takaful operator is the entrepreneur (Mudarib) providing management skills or labour.
- The operator is appointed by the participants, who act as investors or fund contributors (Rab al-mal).
- Any surplus or profit resulting from takaful fund investments are shared between the takaful operator and takaful fund according to a pre-agreed ratio.
- Possible losses are borne only by the takaful fund unless there is element of negligence from the takaful operator.

### Wakalah Takaful model
- Based on the Islamic financial instrument Wakalah – a contract between the takaful participants and the Takaful operator that acts as an agent (Wakil).
- Any surplus realized from the investment of the participants’ funds will go to the participants only.
- The takaful operator is entitled to an agency fee for the services rendered on mutual agreement and the predetermined terms in the contract.
- Profit and losses derived from the operations of Takaful fund and the investments belong to takaful fund only.

### Hybrid Takaful models
- Hybrid Takaful is an Islamic insurance contract structured to combine more than one financial instrument.
- Wakalah-Mudaraba model:
  - Combines features of Wakalah and Mudaraba.
  - Participants and the Takaful operator sign two contracts: under the Wakalah contract the operator is entitled to a fee from the contributions; under the Mudaraba contract the operator is entitled to the predetermined share of profit from investments of the takaful fund.
- Waqf-Wakalah-Mudaraba model:
  - Integrates elements of the charitable endowment Waqf.
  - No party gets the underwriting surplus so that the original contributions remain in the common pool for reinvestment and to enhance sustainability.

### 7. Islamic financial instruments classified as financial derivatives (F7)

### Role and permissibility of derivatives in Islamic finance
- Financial derivatives have a prominent role in conventional finance, but less so in Islamic finance.
- Prohibition of gambling and excessive uncertainty/risk as well as short sales or financing activities significantly limit the use of derivative contracts in Islamic finance.
- Certain types of forward sales are permitted, but these are not necessarily considered derivative contracts.
- Derivative contracts whose sole purpose is hedging (to minimize any risk exposures) do not seem to be incompatible with Shari’ah principles.
- Islamic financial institutions may enter into derivative contracts purely for hedging purposes (regardless of what the counterparty’s objective might be), and this is the case in some countries.
- The use of financial derivative types remains a somewhat open-ended issue in Islamic finance in terms of a general treatment that can apply across economies.
- Their use varies across jurisdictions, depending upon the domestic Shari’ah regulators and legislation.

### 8. Islamic financial instruments classified as other accounts payable/receivable (F8)

### Definitions and classifications
- Istijrar:
  - An agreement where the buyer purchases commodities under a single agreement from a supplier from time to time in different quantities.
  - The deal is considered as a sole agreement when all terms and conditions are finalized.
- Istisna’a financing:
  - Relates to goods or buildings for the Islamic financial institution’s own use and should be classified as trade credit and advances.
  - A Ju’alah contract is essentially an Istisna'a that applies to services as opposed to a manufactured good.
- Bai Muajjal financing:
  - Discussed elsewhere (paragraph 26.73) and classified as trade credit if it is a direct extension of credit by the supplier.
- Bai Salam financing:
  - If the associated goods or services are for use by the Islamic financial institution (lender), the arrangement would be considered trade credit.

### 9. Islamic financial instruments and related investment income under the functional classification of BPM7

### Broad principles and specific treatments
- This section follows classification of Islamic instruments and extends to the functional classification used in external sector statistics; classification of equity and debt security like instruments to functional categories follows principles from Chapter 6, BPM7.
- Qard, Wadiah, and Amanah deposits:
  - Included in other investment under currency and deposits, specifically Transferable or other deposits (F22 or F29).
  - Related income reflected under investment income as Interest and similar returns under other investment.
  - Quard-Hassan deposits treated similarly under Other deposits; in this case investment income is not relevant.
- Mudaraba funds:
  - Restricted Mudaraba funds included in other investment under currency and deposits as Other deposits, or as portfolio investment Equity, depending on whether funds are held on-balance sheet or off-balance sheet.
  - Unrestricted Mudaraba funds classified under Other deposits for both fixed term and non-fixed term arrangements.
  - Fixed arrangements with Mudaraba certificates should be classified as either debt (F3) or equity (F5) under portfolio investment, with corresponding investment income recorded as Interest and similar returns or Dividends.
  - Participation term certificates follow the same treatment as fixed Mudaraba with certificates.
  - Profit and loss sharing certificates are included as Other deposits (F29) under other investment if not negotiable or Debt securities (F3) under portfolio investment if negotiable, with income as Interest and similar returns or Dividends accordingly.
- Sukuk:
  - Can take the form of a debt security (F3) or an equity security (F5) under portfolio investment with investment income recorded as Interest and similar returns or Dividends.
  - Fixed-income sukuk constitutes a Debt security under portfolio investment.
  - Equity-like sukuk recorded under portfolio investment equity security.
  - Variable profile sukuk can be treated as debt or equity security under portfolio investment, depending on the precise nature of the arrangement.
- Quard-hasan financing, Murahaba financing, Mudaraba financing, tawarruq (commodity murabaha), bai bil wafa and bai bil istighlal:
  - Classified as loans (F4) in other investment.
- Bai Muajjal, Bai Salam, Ju’ala, and Istisna’a financing:
  - Classified as either loans or trade credits and advances; trade credits apply when the commodities are used by an Islamic financial institution.
  - If an optional or required return is paid, investment income is classified as other investment Interest and similar returns.
- Ijarah Wa-iktina (financial lease):
  - Classified as loans under other investment; investment income recorded under other investment Interest and similar returns.
  - Ijarah Muntahia Bittamleek (operating ijarah/operating lease) does not give rise to entries in the financial account; treated as Operating leasing services in the services account.
- Musharaka and Mushtarakah:
  - Classified as either loans (F4) or equity (F5), with corresponding income flows recorded as Interest and similar returns or Dividends.

### F. Economic ownership of non-financial assets under Islamic financial arrangements

### Special considerations and regulatory framework
- SNA and BPM distinguish legal ownership from economic ownership: legal owner is the institutional unit entitled by law to claim benefits; economic owner is the unit entitled to claim benefits by virtue of accepting economic risks over the relevant period.
- Usually legal owner coincides with economic owner; when not, assets are allocated to the sector of the economic owner.
- Islamic finance accounting standards recommend recording ownership of underlying non-financial assets in balance sheets of Islamic financial institutions even if they do not use the assets productively or hold them briefly; this focuses on legal ownership.
- An alternative interpretation, consistent with shared relationships in Islamic finance and guidance for conventional finance, is that economic ownership rests with users of the assets; users are economic owners in most cases.
- Islamic financial institutions may set up separate entities (consolidated or unconsolidated) which can be legal and economic owners of underlying assets (example: real estate investment co-investment ventures).
- Islamic financial institutions can act as facilitators by transferring economic ownership from seller to client, allocating economic ownership at the outset.
- Not recording economic ownership of underlying assets in Islamic financial institutions’ balance sheets can better reflect their role as providers of financial services facilitating transfer of non-financial assets.
- Brief ownership by Islamic financial institutions may be constructive possession (Qabd Hukmi) or physical possession (Qabd Fe'eli) and should not be considered economic ownership.

### Economic ownership under different types of Islamic financial arrangements — background
- Focuses on ownership of non-financial assets related to sales, leasing, pure lending and equity financing and their treatment in Islamic finance accounting frameworks.
- Ultimate purchasers of underlying non-financial assets are considered economic owners of assets obtained through Islamic financial institutions’ arrangements.
- Economic owners claim benefits and assume risks associated with use; time of acquisition is when economic ownership changes hands.
- If change of ownership not obvious, time when assets enter transaction partners’ books or when physical possession and control is acquired are good indicators.

### Economic ownership structures — general assessment
Shorter-term financing
- If the financial institution acquires goods or services for its own use, it is legal and economic owner.
- For shorter-term financing related to sales of goods and services, purchaser/user is owner or economic owner early in arrangement; Islamic financial institution typically only has a financial claim on the borrower where products are low value.
- Financial institution may take legal ownership briefly (e.g., Murabaha) before selling; intent is facilitation of purchase by client and ultimate user.
- When products sold, final user is legal and economic owner; financial institution holds a claim on the client for amount financed.
- For spot purchase for future sale (e.g., Bai Salam), the financial institution may be legal and economic owner during holding period; when goods acquired by users they become legal and economic owners.
- Bai bil Wafa / Bai bil-Istighlal: purchaser pledges to sell back to client at fixed future date, making purchaser legal and economic owner for a typically short period.
- Operating lease (Ijarah Muntahia Bittamleek) is a rental agreement not covering significant portion of asset’s economic life; lessor (Islamic financial institution) is legal and economic owner and assumes risks and rewards of ownership.

Longer-term financing
- Substantive issues arise for acquisition of high-value goods, construction, or project finance over extended period (e.g., Istisna’a).
  - During progress payments period financial institution is legal and economic owner; once asset complete, economic ownership shifts to actual user though financial institution holds a claim until debt extinguished.
- Mudaraba financing and Musharaka partnerships:
  - Islamic financial institution provides funding (may share in profits for Musharaka); underlying assets economically owned by party that uses those assets even if legal ownership remains with financial institution during financing.
- Financial leases (Ijara Wa-iktina):
  - Lessor is legal owner but risks and rewards transferred to lessee over loan-lease term; lease term typically covers substantive portion of economic life and lessee has purchase option at end.
  - Lessee is economic owner.
  - Lessor entitled to residual value at end of lease term, either as payment for purchase of depreciated asset by lessee or by getting economic ownership of depreciated asset.

### Economic ownership in the case of a client’s default
- For items acquired for use by a financing contract, defaulting on payments may arise in Islamic finance.
- Given Shari’ah principles’ social benefit aspects, in several cases economic ownership is unaffected when economic owners default on payments in financing arrangements such as Murabaha and Istisna’a.
- It can be argued default only relates to financial payment, not the full arrangement; contracts with profit sharing or participation cannot be considered in full default, so the user would remain the economic owner.
- Therefore, it can be assumed that defaulting clients will remain economic owners, but there are likely some non-mutually exclusive and complicating considerations.

*International Monetary Fund.*

### 26.110 It is possible, however, that default actually leads to a change in economic ownership.  If, for example, the

### 26.110–26.111: Change in economic ownership on default; Islamic finance and insurance recording

### Change in economic ownership on default
- Paragraph 26.110: It is possible that default actually leads to a change in economic ownership.
- Circumstances described:
  - If the Islamic financial institution determines that the borrower did not enter into a contract in good faith, then the institution (subject to the clauses of the contract) could repossess the assets and temporarily becomes the economic owner as well as the legal owner, while the borrower could face a penalty.
  - In the case of a shortage of a particular asset (e.g., dwellings), or in the case of neglect of the maintenance of the asset, the financial institution may be able to find a more worthy or needy client.
  - If circumstances indicate that the non-performing loan is a write-off, and the borrower is not expected to ever be able to repay, a change of economic ownership may be warranted.
  - A change in economic ownership may depend on the details of the situation, in addition to the type of financing and the actual use of the commodity (e.g., a community building versus a business asset).
- Paragraph 26.111: For financial leases or ijara Wa-iktina it is likely that in some or many of these instances the lessor will seek to find another lessee.

### Classification of Islamic financial instruments and income (ANNEX II)
- Instruments and their recording in National Accounts, External Sector Statistics, Financial Accounts/International Investment Position (FA/IIP), and Income classification are listed with precise mappings. Examples include:
  - Qard, Wadiah, and Amanah
    - FA: Transferable deposits (F22) or Other deposits (F29)
    - Income: Interest and similar returns (D41)
    - FA/IIP: Other investment: Currency and deposits: Transferable deposits or other deposits
    - Income: Primary income: Investment income: Other investment: Interest and similar returns
  - Qard-hasan
    - FA: Other deposits (F29)
    - Income: Interest and similar returns (D41)
    - FA/IIP: Other investment: Currency and deposits: Other deposits
    - Income: N/A
  - Restricted Mudaraba funds
    - FA: Other deposits (F29) or Equity (F51)
    - Income: Interest and similar returns (D41) or dividends (D421)
    - FA/IIP: Other investment: Currency and deposits: Other deposits or Portfolio investment: Equity
    - Income: Primary income: Investment income: Other investment: Interest and similar returns (D41O) or Portfolio investment: Dividends
  - Mudaraba – fixed; Mudaraba – not fixed; Mudaraba – fixed with mudaraba certificates
    - FA and Income: variously recorded as Other deposits (F29), Debt security (F3), Equity security (F5), with Income as Interest and similar returns (D41) or dividends (D421)
  - Participation term certificates; Sukuk (generally); Sukuk (Variable profile); Sukuk (Equity-like); Sukuk (fixed-income)
    - FA: Debt security (F3) or Equity security (F5) depending on type
    - Income: Interest and similar returns (D41) or dividends (D421)
    - FA/IIP: Portfolio investment – Debt or Equity security
    - Income: Primary income: Portfolio investment: Debt or equity securities: Interest and similar returns (D41P) or dividends (D42P)
  - Wakalah deposits
    - FA: Transferable deposits (F22) or Other deposits (F29)
    - Income: Interest and similar returns (D41)
    - FA/IIP: Other investment: Currency and deposits: Transferable deposits or other deposits
    - Income: Primary income: Investment income: Other investment: Interest and similar returns (D41O)
  - Murabaha financing; Qard-hasan
    - FA: Loans (F4)
    - Income: Interest and similar returns (D41)
    - FA/IIP: Other investment: Loans
    - Income: Primary income: Investment income: Other investment: Interest and similar returns (D41O)
  - Istisna’a financing; Bai Salam; Bai Muajjal
    - FA: Loan (F4) or Trade credits and advances (F81)
    - Income: Interest and similar returns (D41)
    - FA/IIP: Other investment: Loans Or Other investment: Trade credit and advances
    - Income: Primary income: Investment income: Other investment: Interest and similar returns
  - Ijarah (Operating Ijarah; Financing Ijarah)
    - Operating Ijarah: Production account: market output (P11)
    - Financing Ijarah: FA – Loans (F4); Income – Interest and similar returns (D41)
    - Operating Ijarah CA: Trade in Services: Other business services
    - Financing Ijarah FA/IIP: Other investment: Loans; Income: Primary income: Investment income: Other investment: Interest and similar returns (D41O)
  - Musharaka; Mudaraba Financing; Tawarruq; Bai bil Wafa; Bai bil-Istighlal
    - FA: Loan (F4) or equity (F5) depending on instrument
    - Income: Interest and similar returns (D41) or dividends (D421)
    - FA/IIP: Other investment – Loans Or Portfolio investment – Equity security
    - Income: Primary income: Investment income: Other investment: Interest and similar returns (D41O) Or Income: Primary income: Portfolio investment: Equity securities: Dividends (D42P)
  - Ju’alah
    - FA: Loan (F4) or Trade credits and advances (F81)
    - Income: Interest and similar returns (D41)
    - FA/IIP: Other investment: Loans Or Other investment: Trade credit and advances
    - Income: Primary income: Investment income: Other investment: Interest and similar returns
  - Mushtarakah
    - FA: Loan (F4) or equity (F5)
    - Income: Interest and similar returns (D41) or dividends (D421)
    - FA/IIP: Other investment – Loans Or Portfolio investment – Equity security
    - Income: Primary income: Investment income: Other investment: Interest and similar returns Or Income: Primary income: Portfolio investment: Equity securities: Dividends
  - Istijrar
    - FA: Trade credits and advances (F81)
    - Income: Interest and similar returns (D41)
    - FA/IIP: Other investment – Trade credit and advances
    - Income: Primary income: Investment income: Other investment: Interest and similar returns (D41O)

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_Source: https://www.imf.org/-/media/files/data/statistics/bmp7/draft-chapters/sna-ch26-bpm7-ch17.pdf_