SHARIAH RULES IN FINANCIAL TRANSACTIONS

SH5023

BUSINESS PROPOSAL BASED ON MUDHARABAHCONTRACT

Prepared by;

Mohamed Aslam bin Mohamed Iqbal

1400182

MIFP September 2014

Abstract

T Coffee Cafe is a proposed coffee bar business which will be the

place where locals and tourists hangout for the quality of the

coffee and pastry as well as for the relaxing ambience. The café

will operate in one of the shop lot at Jaya One Square. The

location of the café is very strategic and surrounded by offices

and universities. Coffees are made from the imported beans from

all over the world. Pastries and desserts will be made with high

quality ingredients. Furthermore, there will be Italian dishes

and sandwiches prepared by well trained chef who earned his

Master’s in Italian Cuisine from University of Gastronomic

Science in Italy.

The shop lot has been secured for five years lease with an option

to extend for another five years. In addition to that, the

business is proposed to be fully funded by CBB Bank under

mudharabah contract. Start-up capitals of $146,990 will provided

by CBB Bank who acted as Rabb al Mal while Aslam will become the

mudharib who acted as the manager of T Coffee Café to manage the

i

business operation. The proposed profit sharing ratio has been

set to 40% for Rabb al Mal and 60% to Mudarib.

The company is expected to grow sales revenue from $639600 in

2015 to $936438 in year five. T Coffee Cafe will strive to

maintain a 53% gross profit margin and reasonable operating

expenses; it will see net profits grow from $57,384 to $181,201

during the same period.

Table of Contents

Abstract.......................................................i1.0 Introduction...............................................11.1 Objectives...............................................21.2 Attraction...............................................2

2.0 Company Summary............................................33.0 Business cost and capital..................................33.1 Operational cost.........................................43.2 Equipment cost...........................................43.3 Cost of Sales............................................53.4 Administrative cost......................................53.5 Technology cost..........................................6

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3.6 Professional Cost........................................63.7 Marketing Cost...........................................73.8 Total Capital............................................7

4.0 Market Analysis............................................84.1 Sales Strategy...........................................84.2 Sales target.............................................94.2.1 Calculation for expected weekly revenue for the 1st year...........................................................114.2.2 Projection of Profit and Loss of T Coffee Café for 5 years......................................................12

5.0 Mudharabah Contract Arrangement...........................135.1 Core Clause.............................................135.2 Additional Clause.......................................14

6.0 Conclusion................................................157.0 References and Bibliography...............................16

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1.0 Introduction

T Coffee Cafe is a coffee bar business which will became the

place for coffee lovers, office workers, married couple, and

students who aim to release their daily stress and meet up with

friends as well as having relaxed conversation in the most

relaxing ambience kind of café. T Coffee Café will capitalize on

its strategic location in Jaya One Square shop lot where

universities such as KDU University, University Malaya (UM),

University Islam Antarabangsa (UIA) as well as factories and

offices are located nearby. These will attract high amount of

customers. T Coffee Café will offer the best experience in high-

quality gourmet coffee, well baked pastries, healthy fruity

desserts as well as free internet service and board games for the

customers to enjoy during their visit. The relaxing ambience with

amazing interior is another compelling attraction that will

impress the customers.

The café will operate on a 2,000 square foot shop lot, with

coffee made from the imported beans from 10 main countries

including Vietnam, Indonesia, Brazil, Colombia, Yemen, Kenya,

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Ethiopia, Guatemala, Costa Rica and Mexico[1]1. Pastries and

desserts will be made with high quality ingredients and fresh

fruits with no additives.

In addition to that, T Coffee Café will have a very talented chef

who graduated with Master`s in Italian Cuisine from University of

Gastronomic Science in Italy to prepare Italian Cuisine as main

dish for the café This will give the customers the best

experience of tasting Italian dishes in the most original taste.

1.1 Objectives

There are few short term and long term objectives that has been

set for T Coffee Café to achieve during its operation which is as

follow:

1. To become no.1 café in Trip Advisor in Malaysia`s attraction

in the first year of operation

2. To maintain 53% profit margin every year

3. To generate extra profit by providing training service to

barista

1 Taylor, D.W., Best Coffee In The World. Clinton Gilkie2

1.2 Attraction

What will make T Coffee Café different from others are;

1. The interior which is visually attractive which will have

three different corners separated by glass doors;

i) First is outdoor with garden concept that will attract

nature lover

ii) Second is the indoor which will have the ambience of a

football bar which gives a feeling of happiness

watching football

iii) Third is the quite zone where students and worker who

wants to relax while doing their assignment or light

reading

2. Weekly football gathering event for football lovers and

special promotion and treats during game.

3. Membership card that will include free coffee with every 10

coffee purchases.

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2.0 Company Summary

T Coffee Café is a coffee bar business specialized with gourmet

coffee from all over the world with high quality pastries in

addition to Italian Cuisine meals and fruity desserts. This

business will be operated at Lot 2-13A in Jaya One Square with

size of 2,000 square feet space. CBB Bank owns 100% of the T

Coffee Café but will be managed by Aslam with pre-determined

profit sharing rate of 40:60 under Mudharabah contract for 5

years with an option of 5 years extension.

3.0 Business cost and capital

The business cost and capital are divided into few categories

before being totalled up[2]2. The calculations made are start-up

cost and for one month expenses. Hence to get the value for the

whole year, some of the reoccurring expenses will need to be

multiply by 12. The cost are calculated in USD since CBB Bank has

requested for everything to be valued using USD for contract

agreement and in accordance to BNM Guideline, monetary assets of

2 Fonseca, R., P. Lopez-Garcia, and C.A. Pissarides, Entrepreneurship, start-up costs and employment. European Economic Review, 2001. 45(4): p. 692-705

4

different currencies shall be valued according to an agreed

currency at the time of signing the Mudharabah contract[3]3.

3.1 Operational cost

Operational cost includes renovation, rental, utilities, manager

salary, workers salary and deposits[4]4.

Table 1: Operational cost of T Coffee CafeOperational cost Cost ($)Renovation 20000Rental (1st month) 1500Utilities (Expected 1st month) 500Security Deposit (3 months) 1500Utilities Deposit (3 months) 4500Workers Salary (4 workers and 1 manager) 2800Salary Cash Reserve (3 months) 8400 TOTAL = $39,200

3.2 Equipment cost

Equipment costs are as below[5]5;

3 Malaysia, B.N., Guidelines on Musharakah and Mudharabah Contract for Islamic Banking Institutions4 Berry, T., A standard business plan outline. Ei päiväystä.[Verkkosivu]. Bplans.[Viitattu 26.3. 2013].5 Java Culture. 2001 [cited 2014 31 October]

5

Table 2: Equipment costEquipment cost Cost($) Espresso machine 7000 Coffee maker 800 Coffee grinder 300 Food service equipment (stove, oven, utensils, etc.)

20000

Storage (rack, shelves, etc.) 3315 Counter equipments (sink, ice blending, etc.) 9200 Serving equipment (plates, glasses, etc.) 2800 Store equipment (cash register, aircond, tables, etc.)

14000

Office equipment (laptop, phone, printer, etc.) 3200 Miscellaneous 500 TOTAL = $61115

3.3 Cost of Sales

Cost of sales includes product inventory, raw materials,

shipping, packaging and insurance.

Table 3: Cost of sales of T Coffee CafeCost of Sales Cost($)Inventory Coffee beans 5000 Retail Supplies (sugars, napkins, creamer, etc.)

2000

Office supplies (membership card, pens, etc.) 235Inventory Total = $7235

Raw materials Coffee (filters, milks, ice cubes, etc.) 3500 Pastries (butter, bread, bacon, etc.) 5500 Italian cuisine (cheese, pasta, etc.) 6000

Raw Materials Total =$15,000

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Shipping + Insurance $1000Packaging $2000

TOTAL = $22,235

3.4 Administrative cost

Administrative cost includes takaful cover, fax machine, licence

and permit as well as papers for printing and faxing purposes.

Table 4: Administrative cost of T Coffee CafeAdministrative cost Cost($)Takaful cover (mortgage, workers, general liabilities)

2500

Fax machine 300License and permit 1300Papers (quotation, promotions, etc.) 300 TOTAL = $4400

3.5 Technology cost

Technology cost includes high speed internet, website

development, server development, astro set up, IT Consulting and

monthly maintainance.

Table 5: Technology cost of T Coffee CaféTechnology cost Cost($)

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High speed internet 300Website development 1000Server development 1000Astro set up 300IT Consulting 2000Maintainance (monthly bills) 940 TOTAL = $5540

3.6 Professional Cost

Professional cost includes legal set up of Sdn. Bhd., attorney

fees, business consultation with ZXY Consulting Sdn. Bhd. on café

set up and management, outsourced accounting set up in addition

to trademark, copyrights and patents registration

Table 6: Professional cost of T Coffee CafeProfessional Cost Cost($)Legal Set up (Sdn. Bhd.) 200Attorney fees 1200Business consultation 2500Accounting(outsource) 100Trademark, Copyrights, Patents 1500 TOTAL = $5500

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3.7 Marketing Cost

Sales and marketing cost includes advertisement board, logo

design, shop signage, flyers, media exposure, and public relation

(PR) for grand opening.

Table 7: Sales and marketing cost of T Coffee CafeSales and Marketing Cost Cost($)Advertisement Board 500Logo design 600Signage 2200Flyers 400Media (radio, television, twitter, facebook, etc.)

800

PR (Grand Opening) 1500 TOTAL = $6000

3.8 Total Capital

Total capital needed is the sum of all calculated cost. Hence in

this case the total capital needed is $146,990 which will be

provided by Rabb Al Mal, CBB Bank to Mudharib, Aslam to start T

Coffee Café business.

Table 8: Total capital needed for T Coffee CafeStart Up Capital Cost($)Operational Cost 39200Equipment Cost 61115Cost of Sales 25235Administrative Cost 4400

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Technology Cost 5540Professional Cost 5500Sales and Marketing Cost 6000TOTAL CAPITAL $146990

4.0 Market Analysis

Malaysians love coffee. According to I.M Magazine poll, almost

81.2 percent of Malaysian loves coffee and almost 44 percent

consume 2-3 cups every day. Based on this we can say that T

Coffee Café is an exciting project which will attract a lot of

coffee customer[6]6. Based on research, there are few

universities which are University Malaya (UM), University Islam

Antarabangsa (UIA), Kolej Damansara Utama (KDU) as well as

International Centre for Education in Islamic Finance (INCEIF)

and factories such as Colgate-Palmolive, Bosch, Nissan Sales

Centre, CIMB Branch Bank and etc. within 5km radius. Hence it

target market is very broad. The during site visit also shows

that the peak hours is from 12pm – 2pm, 8pm-10pm. Students are

more likely to hangout and complete their assignments at the café

from 10pm-12am. During weekend, 8am-10pm, 12pm-2pm, 8pm-12am is 6 Coffee Drinking Habits in Malaysia. 2013

10

the peak hour for football match. Hence it is decided that the

café will open from 9am-1am weekdays and 8am-2.30am weekends[7]7.

4.1 Sales Strategy

Since from the site visit the sales strategy are;

1)Membership sign up for $3 and 10 purchase using member card

entitles you for 1 free coffee.

2)Lunch set special with 3 course meal at the price of $10

3)Breakfast set special with coffee and pastries at the price of $5

on weekdays and special breakfast set on weekends at the price of

$7

4)Football night special where there will be merchandise given for

Saturday and Sunday night based on score prediction.

5)Tea time free espresso with purchase of desserts or pastries $7

4.2 Sales target

For the 1st year of operation, T Coffee Café has projected sales

revenue of $12,300 weekly. 2015 expected sales revenue is (from

Table 9);

Weekly Revenue = $12,300

7 Aslam, M., Site Visit to Jaya One Square, 201411

1st year Revenue = $12,300 x 54

= $639,600

Assumptions based on research[8]8

Expected growth of sales is estimated to be 10% every year for

the whole 5 years.

Marketing expenses, administrative expense, and cost of sales

will increase 10% as well

Staff salary will be increased by 8% every year to retain them

Depreciation of equipment is expected to be at 5% yearly

The net profit after tax for every year will be distributed to

both Aslam and Rabb al Mal with 60% goes to Aslam and 40% goes to

CBB Bank. CBB Bank is projected to earn (from Table 10):

Profit after tax = 40% x ($57 384 + $128 413 + $144 222 + $161

758 + $181 201)

= $269 191.20

Equipment sales = 75% x ($61115+ $300)

8 Needles, B., M. Powers, and S. Crosson, Financial and managerial accounting. 2013: Cengage Learning

12

= $46 061

*assuming depreciation cost is 5%

Projected return after 5 years = $269191.2+$46061−$146990$146990

x100%

= 115%

Projected average yearly return = 115% / 5 years

= 23% / year

The table below is will show how the projection for 5 he and

sales revenue are calculated.

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4.2.1 Calculation for expected weekly revenue for the 1st year

Day Time Expected numberof customer

Average spending (USD$)

Total Revenue(USD$)

Monday 9am -12pm

30 6 180

12pm-2pm 40 10 4002pm-8pm 60 7 4208pm-10pm 40 10 40010pm-1am 20 7 140

Tuesday 9am -12pm

30 6 180

12pm-2pm 40 10 4002pm-8pm 60 7 4208pm-10pm 40 10 40010pm-1am 20 7 140

Wednesday

9am -12pm

30 6 180

12pm-2pm 40 10 4002pm-8pm 60 7 4208pm-10pm 40 10 40010pm-1am 20 7 140

Thursday 9am -12pm

30 6 180

12pm-2pm 40 10 400

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2pm-8pm 60 7 4208pm-10pm 40 10 40010pm-1am 20 7 140

Friday 9am -12pm

30 6 180

12pm-2pm 40 10 4002pm-8pm 60 7 4208pm-10pm 40 10 40010pm-1am 40 7 280

Saturday 8am-10am 40 7 28010am-12pm 20 6 12012pm-2pm 40 10 4002pm-8pm 60 7 4208pm-12am 80 10 80012am-2.30am

30 7 210

Sunday 8am-10am 40 7 28010am-12pm 20 6 12012pm-2pm 40 10 4002pm-8pm 60 7 4208pm-12am 80 10 80012am-2.30am

30 7 210

Weekly Revenue = $12 300

Table 9 : Calculation for expected number of customer and expected sales revenue weekly

4.2.2 Projection of Profit and Loss of T Coffee Café for 5 years.

Table 10: 5 years projection of Profit and Loss of T Coffee CaféYear 12015

12 monthsUSD

Year 22016

12 monthsUSD

Year 32017

12 months

USD

Year 4201812

monthsUSD

Year 52019

12 monthsUSD

Revenue 639,600 703,560 773,916 851,308 936,438Less: Cost of sales (302,820) (333,102) (366,412

)(403,053

)(443,359)

Gross profit 336,780 370,458 407,504 448,254 493,080

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Marketing expenses (55,500) (61,050) (67,155) (73,871) (81,258)Administrative expenses (38,500) (42,350) (46,585) (51,244) (56,368)

Depreciation (5,073) (5,073) (5,073) (5,073) (5,073)Staff costs (33,600) (36,288) (39,191) (42,326) (45,712)

Other expenses (127,595) (54,480) (57,204) (60,064) (63,067)Operating profit 76,513 171,218 192,296 215,677 241,602Interest on loan - - - - -Profit before tax

("PBT")76,513 171,218 192,296 215,677 241,602

Taxation (19,128) (42,804) (48,074) (53,919) (60,400)Profit after tax

("PAT")57,384 128,413 144,222 161,758 181,201

Gross Profit Margin 53% 53% 53% 53% 53%EBITDA 81,585 176,290 197,369 220,750 246,674

EBITDA/Revenue 13% 25% 26% 26% 26%Operating

Profit/Revenue Ratio12% 24% 25% 25% 26%

Monthly average PBT 9,564 14,268 16,025 17,973 20,133Monthly average PAT 7,173.05 10,701 12,019 13,480 15,100

Monthly average EBITDA 10,198 14,691 16,447 18,396 20,556

5.0 Mudharabah Contract Arrangement

Mudharabah contract arrangement will be classified into two

categories which are the core clause and additional clause[9]9.

5.1 Core Clause

1. The parties that will be involved are;

9 Kahf, M., Samples of Islamic Finance Contracts

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i) Rabb Al Mal : CBB Bank (funds owner)

ii) Mudharib : Aslam (T Coffee Café Manager)

2. The proposed business is a café bar business with business

location will be at Lot 2-13A in Jaya One Square which has been

secured by Aslam for 5 years leasing with an option of 5 years

extension.

3. The Mudharabah hereby establish that;

i) the Rabb al Mal, CBB Bank will provide the capital of

US$146,990 for the purpose of using it as the capital for

Mudharabah

ii) the Mudharib Aslam will takes full charge of managing this

Mudharabah for the purpose of maximizing its profit and to

liquidate all its properties at the end of business. He

shall remain loyal and act with all honesty in achieving the

objective that has been set.

4. CBB Bank has the rights to inspect the accounts, transactions

book and any records at any particular time. Any managerial act

that sees as unfit will cause the Aslam to be called by CBB Bank

for hearing.

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5. Any misconduct and negligence by Mudharib(Aslam) that leads to

big losses gives the rights to Rabb Al Mal (CBB Bank) to

terminate his contract right away.

6. All banking transaction will be reviewed by CBB Bank for

approval.

7. Aslam pledges to supply CBB Bank with quarterly reports and

understood that all his expertise shall be used to achieve the

objectives of this Mudharabah.

8. The profit is defined as net profit after tax and shall be

distributed at the end of every year. The distribution of profit

shall be as follows;

i) 60% to the Mudharib (Aslam)

ii) 40% to the Rabb Al Mal (CBB Bank)

iii) Any losses shall solely be borne by CBB Bank unless there is

negligence and mismanagement by Aslam which will make him

borne all the losses.

9. All equipments and other assets are fully owned by Rabb Al Mal

(CBB Bank).

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10. The duration of this Mudharabaah is five years starting from

1st January 2015 to 31st December 2019; with an option of

extending the contract for another 5 years upon agreement from

both parties. All remaining assets at the end of Mudharabah

agreed period shall be liquidated by Mudharib and if;

i) the liquidated amount is less than USD$146,990 all of the

amount received shall be returned to CBB Bank fully.

ii) the amount is more than USD$146,990 , the excess amount

shall be split 50:50 between Aslam and CBB Bank.

5.2 Additional Clause

11. At the end third year of the Mudharabah, Rabb Al Mal (CBB

Bank) will be given option to review the business with option of

early termination if Mudharib(Aslam) is incompetent and incur big

losses.

12. At the end of fourth year, Rabb Al Mal (CBB Bank) and

Mudharib (Aslam) will have a meeting to decide the 5 years

extension contract or Mudharabah should end at 31st December

2019.

13. Mudharib(Aslam) shall provide collateral to be used to cover

loses in case of negligence and misconduct.19

6.0 Conclusion

Based on the presented fact and projection, T Coffee Café under

Mudharabah contract is a good business for both Rabb Al Mal, CBB

Bank and Mudharib, Aslam. The return CBB Bank are projected to

have is almost 115% over 5 years with an option to extend the

relationship or to end the Mudharabah. Besides that, CBB Bank

also will have chance to review the business after 3 years with

option of ending the Mudharabah early if the business is not

going as good as projected hence this benefit both Mudharib from

having to lose time and energy as well as Rabb Al Mal to lose

more capital due to bad business. Hence the Mudharabah proposed

should be considered as good business[10]10.

10 Bacha, O.I., Adapting mudarabah financing to contemporary realities: A proposed financing structure. 1997.

20

7.0 References and Bibliography

1. Taylor, D.W., Best Coffee In The World. Clinton Gilkie.

2. Fonseca, R., P. Lopez-Garcia, and C.A. Pissarides,

Entrepreneurship, start-up costs and employment. European Economic

Review, 2001. 45(4): p. 692-705.

3. Malaysia, B.N., Guidelines on Musharakah and Mudharabah Contract for

Islamic Banking Institutions. Online

http://www.bnm.gov.my/index.php, 2010.

4. Berry, T., A standard business plan outline. Ei päiväystä.

[Verkkosivu]. Bplans.[Viitattu 26.3. 2013]. Saatavana:

http://articles.bplans.com/writing-a-business-plan/A-

Standard-Business-Plan-Outline, 2011.

5. Java Culture. 2001 [cited 2014 31 October]; Available from:

http://www.bplans.com/coffee_shop_business_plan/executive_su

mmary_fc.php.

6. Coffee Drinking Habits in Malaysia. 2013; Available from:

http://www.market-truth.com/coffee-drinking-habits-in-

malaysia/.

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7. Aslam, M., Site Visit to Jaya One Square, 2014: Petaling Jaya.

8. Needles, B., M. Powers, and S. Crosson, Financial and managerial

accounting. 2013: Cengage Learning.

9. Kahf, M., Samples of Islamic Finance Contracts.

10. Bacha, O.I., Adapting mudarabah financing to contemporary realities: A

proposed financing structure. 1997.

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