From today, I will pick different points or issues in a Mudarabah transaction and provide the Shariah position on each of them before we move on to the new subject which is Musharakah. This may take a few more articles from here. However, I would like you to share with me any Mudarabah issue on which you need to have my comment or explanation. Please feel free to send it to my email so that I can include it in the next article.
The last two articles bore the explanation on the importance of a business plan in a Mudarabah transaction which provides methodical cognition to an investor to become a Rab Al Maal. I do not think any sensible investor shall merely rely on a business plan and spend the funds without doing due diligence on the Mudarib which includes its depth of relevant expertise, past performance, credibility or trustworthiness and the other aspects explained in detail in article 91. If someone does so, he or she will only have himself or herself to blame if the Mudarabah investment turns out to be a nightmare.
The situation that I would like to discuss with you today is what if a Mudarib wants to terminate a Mudarabah agreement? Are you not surprised at this question since in an ideal situation, the Mudarib would want the Mudarabah arrangement to continue for eternity if it is performing well and sharing handsome returns with the Rab Al Maal? Why then would the Mudarib want to do away with such a comfortable situation where it is enjoying the perks at someone else’s money?
This may happen if the market environment is fairly conducive, enabling the Mudarib to produce the results beyond the projection it had made in the business plan and the Mudarib has made a considerable amount of wealth through its share in the Mudarabah profit which it would now like to deploy so as to go it alone and does not have to share the profit with the Rab Al Maal. Well, can he then terminate the Mudarabah agreement unilaterally?
Going back to the 11 articles you have read so far on Mudarabah, you must have learned that a Mudarib or Rab Al Maal can unilaterally terminate a Mudarabah agreement if the Rab Al Maal has not delivered the Mudarabah capital to the Mudarib and that the Mudarib has not started its deployment. However, once that is achieved, the Mudarabah agreement cannot be terminated by either party unilaterally. Therefore, even if the Mudarib would like to terminate the Mudarabah agreement unilaterally, Shariah principles do not permit this to happen in order to protect the Rab Al Maal’s interest.
So what is the solution which shall take the poor Mudarib out of its misery? Well, the Mudarib can request the Rab Al Maal to agree to terminate the Mudarabah agreement and if the Rab Al Maal agrees, the termination can be achieved to make the Mudarib happy.
But hang on. We will need to slowly unwind the Mudarabah tangle in a Shariah compliant manner. But how?
You see, if the Mudarib would like to terminate the Mudarabah agreement and has obtained the nod from the Rab Al Maal, it would have to return the Mudarabah capital to the Rab Al Maal together with the Rab Al Maal’s unpaid share of the realized profit until the termination date. Fine, but what should the amount of Mudarabah capital be? The same amount which was delivered by the Rab Al Maal to the Mudarib at the outset? No, it does not work that way. Let me try to explain the Shariah way of achieving the termination in this case.
Assume that the Rab Al Maal provided an amount of US$1 million to the Mudarib as the Mudarabah capital at the time of entering into a five-year Mudarabah agreement based on the business plan submitted by the Mudarib stating in detail that the amount shall be invested in buying off-plan real estate units which are nearing completion in different communities at the original price or at not more that 5–10% premium due to market conditions at the time. Based on its expertise, the Mudarib selected the right properties at prime locations and rented them out as and when the delivery was made by the developers.
The rent received from all occupied seven properties is being distributed between the Rab Al Mal and the Mudarib at a 50:50 ratio after netting out service charges and maintenance expenses on a half-yearly basis.
The Mudarabah arrangement has just entered into the fourth year and the rent from all properties has gone up by 20–30% whereas the property prices are also exhibiting an overall upward trend. The Rab Al Maal is very pleased with the Mudarib’s performance and is shocked to receive a request for the premature termination of the Mudarabah agreement.
What I need to know from you in the next few days is what the amount of the Mudarabah capital should be that the Mudarib is required to return to the Rab Al Maal if the latter accepts the request to end the Mudarabah agreement.
The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinions of the Dubai Islamic Economy Development Centre, nor the official policy or position of the government of the UAE or any of its entities. The purpose of this article is not to hurt any religious sentiments either consciously or even unwittingly.
Sohail Zubairi is the senior advisor with the Dubai Islamic Economy Development Centre. He can be contacted at [email protected]
Next week: I will continue to discuss the finer and final points of Mudarabah in the next article. Stay safe, stay home.