With a due apology to readers, I would like to paste one-third of the content of last week’s article here since it will make more sense to read the nature, importance and effectiveness of the business plan and proper due diligence at one go. Remember, we did not have enough space to complete this discussion last week.
The lawyer with expertise in Islamic trade and investment transactions as well as in Islamic arbitration cases patiently heard Shafiq, Ebrahim and Jamil before advising as follows:
a. Ebrahim should not become a shareholder with Shafiq in the business immediately. He should first test the waters through a time-bound Mudarabah agreement which will provide Ebrahim with the opportunity to get to know the business in addition for Ebrahim and Shafiq to understand each other.
b. As part of the Mudarabah arrangement, Ebrahim shall be the Rab Al Maal or the fund provider and Shafiq shall act as the Mudarib or fund manager.
c. Based on the expertise Shafiq has acquired in the business, he is required to submit a detailed business plan to Ebrahim with the following factual information:
1. Year-on-year growth Shafiq has achieved in the eight years that he has been in this business
2. Evidence of the distributorship from Chinese manufacturers including its validity and product range
3. Terms of import from China and re-export to East Africa including payment terms at both ends
4. Summary of the audited financial statements including the cash flow position for the last three years
5. Full details on setting up own company in Kenya including business justification, breakdown of needed funds, pros and cons/SWOT [strengths, weaknesses, opportunities and threats] analysis, expected boost to the revenue and profitability and the targeted countries in East Africa
6. A three-year consolidated financial projection covering Dubai and Kenya operations, exhibiting the revenue and gross profit/net profit outlay and the expected profit for both parties based on the ratio of profit distribution between the Mudarib and the Rab Al Maal, and
7. The indicative overall current size of the tire and battery market in Kenya including local consumption and export to neighboring countries, and Shafiq’s current share of that market and the expected growth in the next three years in it pursuant to setting up own company.
d. A brief on Shafiq’s competitors in Dubai and Kenya including top names and their market share and how the landscape will look like in three years from now including Shafiq’s operation.
e. A plan to manage two different businesses in a similar number of jurisdictions, and a description on Shafiq’s existing management team and the level of its professionalism as evidenced by the standard operating procedures (SOPs), manuals, etc.
f. Details on the types of insurance held covering the goods in transit, inventory, fixed assets and employees and claims lodged with and payments received from the insurer.
g. Any outstanding lawsuits, liens or judgments against the existing entity or its owner/employees, and how they were resolved.
h. The extent of the shareholding that Ebrahim shall be accorded with in the overall business covering Dubai and Kenya pursuant to the successful completion of the Mudarabah transaction.
Shafiq caught his head once the lawyer completed the detailed explanation. He gave a quizzical look to his cousin Jamil as if saying “thank you very much bro”. The three thanked the lawyer and left with a promise to let him know if Shafiq and Ebrahim agree to proceed on this basis.
Ebrahim did not hear from Shafiq for the next couple of weeks and had lost hope until one day he got a call from Shafiq who wanted to meet. In the meeting, Shafiq told Ebrahim that he has never been probed in the way the lawyer wanted him to reveal everything about the business and that for days he felt uneasy about the meeting.
However, yesterday it dawned upon him that he would like to know exactly the same information if he would be looking to invest in a running business either temporarily through Mudarabah or considering to take a perpetual stake. Moreover, he now thinks that it will help him as well to know how robust his eight-year old company is from the perspective of professionalism and resilience once he has compiled the information dossier in detail. A decision will then be for Ebrahim whether he would like to join Shafiq or part ways.
As for Ebrahim, it seemed that the meeting with the lawyer and now with Shafiq has turned him into a mature and prudent investor overnight. What transpires from this little story is that Shariah provides a thorough system of checks and balances in an investment transaction, including Mudarabah, with the rights of the investor and the entrepreneur equally preserved. Furthermore, the Shariah guidance in the process of making an investment decision is always based on a scientific approach, instead of based an impulsive decision.
Last but not the least, as Shafiq has admitted to Ebrahim, the importance of due diligence while parting with wealth is close to human nature and has been appropriately embedded in the Shariah principles.
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 use next week’s column to start our journey toward the end of the current subject. Stay safe at home and let me know if you have any questions on today’s article.