In the opening article of Mudarabah (article 81), I had briefly mentioned about the business plan the Mudarib submits to the Rab Al Maal. The following is the relevant part as a refresher:

“In present-day circumstances, the potential Mudarib submits a business plan or a feasibility study to a potential Rab Al Maal where it exhibits the expertise it holds, the required amount of the Mudarabah capital, the time period for which the Mudarabah capital needs to remain invested, the profit expected to be generated from the venture and the ratio of profit distribution between the Rab Al Maal and the Mudarib. It is to be noted that the underlined part refers to the distribution ratio of whatever actual profit is generated and not the rate of return which shall make it into interest.”

Then, in article 89, I again mentioned the business plan twice while discussing the adverse circumstances in a Mudarabah transaction. What is this business plan, how is it prepared, what are its main ingredients and most importantly, how can one gauge the reliability or accuracy of the business plan submitted by the Mudarib?

Postulate that Ebrahim’s parents passed away last year and as per the Islamic inheritance law, the wealth was distributed between the two brothers (including Ebrahim) and one sister who are the only surviving heirs. The wealth was divided into five shares of equal value and the sister received one share whereas each brother got two shares. Each share comprised property, stocks and cash.

Ebrahim has been trying to start some business activity with the help of the hard cash he got transferred into his bank account as part of the inheritance. However, being the youngest sibling and inexperienced, he has burnt his fingers in a couple of attempts and is now utterly confused what to do next. He discusses the dilemma with Jamil, a close friend in his circle who is older and holds a good position in a government department. Ebrahim requests Jamil to let him know if he finds any safe investment opportunity with decent returns among his friends or relatives.

After a few days, Jamil calls to inform him of an investment opportunity in the business owned by his cousin Shafiq. A meeting is arranged at Shafiq’s business premises in which he explains to Ebrahim the tire and battery business he has been successfully running since last eight years after obtaining distributorship from Chinese manufacturers. Shafiq imports the goods in Dubai for re-export to his regular buyers in the East African countries.

However, Shafiq now wants to establish his own company in Kenya to avoid double shipping costs (China–Dubai, Dubai–East Africa) besides reducing the number of days before the goods are received by his buyers. This will also allow Shafiq to have a better idea about that market for promotion of his goods on a larger scale. The idea is to get the goods directly shipped from China to his own company in Kenya rather than the current practice of re-shipping them from Dubai upon receipt of partial advance payment from the African buyers.

Ebrahim is impressed with the success and growth Shafiq has attained in a short time and would like to be a shareholder with him. However, Jamil is being extra careful owing to his relationship with Shafiq and friendship with Ebrahim. He suggests discussing the matter with a lawyer he knows who is regarded as an expert in Islamic trade and investment transactions and has also been part of the Islamic arbitration panel in a few transactional disputes.

The trio seeks an appointment and meets with the lawyer who, after hearing the detailed explanation, advises as follows:
a. Ebrahim should not become a shareholder with Shafiq in the business straightaway. 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 and 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 cash flow position for the last three years
5. Full details on setting up own company in Kenya including business justification, breakdown ofneeded 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, and
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.

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: Lawyer’s explanation would have continued but alas we have run out of allotted space. See you next week insha Allah. Stay safe and read this article from home.