Phew, what a long journey we have covered in 5.5 months to understand all aspects of Mudarabah. This well-rounded discussion shall be completed today by discussing what a master Mudarabah contract is. Have you heard of an MoU? As per Investopedia, an MoU is an agreement between two or more parties outlined in a formal document. It is not legally binding but signals the willingness of the parties to move forward with a contract in future.

Let me add that MoUs demonstrate a certain degree of seriousness to do something together by the parties in the near future and can be regarded as the first steps toward entering into a legally binding contract. You could consider an MoU as parallel to a letter of intent (LOI). The LOI too is a written but non-binding document that suggests that a binding contract may be followed soon; however, the difference between an MoU and an LOI is that the latter is signed singly by the issuer, as against the former which is jointly signed.

With the aforementioned prelude, I am sure most of you may have already guessed that a master Mudarabah contract (or agreement) is also like an MoU. That is right.

AAOIFI Shariah Standard No 13 has three articles on master Mudarabah agreements and that too during the opening of the chapter. The following is the gist of them:
• Shariah permits entering into a master Mudarabah agreement on the basis of a general understanding that actual transactions shall follow suit
• The master Mudarabah agreement should lay down the nature of actual Mudarabah transactions whether they will be executed on a restricted or unrestricted basis (see article 99)
• It should also stipulate the ratio for distribution of the actual profit between the parties which will emanate from the transactions, as well as define clearly if the Mudarib shall provide any guarantee, security or collateral (see article 89) to cover its negligence if any, and
• All transactions subsequently taking place in terms of the master Mudarabah agreement shall be subject to its terms and conditions. Or, in other words, all terms and conditions mentioned in the master Mudarabah agreement shall become an integral part of the transactions.

So, how do you think the actual transactions will take place in terms of a master Mudarabah agreement? I mean what will the parties be signing at that time since they have already signed the agreement? Of course, they will not be signing the same agreement all over again when the time comes for the Rab Al Maal to part ways with the Mudarabah capital for the Mudarib. Actually, the master Mudarabah agreement provides a mechanism for transactions within its contents. There is usually a template attached as an appendix to the master Mudarabah agreement for the Mudarib to fill, sign and submit to the Rab Al Maal each time it needs funds for deployment in a profitable transaction within the purview of the arrangement. This will be regarded as the offer by the Mudarib to invest the Rab Al Maal’s capital.

The Rab Al Maal shall countersign the same in acceptance, or may provide the acceptance through a separate template, also part of the master Mudarabah agreement. Upon completion of the offer and acceptance, all terms and conditions stated in the master Mudarabah agreement shall take effect for that particular transaction. From a legal perspective, a copy of the master Mudarabah agreement should be attached with each offer and acceptance, representing the complete understanding of both parties for each transaction.

Why is there a need to enter into a master Mudarabah agreement when no transaction is going to take place at the time of the parties executing it? Well, there are a few valid reasons for doing so, such as both parties wanting to ensure they are available to each other when the right investment opportunity arrives.

Moreover, in case of big ticket transactions such as consortium financing for projects, the entire funding is not required at the same time but is obtained piecemeal as and when the need arises. In such situations, a master Mudarabah agreement is an ideal arrangement as it not only provides assurance to the obligor that the funding for the project has been lined up by the participating banks, but it also saves a considerable amount of time and legal fees since there will be no need to prepare the entire documentation by the transaction law firm for each drawdown and simply executing the supplemental schedules by the parties will serve the purpose.

Another effective use of a master Mudarabah agreement is when the originator of Sukuk (the obligor or the party needing funds) declares a Sukuk program, revealing its intention to keep returning to the capital market from time to time by issuing a string of Sukuk under the program. It is also referred to in the banking circle as the euro medium-term notes or EMTN, or simply MTN.

Here, the originator pays the heavy legal fee to the appointed law firms only once to prepare the Sukuk program documentation and subsequently pays a considerably lower amount to issue a legal opinion on the issuance of each Sukuk. Similarly, the cost of getting a Shariah Fatwa approving the transaction is borne upfront by the obligor.

Well, that is the end of the Mudarabah discussion. Bye for now.

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: Stay safe, stay tuned for a new topic. Can you guess what it is?