Tuesday, 28 October 2014

Mudarabah and Jersey Limited Partnerships

Islamic financing emphasises the importance of a genuine assumption of risk on the part of the financier to justify reward.  Mudarabah are one of the legal forms used in Islamic financing to establish a risk sharing venture; and it is possible to establish limited partnerships in Jersey (a “JLP”) which qualify simultaneously as mudarabah in accordance with the standards defined by Shariah Standard No 13 of the Accounting and Auditing Organisation for Islamic Institutions (AAOIFI).

Islamic origins of the limited partnership concept

Structuring a JLP so as to qualify simultaneously with the requirements for a mudarabah reflects the closeness of these two concepts; indeed it points towards the almost certain fact that the commandite or limited partnership concept which developed across Europe since medieval times has its origins in the mudarabah which was copied and developed as part of European commerce in the Middle Ages by Italian merchant venturers conducting business with Moslem traders in the Adriatic and Eastern Mediterranean.
So by setting up JLPs which also qualify as mudarabah we are returning to the origins of the silent partnership concept as it was introduced into Western Europe along the ancient Islamic trade routes. 

Key Considerations

Under these arrangements the General Partner of the JLP acts as the mudarib and the Limited Partner as the rab al-maal.  The General Partner will provide its labour and skill to the JLP and be responsible for managing the affairs of the partnership while the Limited Partner will provide the working or investment capital for the partnership.

Care needs to be exercised to adapt the partnership agreement so as to meet the express requirements for a mudarabah.  The limited partnership agreement will also need to comply with the general tenets and principles of Sharia including certainty of contract and fairness in dealings.  The partnership activities will need to exhibit the positive application of capital through transactions which are not associated with speculation or gambling.  Investments in haram or prohibited activities such as in pork, weaponry, alcohol or casinos will not be permitted on account of their detrimental social effects.

Use of JLP as a mudarabah

Jersey limited partnerships structured to comply with the requirements of mudarabah can be used for permitted activities including passive investment or active trading purposes on a profit sharing basis. These are flexible contract based schemes which have the added advantage of tax transparency and a high degree of privacy for the partners’ risk/reward participation rights which lie at the heart of the partnership agreement. 

They are a good example of the flexible structuring solutions that Jersey is able to offer, allowing the Occidental and Islamic traditions to combine in a fully compliant manner to achieve an investment or business objective.

Simon Howard

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