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Profit-sharing (Mudarabah)

A profit-sharing agreement (Mudarabah) has features of both agency (Wakala) and joint venture (Musharaka) facilities as it is an arrangement whereby one partner contributes capital into a commercial enterprise, while another partner provides expertise and management skill.

The capital contributor is known as the rabb-ul-mal and the managing partner is known as the mudarib.

Both parties agree a profit ratio at the outset, with the investing partner usually receiving a majority of the profits while the managing partner receives the remainder and, if agreed, a performance fee for providing his entrepreneurial skills.

The simplified diagram below illustrates the profit-sharing (Mudarabah) structure:

saracens 3

Overview of the structure

(1)  The investing partner enters into a profit-sharing agreement with the managing partner to form a enterprise with the purpose of generating profits on the principal amount;

(2)  The investing partner will contribute capital;

(3)  The managing partner will contribute management skill and experience;

(4)  The investing partner will take a pre-agreed ratio of the profits, which will be accrued until the end of the enterprise;

(5)  The managing partner will take the remaining profits, which are accrued until the end of the enterprise, and potentially a performance fee.

We are can advise parties on all the key considerations, some of which are set out below:

  • Ratio of profit division
  • Asset tangibility
  • Obligations of the managing partner
  • Limitation of liability for each partner
  • Any required purchase undertakings

If you are considering entering into a Shari’ah profit-share arrangement as investor or manager, please phone our London office on +44 (0) 20 3588 3500 and talk directly to one of our lawyers. Alternatively, you can request a call back and we will be in touch at a time convenient to you.

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