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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:
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.