Islamic financing emphasises the importance of a genuine
assumption of risk on the part of the financier to justify reward
and a mudarabah is one of the legal forms used in Islamic financing
to establish a risk-sharing venture. It is possible to establish
limited partnerships in Jersey (JLP) that qualify simultaneously as
mudarabah in accordance with the standards defined by Shariah
Standard No 13 of the Accounting and Auditing Organisation for
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 that has been developed
across Europe since medieval times has its origins in the
mudarabah. It 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 that also qualify as
mudarabah, we are returning to the origins of the silent
partnership concept as introduced into Western Europe along the
ancient Islamic trade routes.
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 provides labour and skill to the JLP and is responsible for
managing the affairs of the partnership, while the Limited Partner
provides the working or investment capital.
Care needs to be exercised in adapting the partnership agreement
so that it meets the express requirements for a mudarabah. The
limited partnership agreement also needs to comply with the general
tenets and principles of Sharia, including certainty of contract
and fairness in dealings. The partnership activities need to
exhibit the positive application of capital through transactions
that 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 due to their detrimental
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 on a profit sharing
basis. They are flexible contract-based schemes that have the added
advantage of tax transparency and a high degree of privacy for the
partners' risk/reward participation rights, elements that 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 way to achieve an
investment or business objective.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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