Valuation of monetary value in Mudarabah capital

In-Depth Analysis

Thank you to those of you who sent in guesses on the Mudarabah capital amount required to be redeemed by the Mudarib to the Rab Al Maal upon the premature termination of the Mudarabah agreement at the Mudarib's request. All of the responses suggested US$1 million — the original Mudarabah capital to be redeemed. Unfortunately, that is not correct. From the email addresses and drafting style, the author can make out that all of you are bankers — and hence the answer: since a traditional banker cannot think beyond the 'principal' amount. Let me explain why the answer is not correct. When a Mudarabah transaction takes place, the Rab Al Maal injects the 100% capital which is deployed or invested by the Mudarib to create a commodity-based business transaction or develop the assets (such as in our case) with the objective of generating a profit for distribution between the two. Although the Rab Al Maal does not interfere in the day-to-day running of the Mudarabah affairs and the Mudarib is the face of the business activity for the counterparties — which may include, if required, the Mudarib holding the registered title to the fixed assets — in actual sense, the Mudarabah commodities or assets are solely owned by the Rab Al Maal. In other words, you may say that the Rab Al Maal is the de facto owner of all Mudarabah possessions be they in the form of inventory, fixed assets, or receivables. Apply this Shariah principle to the example given in the last article. Note that although the original capital provided by the Rab Al Maal was US$1 million which was prudently invested by the Mudarib in buying seven properties at prime locations at a base price or with little premium, the value of the set of properties has not remained static at US$1 million but has increased with the upsurge in the property market. Since the Rab Al Maal is the de facto owner of the Mudarabah assets, the value of the Mudarabah capital has also appreciated along with the enhancement in the market value of the properties. In view of the foregoing, if the Mudarib would like to terminate the Mudarabah agreement prematurely, the Shariah approach is to first get the valuation of the seven properties carried out from an independent reputed surveyor which both parties trust. Based on the professional current market valuation of the properties ascertained by the surveyor, the Mudarib should make an offer to buy all of them from the Rab Al Maal. The Mudarabah structure is the most misunderstood offering in the Islamic banking and finance industry, unnecessarily labeled as a high-risk proposition. There is a long list of benefits to be explored — at every level, be it SMEs, mid-caps, large corporates, capital markets, asset and wealth management, Takaful, or Waqf.