Islamic Finance – Islamic Capital Market – Sukuk Mudarabah
Mudarabah is a partnership contract whereby one party provides the money and the other provides the management and entrepreneurship skills. The investors, the issuer (which is the company), and the manager (Mudarib), who will oversee the business venture, are all required for a Sukuk structure to collect the required capital. The manager (Mudarib) will not be liable for the loss, unless it was brought on by his negligence or misconduct. These are two additional characteristics of a Mudarabah contract. Neither the capital nor the profit are assured. (iii) the Profit Sharing Ratio (PSR) can be revised with the agreement of both parties. The decision of the investors to forego their right to the profit is based on the principle of Tanazul, a Shari'ah principle that permits one party to a contract to give away his right or entitlement to another party for no consideration. (iv) The capital providers may agree to limit the rate of return, with the remaining amount being given to the manager as an incentive or performance fee. In reality, the business may issue the Sukuk directly or set up a Special Purpose Vehicle (SPV), being a remote entity, to issue Sukuk Mudarabah to facilitate the partnership between the investors and the manager. An SPV is a company that has been specifically established to retain Sukuk assets, keeping them apart from the issuer's other assets. The assets that an SPV typically holds are held in trust for the advantage of the Sukuk investors. This entity cannot be served with a liquidation order by the issuer's debtors. The SPV was established to safeguard the interests of Sukuk investors. The money received from a Sukuk Mudarabah subscription will be used to pay for the venture's company operations. The business could be in the building, manufacturing, trading, service, mining, or oil extraction industries. The investors will receive the earnings, if any, based on a predetermined PSR. As previously stated, investors may agree to limit their profit to, for instance, 10% of the capital even though the profit is based on a ratio or percentage, such as 1/3:2/3 or 30%:70%. The manager will receive the balance as a performance fee after waiving the rest.
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