The document discusses a Mudaraba-based working capital facility structure commonly used by commercial banks. In a Mudaraba, a Rab al-Mal provides capital to a Mudarib manager who invests it. Profits are shared according to a pre-agreed ratio while capital losses are borne solely by the Rab al-Mal. The facility allows banks to fix financing costs and rates of return in advance through incentive mechanisms while still complying with Mudaraba rules by assessing profit ex post. The accompanying agreement incorporates provisions to prevent moral hazards like underreporting profits.

1. WORKING CAPITAL FINANCE:
MUDARABA BASED
AUTHORS:
Tarek El Diwany and Badrul Hasan
Legal Review by Shariah Review by Produced by

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Contents
About this Product Guidance Note and Documentation ............................................................................................................3
About Thomson Reuters...............................................................................................................................................................4
About Zawya Islamic....................................................................................................................................................................5
About Freshfields Bruckhaus Deringer........................................................................................................................................6
About Shariyah Review Bureau....................................................................................................................................................7
Freshfields Bruckhaus Deringer certificate..................................................................................................................................8
Shariyah Review Bureau certificate..............................................................................................................................................9
Introduction................................................................................................................................................................................ 10
Transaction Steps and Diagrams................................................................................................................................................ 11
Key Differences between the equivalent Islamic and non-Islamic Products............................................................................. 14
Key Islamic provisions in the Mudaraba Facility Agreement..................................................................................................... 15
Regional practices in the Middle East and South East Asia regions......................................................................................... 19
Shari’a issues and risks.............................................................................................................................................................. 20
Basic commercial issues typically negotiated between parties.................................................................................................22
Appendices.................................................................................................................................................................................22
Master agreement For Working Capital Finance: Mudaraba Based...............................................................................21

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About this Product Guidance Note and Documentation
The `Murabaha to the purchase orderer’ (MPO) is one of the most common contracts used to structure
short- to medium-term Shariah-compliant fixed rate asset financing.
This guidance note explains in detail the characteristics of the MPO, with diagrams used to illustrate the
sequence of transaction steps. A key feature of MPOs is the imposition of Wa’ad into the contract along with
other standard Shariah requirements, namely the application, offer and acceptance and payment method.
This guidance note also explains the differences between a conventional loan facility and a Shariah-
compliant Murabaha contract, and presents the Shariah issues and risks involved related to MPOs.
Further, variations in the use of MPOs between the GCC and Southeast Asia are explained with particular
attention on the imposition of penalty charges on late payment.
This guidance note has been reviewed and certified by Freshfields Bruckhaus Deringer and Shariyah
Review Bureau to ensure its legal and Shariah-compliance.
PRODUCT GUIDANCE NOTES AND DOCUMENTS AVAILABLE
Sharia compliant asset & housing finance: Ijara and forward Ijarah based contract
Sharia compliant asset finance: Murabaha based
Sharia compliant deposit products: Saving and current accounts
Sharia compliant trade finance: L/C facilities
Sharia compliant credit cards: Fee or tawarruq based
Sharia compliant guarantee contract
Sharia complaint overdraft facility
Treasury Placement: Wakala based
FX-spot and forward contract: Wa’d based
Working capital finance: Mudaraba Based
Investment Sukuk – Sukuk al Wakala, Sukuk al Musharaka and Sukuk al Mudaraba structures
Islamic syndicated financing: Mudaraba based
Islamic Project finance: Istisna plus forward Ijara based
Islamic Project finance: Musharaka and diminishing Musharaka based

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About Thomson Reuters
Thomson Reuters is an integrated knowledge services provider that assists the Islamic Finance industry
through providing solutions that enhance transparency, clarity and accessibility of Islamic Finance to
the global audience of businesses and professionals. We are proud to have been at the heart of Islamic
banking since the first commercial Islamic bank was launched in 1975.
Our knowledge solutions help you gain clarity and transparency in the rapidly emerging Islamic finance industry by providing you with data
services, research products and consulting services.
DATA SERVICES
Thomson Reuters Eikon and Zawya products provide access to a full spectrum of all relevant Islamic asset classes and content sets to give
us¬ers the best of class research capabilities.
RESEARCH
Built on the back of the world’s most extensive data capabilities, Thomson Reuters leverages its global network to provide primary source
in¬telligence on markets, industries and institutions relevant to Islamic finance.
CONSULTING
Thomson Reuters can provide bespoke service harnessing our global knowledge network com¬bined with our deep expertise
in Islamic finance.
ISLAMIC FINANCE GATEWAY COMMUNITY
Islamic Finance Gateway (IFG) Community is the one dedicated knowledge Gateway for profes¬sionals from across different countries to
converge and interact on industry issues that matter in order to generate actionable outcomes to shape and speed up the industry’s growth.

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About Zawya Islamic
Our comprehensive platform provides the transparency and clarity of information you need to
conduct business more effectively. We also provide you with tools you can use to better shape
investment decisions.
Our intelligence includes all Islamic finance and Shariah-compliant asset classes, databases, research, news and market data, and is
supported by other data that serves as a benchmark against conventional fundamentals.
Zawya Islamic addresses the needs of any investment manager or consultant – Islamic or otherwise – by giving you access to the full
spectrum of legal, Shariah and market information.
We are powered by data from Thomson Reuters and also partner with other global Shariah and Islamic finance market players, standard
setters and authorities. We have developed for your use a well-connected and networked platform that makes Shariah-compliant
investment and decision making easier. Zawya Islamic is all of the following on one single platform:
• Fatawa, standards, regulations, legal documentation and product guidance notes, intelligently connected with scholars and instruments;
• Deep fundamental data on global sukuk, Islamic funds, Islamic banks and financial institutions, and Shariah -compliant equities;
• Islamic finance news, research, indices, money market and benchmark rates; and
• The ICD Thomson Reuters Islamic Finance Development Indicator and the Islamic Finance Gateway Community.
www.zawya.com/Islamic-finance

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About Freshfields Bruckhaus Deringer
Freshfields was founded in 1743 in the City of London, making it the oldest existing law firm in the world.
Today, we are host to over 2,500 lawyers located across 28 offices in 16 countries throughout the Middle
East, Europe, the Americas and Asia.
While we have offices in all the main financial and regulatory centres globally, over 30 per cent of our
work is in countries where we do not have an office. Therefore our lawyers are deeply experienced in
working outside their home markets. Moreover, the proportion of our work outside our “home markets” is
growing, and is likely to continue to do so, as businesses invest in those places which are growing faster
than the developed world. We are focused on being able to provide our advice where our clients need it,
not just where we happen to have an office.
Our market leading practice areas
Our firm is organised into nine international practice groups in line with our clients’ business needs – they include Finance (both Islamic
and conventional); Corporate; Antitrust, Competition and Trade; Dispute Resolution; Employment, Pensions and Benefits; Environment,
Planning and Regulatory; Intellectual Property and Information Technology; International Tax; and Real Estate (including Construction).
We are proud of the fact that all our practice groups and many of our lawyers are consistently recognised by the most renowned legal
research directories and market commentators to be among the market leaders in their respective areas of law.
What sets us apart from our competitors is that on every instruction on a profoundly consistent basis, we bring to bear the unique
benefits and advantages of our global coverage, comprehensive platform, true integration and client-centric mindset. We are
committed to excellence in the legal advice and support we provide to our clients for their entrepreneurial decisions – no matter the
geography, scope or mandate.

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About Shariyah Review Bureau
Shariyah Review Bureau (SRB) is the Corporate World’s leading Shari’a Advisor with scholarly presence
in more than 12 countries from US, Europe, Africa, GCC and Asia. The breadth of geographical reach
crossing national boundaries makes it a unique Shari’a consultancy body that can meet clients true
international business requirements.
Licensed by the Central Bank of Bahrain it is a natural proxy to institutes seeking Shari’a Compliant Funds and Islamic windows and
transactions. Apart from clients in UK, Canada, France, Australia, Hong Kong, Switzerland and the GCC, it is the Shari’a Advisor for 21%
of the Co-operative Insurance Firms Listed on the stock-exchange market in the Kingdom of Saudi Arabia. SRB also serves 12% of the
Saudi Investment Companies licensed and regulated by the CMA and has a diverse set of experience in Islamic banking and non-banking
institutions, including securities firms, Shari’a compliant national banks, energy firms and information providers. It also has an extensive
experience in helping clients cover a wide spectrum of transactions ranging from Sukuk’s, Private Equity Funds, Equity projects, Trade
Finance transactions, Margin Trading, Real Estate Developments, Land Funds, ICT Deals, Money Market, Textile, Sports and Pharma Funds.
With almost a decade experience of Shari’a Advisory and Shari’a Audit, srb has sustained a record in innovation and impact for transactions
in Shari’a compliant Corporate debt, Sukuks and Islamic equity markets, initial public offerings screening & Investment Banking Practice.
To learn more visit www.shariyah.com

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Freshfields Bruckhaus Deringer certificate

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Shariyah Review Bureau certificate

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1 Introduction
A Mudaraba is a form of contract that involves both partnership and investment agency. It involves the
provision of funds by the Rab al-Mal, who is often but not always a silent partner, and their application
by the Mudarib who is a manager of funds. Capital losses are borne by the Rab al-Mal and profits are
shared by both parties in a ratio that is agreed at the time of contract. The Shariah sees the Mudarib as
having a hybrid relationship with the Rab al-Mal. The Mudarib is an agent of the Rab al-Mal with respect
to the capital, and under the Islamic rules of trust is therefore not liable for losses of the capital except in
cases of fraud, negligence or breach of contract. However, with regard to profits, the Mudarib is a partner
of the Rab al-Mal, and therefore has a claim over any profits that are made.
Commercial banks, and in many cases their customers, wish to fix their financing costs and rates of return in advance. Where working
capital is concerned, the contractual form most commonly used to achieve this objective is the tawarruq. An alternative to tawarruq is
Mudaraba which is considered to be more closely aligned with the spirit of Islamic finance. However, Mudaraba has proved less popular
than tawarruq among commercial banks due to the difficulties that arise when attempting to fix financing costs and rates of return in
advance. In principle, the Mudaraba contract requires that the cost of finance is determined ex post upon liquidation of the Mudaraba,
based upon the profitability of the underlying activity at completion. In practice, this problem has been overcome to a large extent by
allotting to the Mudarib any profit generated above a certain rate, as an incentive, and if the profit is below or equal to the rate, the profit
will be distributed in accordance with the ratio agreed between the Rab al-Mal and Mudarib. The Shariah compliance of this practice is
discussed below in section 6 (Shariah Issues and Risks).
A Mudaraba working capital facility is usually structured as a short-term funding line provided by the Bank to the Customer. The facility
may be on an unrestricted basis in which the Customer may apply the funds in any way that it sees fit, or on a restricted basis. The degree
to which the capital of the Mudaraba can be used for general working capital purposes is of course largely determined by the nature of
any such restrictions. The rate of return on the funding line is often benchmarked to the inter-bank interest rate on short-term money
market deposits, although a number of clauses admit the possibility that the return to the Rab al-Mal will deviate from the inter-bank rate.
These are the clauses that seek to achieve compliance with the rules of Mudaraba, despite the similarity of the resultant cash-flows with
an interest-based loan. Among them is the requirement that the change in net assets achieved by the Mudarib is assessed ex post upon
liquidation of the Mudaraba on an agreed accounting basis.
In some countries, Islamic banks experienced moral hazards and conflicts of interest when operating Mudarabas. Mudaribs would sometimes
understate their revenues or exaggerate their expenses in order to reduce the reported value of distributable profits upon which the Bank relied
for achieving a return on its capital. The Mudaraba Facility Agreement accompanying this practice note incorporates a number of provisions
designed to prevent this.