Raising Finance via Profit Sharing (Mudarabah) Bonds

A mudarabah bond is a security designed on the basis of mudarabah contract. The issuer of mudarabah bond collects funds from the applicants in return for assigning such bonds to them, and provides the Special Purpose Vehicle (SPV) with such funds. The SPV applies the funds in profitable economic and business activities and distributes the resulting profit at the end of each transaction or at the end of each financial period between himself and holders of bonds pro rata their respect contributions specified on the bonds. The holders of bonds play the role of the owner and SPV plays the role of the agent of the mudarabah contract. Mudarabah bonds may be designed with varying applications.

Types of Mudarabah Bonds

1)     Special Mudarabah Bonds: Such bonds are offered for special trading activity and the resulting profit is distributed after completion of such activity. Sometimes a trading company (SPV) has both the required knowledge and experience and the authorization for transaction certain goods, but is has encountered problems for supply of financial means. To resolve the problem mudarabah bonds are issued for the special trading activity, and the required capital is provided to the SPV, enabling him to engage in the specified trading activity. At the end of such activity, SPV will distribute the resulting profit among the holder of bonds, after deduction of the agent’s share. The holders of bonds may maintain the bonds and enjoy the trading profit, or otherwise sell the bonds at the secondary market.

2)     General Mudarabah Bonds with Maturity: The SPV issues such bonds with a specified maturity (e.g., three or five years) and with specified financial periods (e.g., three or six months or one year), then, engages in trading activity using the resulting capital. In this state, no special activity is defined for the SPV, and it distributes the resulting profit among the holders of bonds at the end of each financial period, after deducting the agent’s share. SPV, in addition to the profit of the last financial period, returns the principal contributions of holders of bonds, or converts them into the general mudarabah bonds with new maturity.

3)     General Mudarabah Bonds without Maturity: Such bonds act like the preceding state in respect of activity and profit payment; the only difference is that they have no maturity, and they stand valid until dissolution of the company and earn profit in each financial period. At the end of each financial period, the trading company pays the profit due from the activity to the bank, after deduction of the agent’s share, so that the bank may distribute the same among the holders of bonds. This situation continues dissolution of the trading company so applied for the capital, and in case of its dissolution, the assets of the company will be distributed among the holders of bonds in compliance with the relevant regulations.