Contracting conceptsAccommodation of concepts
Mudarabah – profit sharing partnership separating responsibility for capital investment and management.
The main characteristics of mudarabah – being a form of profit partnership, in which one partner, the rab-al-mal, provides funds or capital and the other partner, the mudarib, manages the financier’s investment for economic activity – could be mirrored economically with different legal concepts or partnership forms under Swiss law.
For instance, the basic economic effects of mudarabah can be achieved by the rab-al-mal and the mudarib entering into a simple partnership or a silent partnership agreement. In a simple partnership, by default, both partners shall have management rights, but the partners may defer from the default rule and assign the management responsibility to one of the partners. In a silent partnership, the partnership does not act externally as such; the silent partner will not be visible to the outside, but only his or her partners.
The internal relationship of the simple partnership is primarily determined by the contract between the partners. Subsidiarily, the rules of article 530 et seq of the Swiss Code of Obligations (CO) apply.
In a simple partnership, title to the capital contributions provided by the partners will generally belong jointly to the partners. In the case of a silent partnership, the silent partner customarily participates in the business activities of the other partner by contributing to the transfer of latter’s assets – in return for a profit claim – and in which the principal shareholder acts solely externally and appears as the sole beneficiary and obligor of the business activity. Hence, in contrast to the mudarabah structure, where the rab-al-mal remains the owner of the assets, legal title to the funds or capital provided will usually be held jointly by the partners (simple partnership) or even transfer from the silent partner to the other partners (silent partnership).
From a formalistic point of view, mudarabah agreements (with title to the assets will remain with the rab-al-mal) in the form of simple partnerships are technically only feasible under Swiss law where the capital to the undertaking is not provided in money but in other assets, and where only the use of such assets (eg, the usufruct of a property), and not ownership of the assets itself, is supplied or contributed by the rab-al-mal.
Another possible structure of madurabah under Swiss law could be based on a mandate under which the rab-al-mal takes the role of principal and the mudarib as an agent.
Murabahah – cost plus profit agreement.
Murabaha transactions can be generally implemented under Swiss law and several banks are offering this kind of transaction in the Swiss market (using documentation usually governed by English or Swiss law).
Generally, in murabaha transactions, a bank will act as a funder to purchase certain goods (eg shariah-compliant commodities such as palladium and platinum) and the customer will act as the purchaser of those goods. The parties must determine the quantity, quality, cost and specifications of the goods. The bank may finance all or part of the cost of the goods and must provide the funds required for the purchase. The margin between the cost of the goods and their sale price for the sale to the bank’s client and the (deferred) payment terms are agreed between the bank and the customer.
Therefore, murabaha transactions encompass elements of several contractual relationships. Under Swiss law, murabaha is treated as a contract sui generis with elements of a purchase contract and a credit transaction. Further, certain provisions of the CO on agency agreements will apply if the customer appoints the bank as its agent to on-sell the purchased goods (in particular in connection with master murabaha agreements on commodities).
Musharakah – profit sharing joint venture partnership agreement.
In Islamic finance, musharakah is a joint venture or a partnership arrangement in which profits and losses are shared. The term ‘joint venture’ covers a variety of short or long-term cooperation arrangements between two or more parties for a common project or enterprise. With simple partnership agreements under Swiss law (article 530 of the CO) profits and losses are also shared and compensated and, in principle, compliant with the prerequisites of Islamic finance.
Similar to mudarabah structures, the main economic effect of musharakah can, in principle, be achieved by different forms of partnerships (particularly, simple partnerships or limited partnerships under article 594-619 of the CO, according to Swiss company law).
Just as musharakah, simple partnerships and limited partnerships involve a combination of entrepreneurship and capital, where the partners contribute their knowledge and their assets to achieve a common goal and profits are shared amongst the partners. However, depending on the chosen partnership structure under Swiss law, certain differences to the classic musharakah concept will appear concerning the recognition of the undertaking as a legal entity or in terms of the liability of the individual partners towards third parties.
Ijarah – lease to own agreement.
Ijarah can be implemented under Swiss law in the form of a rental agreement (operating lease) or the form of a lease with a transfer of ownership at the end of the period (financial lease), the latter being usually referred to as ‘leasing’ under Swiss law.
A financing lease involves pure innominate contracts, while an operating lease can include elements of a rental agreement or usufructuary lease.
To date, there are no laws in Switzerland that specifically regulate the (financial) leasing industry, as leasing agreements usually contain and combine aspects of different types of contracts (eg, instalment-purchase contracts, loan contracts and rental contracts).
Given the predominant principles of freedom of contract and form under Swiss contract law, shariah-compliant Ijarah transactions governed by Swiss law are possible without there being significant obstacles to be observed.
Wadiah – safekeeping agreement.
In Switzerland, wadiah agreements could, in principle, be used for safekeeping agreements. Contrary to customary safekeeping agreements, the bank should not guarantee any incentive, performance, reward or bonus to the customer and the bank would have to guarantee the return of the deposited funds and allow the customer to collect the funds at any time (subject to any restrictions directly imposed by certain investment vehicles). However, the bank could, at its sole discretion, grant to the customer a gift (hibah) instead of interest. The bank could still charge the customer administration fees if they directly relate to the management of the deposited funds.
Deposit-taking is regulated in Switzerland and providers should thus adhere to the relevant licensing requirements.
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19 August 2020.