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Russian legislation encourages doing business on the basis of mutual partnership

30.04.2010

The Ministry of Economic Development of the Russian Federation has prepared a draft federal law “On Investment Partnership and Amending Certain Legislative Acts of the Russian Federation”.
Russian legislation encourages doing business on the basis of mutual partnership
The Ministry of Economic Development of the Russian Federation has prepared a draft federal law “On Investment Partnership and Amending Certain Legislative Acts of the Russian Federation”.

According to the draft law partnership will represent an association of organizations or private entrepreneurs to implement joint investment projects or other entrepreneurial activities. The main characteristic feature is that a formation of a contract is enough for the establishment of such a partnership, i.e. it is not necessary to register the legal person. Members of the investment partnership can invest not only tangible, but also intangible assets.

The degree of participation of every member is determined by the contract and does not depend on his or her contribution. The contract also determines other conditions of partnership: the management side, the responsibility of the parties, the terms of participation of each party, etc.

Thus, a new business model should facilitate the implementation of investment projects and support investment processes in the Russian economy. A closed mutual fund is known to be the main form of investment funds nowadays. However, its application is accompanied by many difficulties and large expenditures, which become a barrier for some investors. Other forms, such as “Limited liability company” (LLC) and “Joint-stock company” (JSC), have many drawbacks either. Investment partnerships will help both businessmen and investors establish joint cooperation as quickly, cheaply and simply as possible. It is especially important that the spread of partnerships in some country increases the stability of its economy, and develops entrepreneurial activity. It also helps to diversify finance sources, stimulate innovative and investment processes, popularize mutual assistance partners and equity in business.

This initiative is not new, as investment partnerships exist in many countries already. Trust partnerships are especially popular among Americans, who have borrowed this idea from Europeans, who in their turn borrowed it from the Muslims. Muslim merchants established such partnerships to cooperate with those people who had money and wanted to invest it in some profitable business. According to the Islamic law, one party was an entrepreneur (Mudarib), and another one was a capital owner, or investor (Rab-ul-Maal), and the contract itself was an investment agreement ­- Mudaraba. As Islam spread and the borders of the Islamic state extended, Islamic business models also spread everywhere, including Europe. To develop their trade, merchants of the Iberian Peninsula and some neighboring islands started using these forms of partnership actively. They called this model Commandita. These trust partnerships (limited partnerships) copied the Mudaraba model, i.e. one partner managed the business, and another one just invested money or goods. However, after a while, usurious banks started developing in Europe and took a leading role in financing entrepreneurs. But partnerships did not disappear - modern Islamic banks use them to finance investment projects and enterprises. They are also common in the US as Limited partnerships for venture business development and small-scale business support.

Investment partnerships have also been used in Russia. One can find several articles about common partnership and trust partnerships in the Civil Code of the Russian Federation. It means that there are no legal barriers to the development of business partnerships in Russia, which comply with Islamic principles. They can become one of the main forms of implementation of Islamic business and finance in Russia. There exist several trust partnerships in Russia, which are engaged in building or construction industry. They attract money for their projects through investment contracts. A limited partnership “Yumart Finance” in Kazan developed an Islamic finance company model and is going to operate in compliance with Sharia principles in the nearest future.

We hope the law on investment partnerships will be adopted. It will promote the development of Islamic business and finance in Russia according to veritable principles of partnership, equity and benefit to everyone. The Muslims should try to realize the principles of Islamic economy, which exist in the Russian legislation and bring forward new initiatives in order to make our society better. I would like to mention note that Russian Muslims have often raised a question at many recent meetings about the implementation of the Islamic finance model, and the adaptation of legislation for that purpose. The International Islamic Business and Finance Summit will be held in Kazan in June this year. In the framework of the Summit discussions it is important to focus on implementation of such laws that can encourage Islamic financing in Russia.

Eldar Yakhin, RCIEF specialist.

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