Terms of Mudharabah
| Fatwa #817 | Category: Business & Trade | Country: Zambia | Date: 25th March 2024 |
| Fatwa #817 | Date: 25th March 2024 |
| Category: Business & Trade | |
| Country: Zambia | |
Question
The scenario is as follows:-
Ahmed has an empty shop and has no capital currently. Bilal has capital and he wants to invest into a business with Ahmed.
Bilal will borrow to the business he wants to start with Ahmed the sum of $100,000 as Capital which he will get from his other business named ABC LTD.
As the business starts making sales, the initial $100,000 has to be paid from the profits in instalments every month in say instalments of $2,000 a month or whatever can be removed from the profits in order to pay back ABC LTD.
Whatever remains as net profits has to be shared between Ahmed and Bilal in a profit sharing ratio of 80% to Ahmed as he will be involved in the daily running of the business and Bilal will only get 20%
The initial $100,000 that is injected by Bilal into this business will be paid back as $100,000 and nothing more. After this has been fully paid back by the business to ABC LTD according to the agreement between Ahmed and Bilal, Bilal will still be getting 20% from the net profits as investor of the business.
The question is, is there any element of interest that may arise from this deal ?
Answer
In the Name of Allah, the Most Gracious, the Most Merciful.
As-salāmu ‘alaykum wa-rahmatullāhi wa-barakātuh.
The transaction described has merged a loan and a Mudharabah transaction into one. On the one hand, Bilal or ABC Ltd will be loaning $100,000 to Ahmed, and therefore do not have reason to claim any percentage of the profits. They can only claim the loaned amount back, irrespective of how the business performs. Conversely, if the $100,000 being given by Bilal or ABC Ltd is an investment, then this would be a Mudharabah which means that Ahmed and Bilal or ABC Ltd will only share the profits on pre-agreed ratios whereas loss will entirely be borne by Bilal or ABC Ltd.
The transaction can be made valid solely as a Mudharabah with the following terms:
- The capital is invested by the financier (Bilal or ABC Ltd).
- The work will be done by the employee (Ahmed).
- All losses will be borne solely by the financier (except in instances of negligence of the employee)
- All profits will be shared on pre-agreed percentages between the financier and the employee. For example 20%-80%.
- Profit sharing cannot be agreed on lump sums or percentages of the capital. It must be a percentage of actual profits realised.
- When the Mudharabah comes to a close, or one trading period comes to a close, any losses sustained during the period will first be offset by profits generated during the period, should there be any surplus after that, that will be the true profit which will be distributed between the financier and employee. Should there be a loss, it will be sustained by the financier and the employee will lose his efforts.
- It is not permissible to stipulate that all profits must first recover the capital, thereafter profits will be shared out on agreed percentages.
The above is based on the assumption that Bilal and ABC Ltd are one entity.
If ABC Ltd is considered an independent entity which is loaning Ahmed $100,000, then ABC Ltd will be a creditor to Ahmeds business. However, in this case, there is no investment from Bilal into the business of Ahmed, hence Bilal is not deserving of any profit, nor is he a part of Ahmeds business in any way.
Alternatively, ABC Ltd as an independent entity may loan Ahmed $50,000, and Bilal in his personal capacity can invest $50,000 into the business run by Ahmed. Ahmed and Bilal will now be 50-50 partners. Ahmed, in his personal capacity, will also owe ABC Ltd $50,000. In this case, losses will be shared by both Ahmed and Bilal on a 50-50 basis. Profit sharing may be agreed upon mutually as a percentage of actual profits (not a lump sum or a percentage of the capital). This mechanism is only valid if ABC Ltd exists and operates as a true independent entity, and not merely as a name for Bilal to use.
And Allah Ta’āla Knows Best
Mufti Bilal Pandor
Concurred by
Mufti Nabeel Valli
Darul Iftaa Mahmudiyyah
Lusaka, Zambia