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From Issue: 472 [Read full issue]
Mudârabah
A common profit-sharing commercial venture in Islamic Law is known as mudârabah. This is where one party finances the venture and the other engages in the activities of the business. In other words, one party gives money to the other party to do business with it. They agree to share the business profits according to a pre-agreed percentage.
The scholars make it clear that it is absolutely essential for the two parties to agree to divide the profits between them according to a fixed pre-agreed percentage, like 50-50, 60-40, or 70-30.
It is not permissible to guarantee a minimum return on investment, since the profitability of the venture is not guaranteed. It is likewise impermissible to specify a specific sum of money from the profits – like $1000 dollars – as a return for the investor, since this leads to an uncertain percentage share of the profits for both parties.
If the parties have agreed upon a percentage share of the profits, there is no harm if the trading partner provides a fixed monthly sum to the financing partner on the basis of expected profits, if that is convenient. However, at the end of the venture – or for a continuous venture, after a fixed period of time, like six months or a year – any shortfall or excess needs to be paid out. This is to ensure that the financing party receives the agreed-upon percentage share, no more and no less.
Source:
IslamToday.com - Fatwa by Ahmad al-Rashid