Subject : Guidelines for Trade through Mudarabah
Fatwa Number : 3803
Date : 17-09-2023
Classified : Partnership in Business
Fatwa Type : Search Fatawaa

Question :

My brother has a car dealership, and I provide him with money to use in trading cars, by cash and by installments. In return, he gives me a share of the profit. Is this transaction haram (unlawful)?

The Answer :

All perfect praise be to Allah the Lord of the Worlds. May His peace and blessings be upon our Prophet Mohammad and upon all his family and companions.

The arrangement mentioned in the question is a type of Mudarabah contract. A Mudarabah contract involves one party providing capital (in this case, you providing money) to another person (your brother) for them to conduct business, and the profit is shared according to an agreed-upon ratio. Sheikh al-Islam Ibn Hajar al-Haytami defined the Mudarabah contract as follows: "It is a contract that authorizes the other owner to trade with the provided capital, and the profit is shared between them" [Tuhfat al-Muhtaj, Vol. 6, Page 82].

In the distribution of profits in a Mudarabah contract, it is a requirement that the profit is shared jointly from the total profit. It is not permissible for the provider of capital and the working partner to agree on a fixed amount for one of them, as this would guarantee the capital of the Mudarabah. Similarly, they cannot agree on a percentage of the provided capital, such as if the financier gives the working partner one hundred thousand dinars and they agree on a profit of one-third of the capital. This would be considered a fixed profit, and instead, the profit for both the capital provider and the working partner must be a share of the actual profit generated.

Therefore, if the profit is distributed based on the agreed-upon percentage of the actual profit generated from the operation of the Mudarabah capital, it is permissible in Islamic law. However, if the profit is tied to the amount paid with a guarantee of the capital, it would fall under prohibited riba. And Allah the Almighty knows best.



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