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.
Islamic Jurisprudence defines the Mudarabah Contract as a contract whereby the owner of capital gives a sum of money to a person (or a company) to trade with. The profit is shared between them according to an agreed-upon ratio. For the contract to be valid, the following Sharia conditions must be met:
Firstly, the capital cannot be guaranteed by the Mudarib (the company). Rather, the capital is subject to profit and loss based on the results of the Mudarib's (company's) activities.
Secondly, the capital must be present and handed over to the Mudarib; it cannot be a debt.
Thirdly, the profits of the principal and the Mudarib must be shared proportions of the realized profit, not a fixed amount, nor a shared proportion of the capital, because stipulating a percentage of the capital is considered similar to a fixed amount.
Fourthly, the profits must be realized in practice from the investment of the funds, because if the profit is distributed without being realized, the resulting situation becomes a loan with interest or a means of defrauding people's money.
Fifthly, the investment must be in a permissible activity. Investments in forex, network marketing, pyramid schemes, and Ponzi schemes are not allowed.
A Ponzi scheme is a system that collects money from individuals who want to invest, promising them high returns. The profits distributed in the initial period come from the money of the investors themselves to create the illusion of real profits. This is fraud and is forbidden as it is consuming people's money unjustly. Allah Says (What means): "O you who have believed, do not consume one another's wealth unjustly except [in] trade by mutual consent between you." [An-Nisa: 29].
In conclusion, if the aforementioned Sharia conditions for a Mudarabah contract are met, the contract is valid according to Sharia (Islamic law), and the Mudarib (company) is responsible for the correct implementation of the terms of the Mudarabah contract.
The Iftaa` Department stipulates that these conditions must be applied to all companies and contracts without exception. And Allah The Almighty Knows Best.
