Mudharaba
Question
Two people want to start a partnership. One will provide the capital whilst the other one will manage the business. The agreement between them is as follows:
1. Profits shall be shared between them equally.
2. Whatever profits are made initially, shall be used to pay off the full capital contributed by partner A after which all profits shall be shared between them equally.
Is this Shariah compliant? If not, what is the alternative?
Answer
1. The agreement discussed under point one whereby one partners provides the capital whilst the other partner carries out the work is referred to as a ‘Mudharaba agreement.’ The profits being shared between both partners on a 50/50 basis is correct. However, if the partnership suffers a loss, then the partners (of the Mudharaba agreement) will be required to make up for the loss from their personal profits, and if the loss extends beyond the total profits accrued by both partners, then it will be covered from the capital provided by the Rabb-ulMaal (investor.) The Mudaarib (trader) will not be held responsible for any loss that extends beyond the profits.
2. The partners (of the Mudharaba agreement) will share profits after paying off the capital provided by the Rabb-ul-Maal and expenses incurred by the partnership (as stated in the query) is also correct and in order.
In conclusion, the agreement proposed in your queryseems to be in order.
- Approved by
- Mufti Muhammed Saeed Motara Saheb D.B.
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