Question

Thank you muftisaab. So I have been trading stocks personally for a number of years, and always follow Islamic protocol. I am mindful of what industries I invest in, never going short on trades, mindful of debt ratios etc and alhamdulilah have had good success. This led me to wanting to grow my venture to open up the scalability of it and to start to do it on behalf of others. So I’ve approached friends and family initially, with the proposal that they invest their money with my limited business, and I trade on their behalf in a way that is similar to a fund, of course concentrating only on halal stocks. What I have offered to them is that they receive a X% return on their investment per annum, and If I manage to out perform X% on the market, whTever is in excess, is profit for myself as well, so that the arrangement is mutually beneficial. I have told them that if the year elapses and they request their money back, and the money is currently tied up in open investments in the market, I will honour their request from the pool of funds I have sitting on the side as liquidity, which remains untouched to underwrite any clients investment. I was wondering, mufti, whether this arrangement is permissible? And if it is not permissible, how I can adjust my business model in order to bring it into accordance to Islamic shariah. JazakAllah khair

Answer

This arrangement can be done under a mudarabah agreement. Mudarabah is where one party invests the capital and the other party carries out some business with the invested funds. Profits are then share between the two parties according to the agreement. The distribution must be a percentage of the profits and not a lump sum or percentage of the capital. Hence, if the capital provider invests £1000 the profit share agreement can be for example 60% of profits for the capital provider and 40% for the business manager. It will not be permissible to state that the capital provider will receive £100 or that they will receive 15% of the capital. Hence, the issue with your proposal is that by stating they will receive x% return on their investment the profit is being fixed as a percentage of the capital which is not allowed.

In order to make the investment shari’ah compliant you will need to agree on a profit distribution that is a percentage of the profit. It is permissible to stipulate a ceiling whereby if the profits go beyond the ceiling, the additional sums will be yours and if it does not reach the ceiling then the profits will be according to the agreed distribution. For example, if the capital provider invests £1000, you can agree a profit distribution of 90% for them and 10% for you. And you can stipulate that if the total profits they receive reach £100 or more then any extra will be yours, so their profit will be capped at £100. If the ceiling is not reached then the original profit distribution of 90% and 10% will take place.

The second point to bear in mind is that it is not permissible for the business manager to guarantee the capital. If the capital is guaranteed then this will be seen as a loan and therefore any profits returned will be seen as interest. If however, a third party who is not part of the contract guarantees the capital, this will be permissible.

There is no harm in having a pool of funds to return the capital if needed, however, returning the capital would terminate the mudarabah agreement with that particular individual.

الدر المختار وحاشية ابن عابدين (رد المحتار) (5/ 648)
وكون الربح بينهما شائعا) فلو عين قدرا فسدت (وكون نصيب كل منهما معلوما) عند العقد.
ومن شروطها: كون نصيب المضارب من الربح حتى لو شرط له من رأس المال أو منه ومن الربح فسدت

AAOIFI Shari’ah Standards (13) Mudarabah:

8/1 The distribution of profit must be on the basis of an agreed percentage of the profit and not on the basis of a lump sum or a percentage of the capital.

8/5 If one of the parties stipulates that he should receive a lump sum of money, the mudarabah contract shall be void. This rule does not apply to a situation where the parties agree that if the profit is over a particular ceiling one of the parties will take the additional profit and if the profit is below or equal to the amount of the ceiling the distribution of profit will be in accordance with their agreement.

Answered by:
Ifta Research Fellow

Checked & Approved by:
Mufti Abdul Rahman Mangera
Mufti Zubair Patel