Q: Is it permissible to have a fixed return in the following profit sharing agreement?
A lender agrees to provide an interest free loan to a businessman. Separately, the businessman will in the near future be completing a trade and selling certain goods to his customer.
The lender wants to raise a contract to stipulate that the businessman will pay back the capital after some time together with a share of the profit on the trade, proportional to the amount of funds being provided by the lender.
The lender also wants to stipulate that if the businessman’s customer defaults on his payment, the businessman will still be responsible for paying him back his capital and potential share of profit.
الجواب حامدا ومصليا ومسلما ومنه الصدق والصواب
This is not a sharia compliant structure. The lender is simply providing capital to the businessman with a conditional increment whilst the businessman bears all the risks. The lender should first decide whether he wishes to earn a return or not. If he does not wish to earn a return he should lend to the businessmen without any conditional increment. The businessman will remain responsible for the amount borrowed irrespective of how his business performs. If the lender wishes to earn a return, he cannot lend but must rather invest in to the business as a partner with an agreed ratio of profit. If the business earns a profit he will receive back his investment plus his agreed share of the profit. If the business makes a loss he will bear the loss in proportion to his share of the investment. If the businessman is not providing any capital, then the loss of capital will be borne fully by the investor whilst the businessman will have nothing to show for his labour.
And Allah knows best.
Mufti Mohammed Zubair Butt