Mudharabah: The Speculative Parternship in Islam

In the Name of Allah, the Entirely Merciful, the Especially Merciful.

All praise is due to Allah, The Provider.

It is an amazing coincidence that speculative partnership is the topic of my recent assignment for Fiqh-ul-Muamalat, but nothing truly is a coincidence in the dominion of Allah, and everything seems so according to his plan. Recently, some events unfolded that provided a painful insight into harms of not following the Islamic conditions of Mudharabah (speculative parternership). Unfortunately, it seems a very common practice in western countries to form this invalid type of speculative partnership. Let us examine the details of this type of trade or business that is certainly haram in Islam, but is very attractive among Muslims. In this example, we are looking at a car dealer, who is a Muslim, and looking for investment for his expanding business. He reaches out to other Muslims in his family and community, and able to convince many to participate in his business. However, these partnerships were formed without giving due regards to the conditions set by Allah and his Messenger (PBUH).  In the end, it was a dishonorable situation, and it became a warning and example for other Muslims to not engage in similar trades.

Mudharabah is a type of partnership where one partner provides assets for the business, but does not participate in day to day operations of the business, and the other partner runs the business. In the example of the car dealer, he receives money from a partner, who provides the money without the presence of witnesses, or any written agreement. The Sleeping partner (partner providing the money) verbally stipulates that he requires a certain amount of money every month regularly as “profit”. The working partner (the car dealer), agrees to the terms verbally, and does provide some returns for a period of time. After a while, the business takes a downturn, and the business runs out of money, as the regular “profit” payments to the sleeping partner continue during the loss. In the beginning, the car dealer hides the reality of the business, and get more sleeping partners involve in the same fashion, but once the original partner finds out, he demands his principal and profit. There are many issues with this partnership, and we can go through each of them and identify a solution for them so it can conform to Islamic law.

“[David] said, "He has certainly wronged you in demanding your ewe [in addition] to his ewes. And indeed, many associates oppress one another, except for those who believe and do righteous deeds - and few are they."” (Quran 38:24)

Even if writing down a partnership contract was not an obligation, in the western countries, it should be an obligation, because the law of the land settles financial transaction with written proofs. At the least, it should be done to protect both parries’ interest, and provide a stable partnership. In the above example, the car dealer didn’t find it necessary to write down the terms of the investment/loan/partnership, which became a major issue in keeping track of total debt, and hence collapse of the business. The car dealer continues to borrow money to pay the others’ monthly “profit” payments, without knowing the true nature of his debt, until the end. If the car dealer would have written down every transaction with witnesses, it would have provided the needed awareness of total debt, and hence minimizing the damage, at the least. According to local custom for the western countries, it is critical to record all business transaction, and should be a condition to Islamic transactions within these countries.

"O You who have attained to faith! Whenever you give or take credit for a stated term, set it down in writing. … And call upon two of your men to act as witnesses…” (Quran 2:282)

In this partnership, the sleeping partner was expecting a fixed return on his investment, and this return is not tied to the profit of the business. As we know that one of the conditions of speculative partnership is to use percentages of profits, and not fixed amount of profit, because the business could make no money in one of the months, but the investor will want their return nonetheless.  In fact, we look at his closely, this is a form of Riban-Nasi’ah (interest based loan), because the investment is a loan that was given to the car dealer to do business on the condition that a fee will be returned for using the money, and the intention was not to share the profit from the business, at all. If these two partners would have stipulated the percentage of share from the profit in their agreement, then there would not have been an issue of riba. Unfortunately, the investors are not willing to take the risk, and greed takes hold of them. This greed destroys the business and everyone attached to this business. The Prophet (PBUH) said.

“Any loan that brings a profit is (kind of) riba” Al-Bayhaqi (10933) [5/573]

Any partnership that has deception in it loses blessings from Allah, and in the example of the car dealer, he failed to disclose the true state of the business to his partners. In fact, this is a very common trend among Muslims, and people expect this from of the working partners. In some cases, the sleeping partner takes the option of interest based loan instead of splitting the profit due to the expected deception from the working partners. Also, the sleeping partners deceived the car dealer as well, by denying the money received, as nothing was documented. So, lack of honesty leads to absence of trust, and motivation to rely on interest based loan (haram) instead of sharing the profit (halal). If the car dealer would have been honest about his profit, and loss, he would have taken hold of the situation before it became unbearable.

Abu Hurairah reported that the Prophet (Sallallahu Alaihi wa Sallam) said: "Allah Says: I am the third partner of any two partners as long as neither of them betrays the other. But if one of them betrays the other I get out of them" (Abu Dawud (3383) [3/438])

In conclusion, this type of partnership has become norm of the society now, and Muslims don’t find it objectionable. When this above partnership broke, and interdiction began, the sleeping partner was told that his investment was riba, but he refused to accept it, and claimed to have invested Islamically for profit (fixed profit i.e.). This event caused harm to three close families, and unknown number of indirect victims, including infants and women. During the interdiction, the debt was documented with the help of two male witnesses, and the profit given so far was deducted from the principal amount, and business inventory ceased with allowance of the car dealer to sell the inventory. It is a living example of how disobedience to Allah results in disgrace in this world and disgrace in the hereafter. May Allah guide us all to learn the Islamic law of business, and apply it to protect ourselves.

I beg to all of you to learn and practice Islam in all aspect of your life, or be ready for dishonor in this world and hereafter.

JazakAllah Khairin
A witness to these disobeying Muslims
AbuArman Jumani