Islamic Rulings on Trade
Mufti Abu Muhammad ‘Ali Asghar ‘Attari Madani
Principles of passive partnerships (muḍāraba)
Q: What do the noble scholars say about this matter: To start a business, Zayd gives Bakr £50,000. He states they will share all profit and loss equally. Is this type of business correct? When will the loss be returned to the investor?
اَلْجَوَابُ بِعَوْنِ الْمَلِکِ الْوَھَّابِ اَللّٰھُمَّ ھِدَایَۃَ الْحَقِّ وَالصَّوَابِ
A: The business partnership in which one party (the investor) provides capital and the other party provides skill and labour is termed muḍāraba. The principle regarding loss in muḍāraba is that the person providing skill and labour, called the muḍārib, is only liable for losses in what he is responsible for. To stipulate a condition making the muḍārib liable for all losses in general is invalid. It is stated in Fatawa Razawiyyah: “The condition of making the muḍārib liable for ˹any˺ loss is void. He is not liable for any loss other than his own transgression and waste. Incurred losses will be covered by the investor.”[1]
It is stated in Bahaar e Shari’at:
If there is no uncertainty with regards to profit through the condition ˹imposed in muḍāraba˺, the condition itself is invalid, but the muḍāraba itself is valid. Such conditions include making the muḍārib responsible for all incurred losses in general or making both of them responsible.[2]
In light of these explanations, in the scenario of the questioner, if a loss is incurred in the capital and not because of negligence from the muḍārib, the investor will cover the loss. Hence, in the scenario provided in the question, the condition instated by Zayd to make Bakr, the muḍārib, an equal participant in loss is null and void. However, the business arrangement of muḍāraba˺ will not be nullified by means of this invalid condition.
So, what is loss in muḍāraba and when is it returned to the investor? There are many misconceptions about this. Sometimes, the general lack of profit is considered a loss, whereas this is incorrect. With respect to the loss that can be incurred by the investor in muḍāraba˺, here are three scenarios to keep in mind.
1. The losses will be covered by business profits first. Therefore, in this case, if any profit is remaining after the losses have been covered, it will be divided amongst the parties in the fixed proportions. If there is no leftover profit, both parties will receive nothing.
2. If both parties calculate and distribute the profit whilst business is ongoing and incur losses thereafter, this previously distributed profit will be recollected in order to cover the loss. This ensures the capital is protected from loss. The jurists have mentioned the following point: If the arrangement of muḍāraba˺ was contracted for a specific period of time, e.g., six months, one year, etc. and the parties decide to extend the contract upon expiration, a new contract can be formed. If loss is incurred after this, it will not be covered by the distributed profit of the previous contract.
3. If the losses cannot be covered by any generated profit, the capital will have to be used. Thus, in this scenario, the investor will have to bear this setback and the efforts of the muḍārib will be in vain. The muḍārib will bear no responsibility when there is a loss of capital.
Incurred losses will first be covered by the generated profits. Whilst providing clarity on this matter, Mufti Amjad Ali A’zami رَحْمَةُ الـلّٰـهِ عَلَيْه states:
The wealth lost during muḍāraba will be covered by generated profits. It will not be covered by the capital. E.g. £100 was invested into the business; a profit of £20 was made and £10 was lost. The loss of £10 will be deducted from the profit, i.e. only £10 profit remains. If the profit cannot cover the entirety of the loss, e.g., £20 was made in profit and £50 was lost, it will be covered by the capital. Money will not be taken from the muḍārib as he is entrusted, and there is no penalty upon him, even if he is responsible for the loss. However, if the muḍārib causes the loss deliberately, he will have to compensate as he was not authorised to do such a thing. The investor and labourer usually calculate and distribute the profit on a yearly, monthly, or bi-annual basis, and the contract of muḍāraba continues to run after this. If all or some of the capital is lost or destroyed, both parties will return an amount of profit to make up what was lost. If the loss of the capital cannot be recouped after returning all profits, the profit will be given to the investor. There is no compensation for the deficiency.[3]
وَاللہُ اَعْلَمُ عَزَّوَجَلَّ وَ رَسُوْلُہٗ اَعْلَم صلَّی اللہ علیہ واٰلہٖ وسلَّم
What is the Difference between a Partnership in Services and a Contractual Partnership?
Q: What do the noble scholars say about this matter: what is the difference between a partnership in services and a contractual partnership?
اَلْجَوَابُ بِعَوْنِ الْمَلِکِ الْوَھَّابِ اَللّٰھُمَّ ھِدَایَۃَ الْحَقِّ وَالصَّوَابِ
Answer: There are three types of partnership:
1. Partnership in joint ownership: some people have a joint ownership over an item or wealth. For example, when someone dies, the wealth he leaves behind is under the joint ownership of his inheritors. If two people contribute towards purchasing a plot of land, this is also a joint ownership.
2. Contractual partnership: a contractual partnership is set up by the parties involved. This usually takes the form of a business partnership where two or more people invest money for business purposes. This is known as a contractual partnership.
3. Partnership in services: The type of partnership where all participants supply their services/labour and distribute the received fees amongst themselves. For example, two tailors or estate agents meet and agree to work together. This is a partnership in providing a service.
Note: To learn about these rulings in detail, refer to the section covering the types of partnerships in Bahaar e Shari’at, part 10.
وَاللہُ اَعْلَمُ عَزَّوَجَلَّ وَ رَسُوْلُہٗ اَعْلَم صلَّی اللہ علیہ واٰلہٖ وسلَّم
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