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Taking on Investors

Answered as per Hanafi Fiqh by CouncilofUlama.co.za

Q: Can I enter into a partnership with someone who invests money with me? The profit share split between the ‘investor’ and ‘fund manager’ shall be in the ratio of 50%: 50% respectively. Whilst Islamically, a guarantee cannot apply, the estimated return for the investor is in the region of +- 10% for the investment period of +- 80 days will that be fine?

A: It is permissible to take investors into one’s business. We advise that you read the book, ‘An Introduction to Islamic Finance’ by Mufti Taqi Uthmaani Saheb as well as consult with your local Alim regarding how the investment will work.

Kindly peruse through the article below in order to avoid these wrongs that are prevelant in many partnerships nowadays.

Partnerships/Investments flaws as per the laws of Shariah

It is a common practice amongst many of our business people to seek finance from investors to avoid interest bearing loans from conventional institutions. This is indeed laudable and praiseworthy. However, it has been brought to our attention repeatedly that a good number of these deals and agreements are structured incorrectly.

One of the major issues with many of these agreements is that there is a pre-determined amount fixed as a ‘profit’, which many a times is in the form of a fixed return on the capital invested. A pre-determined amount of money or a return based only capital invested cannot be called or termed as a profit rather this is considered to be akin to interest.

Another major issue is where the capital of the investor is guaranteed. The capital input of an investor in any investment or partnership cannot be guaranteed and there has to be an element of risk and reward.

Therefore if a financier wants to invest in an enterprise or business then he will have to share the risks thereof also. In the case where there is a loss, the financier/investor will have to bear part of the loss it in proportion to his investment. In the same manner because of him subjecting himself and his capital to the risk of loss, he will therefore be entitled to share in the profits the joint venture makes but this profits must also be based  on a pre-agreed upon ratio/percentage of actual profits made by the joint venture.

It is therefore necessary that the ratio of profit for each partner must be determined in advance in proportion to the actual profit accrued to the business, and not in proportion to the capital invested by the parties. Hence it is not allowed to fix a lump sum amount for any one of the partners, or a return on investment based on the capital invested.

E.g. Therefore, if A and B enter into a partnership and it is agreed between them that A shall be given R 10,000/- per month as his share in the profit or that A will receive 20% return on capital invested, and the rest will go to B, the partnership is invalid. Similarly, it is not correct for the capital invested to be guaranteed where Party A guarantees Party B that in the event of liquidation your capital invested is secured and will not be lost.

We appeal to all business people and investors to make sure they check such agreements with an experience pious local Alim they have confidence in, and follow the advices and guidance given before investing or seeking investors.

And Allah knows best.

Aadiel Moosagie (Mufti)
Council of Ulama Eastern Cape
+27 83 982 6968
[email protected]

This answer was collected from CouncilofUlama.co.za, which is operated under the supervision of Council of Ulama Eastern Cape, South Africa.

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