Question:
We are starting a business and need some guidelines on profit sharing. Can you kindly advise how profit sharing works in Shariah?
In the Name of Allah, the Most Gracious, the Most Merciful.
As-salāmu ‘alaykum wa-rahmatullāhi wa-barakātuh.
Answer:
The following points are a few Islamic guidelines to assist in profit sharing and distribution:
- Profits must not be guaranteed or fixed in absolute terms for any business partner. Thus, a fixed amount in numerals cannot be set as a profit share for any partner.
- Profit ratios must not be set as a percentage of capital but as a percentage of the profits[1].
- Every partner must be allocated a profit share regardless of capital input.
- A debt owed to one partner cannot be deemed as the capital investment on behalf of the creditor[2].
- One partner cannot guarantee any part of the profit or capital of another partner.
- Profit share maybe equivalent to capital investment.
- A silent partner’s profit ratio may not exceed his investment ratio[3].
- A business partner may surrender all or part of his profit share to another voluntarily provided doing so is not agreed at the time of the business partnership and nor is it expected from the outset.
- Profit sharing mechanism and profit ratios must be clearly determined at the inception of a business partnership.
- A partnership or company may only announce an expected return for the business; actual returns are declared only after they are known.
Rules of equal capital investment and profit distribution[4]
- It is always permissible to have profit ratios proportionate to capital investment regardless of who’s a working or silent partner. Thus, when capital investment is 50/50, it is permissible to have profit sharing at 50/50. Likewise, when the capital investment is 60/40, it is permissible to have profit sharing of 60/40.
- It is permissible to have equal capital investment at 50/50 and have a profit-sharing ratio at 60/40 whilst both are working partners. However, if there is only one working partner, the working partner must be the party with 60% profit sharing ratio for this to be permissible. If the sole working partner is the partner with 40% profit sharing ratio, such an agreement is impermissible. In other words, a silent partner cannot have a capital investment of 50% and receive 60% profit.
Rules of varying capital investment and profit distribution
- It is permissible to have capital investment of 60/40 and profit sharing ratio of 50/50 on condition both parties are working partners.
- It is permissible to have capital investment of 60/40 and have the 60% investing partner as the sole working partner.
- It is permissible to have capital investment of 60/40, with the profit sharing ratio at 60/40 and the 40% profit receiving partner the sole working partner. The investor of 60% would receive 60% of profit in lieu of capital.
- It is not permissible to have a scenario where the capital investment is 60/40 and the profit sharing ratio is 60/40, with 60% profit for the partner with the lower capital investment (40%), whilst he is a silent partner. In this scenario, he only has 40% capital contribution in lieu of 40% of capital. He does not have any percentage of contribution in terms of capital, labour or risk to be in lieu of the remainder 20%.
The Fiqh (jurisprudence of the answer):
The principle governing the above laws is that some form of risk must be linked and equated to the profit sharing ratio. Every percent must have one of the following in lieu of it to make that percentage lawful as a return:
1) Capital
2) Labour
3) Responsibility to work (ḍamān as in the case of shirkat al-a’māl)
The wisdom of the law:
Note: The law is not dependent on wisdom and benefits. It is possible that not all said benefits are found at a given time. The absence of any or all benefits will not change the ruling or law. The law is not deduced nor determined through benefits. The benefits of the law are enumerated to complement rationale minds.
One of the axioms of Islamic Moral Economy is the principle of ‘Adl (justice) and Musāwāt (equality). Islam conditions Musāwāt, equality and fairness in all transactions. Thus, a party cannot take a greater percentage of return without contributing wealth, labour or risk in lieu of it. As a result, every partner is horizontally equal to one another and one cannot exploit another in any business partnership.
And Allah Ta’ālā Alone Knows Best
Mufti Faraz Adam
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