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Is it Islamically permitted for a financier to demand a fixed return from the borrower?

Answered according to Hanafi Fiqh by Qibla.com

Answered by Shaykh Muhammad ibn Adam al-Kawthari

I am working on developing a model of Microfinance that is shariah compliant. However, one of the problems with regards to profit sharing models in a microfinance environment is that profit/loss records are not usually kept by the borrowers. In this case, poor people often are not capable of or aware enough to properly determine the profit level. As a result, a bank would find it difficult to engage in mudaraba transactions. Is there any way that shariah would allow for some dispensation in this matter so that poor people, who may not be able to properly report profit levels to the bank, to contract to pay back a fixed amount over time so that the burden of tracking profit levels is not placed on them? Of course there would be some relaxation of this based on whether or not there is a profit or loss, and the burden of failed businesses would not rest entirely on the borrower.

Answer:
In the Name of Allah, Most Gracious, Most Merciful

In the name of Allah, Most Compassionate, Most Merciful,

The basic and well-known Islamic concept with regards to financing is that profit can not be made on money only, for money is not an earning asset in of itself; rather, profit is generated when something having intrinsic utility is sold for money or when different currencies are exchanged.

In Mudaraba finance (a special kind of partnership where one partner gives money to another for investment in a commercial enterprise); it is necessary that both parties agree upon a definite proportion of the actual profit that is generated by the business such as both parties agreeing to share the profit on a 50-50 basis. However, it is unlawful and invalid to fix a lump sum of the profit for any one party. As for the loss, the investor will incur loss on his investment, whilst the labour of the working partner would go in vain. (See: the major Fiqh references).

Besides the agreed proportion of the profit, no party can claim any fixed return. The working partner cannot demand any periodical salary, neither can the investor demand any fixed returns. If the borrower is contracted to pay a fixed amount to the investor, then that would fall into the category of interest (riba), hence prohibited.

In light of the above, it would not be allowed for the banks to charge the borrowers a fixed return in order to remove the burden of tracking profit levels from them. This would be considered Riba, hence not permitted. The alternative would be in the borrower paying a third party to keep record of profit/loss levels, which could be added to the total sum of money invested in the business. Thereafter, any profits made by the borrower can be distributed between the bank and the client according to the agreed ratio between both parties.

And Allah knows best

Muhammad ibn Adam al-Kawthari
Darul Iftaa, Leicester, UK

This answer was indexed from Qibla.com, which used to have a repository of Islamic Q&A answered by various scholars. The website is no longer in existence. It has now been transformed into a learning portal with paid Islamic course offering under the brand of Kiflayn.

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