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Ruling when Capital Provider Stipulates Participating in Mudarabah Business

Answered according to Shafi'i Fiqh by Darul Iftaa Jordan
Is the capital provider/owner allowed to participate in the Mudarabah business?

Answer:
Praise be to Allah the Lord of the Worlds.

Mudarabah (Profit sharing) is an Islamic contract where one party provides capital and the other party provides labor and management skills. It is stated in {Moghni Al-Mohtaj, 3/398}, "From the perspective of Sharia, Mudarabah is when the owner of capital gives an agent/manager a sum of money to trade with and the profit is shared by both of them."

The Mudarabah contract is rendered invalid when the owner of capital stipulates participating in the business, and this is why the majority of scholars prohibits such stipulation. In principle, the owner of capital should give the money to the agent/manager and shouldn`t interfere in his business. An-Nawawi says, "If the owner of capital stipulated participating in the Mudarbah business, then the Mudarabah contract is rendered invalid according to our (Shafie) more correct opinion."{Rawdat At-Talibeen, 5/119}. In addition, it is stated in {Hashyat Ibn Abdeen, 5/648}, "If the capital provider stipulates participating in the Mudarabah business, then the Mudarabah contract is invalidated."

The AAIOFI standard No. (13) states, "It isn`t allowed for the capital provider to stipulate participating in the Mudarabah business: buying, selling, and the like." However, Hanbali scholars have allowed it, because, in principle, contractual stipulations are valid and the aforementioned condition doesn`t disagree with the Mudarabah contract. The renowned Hanbali scholar Al-Bahwati stated, "It is permissible for the capital provider to participate, along with his partner (Agent/manager), in the Mudarbah business, because the agent/manager is entitled to the agreed upon profit percentage in return for his labor and management skills, which is the essence of the Mudarabh contract." {Khash-shaf al-Khinaa`, 3/513}.

In conclusion, it is valid for the capital provider to stipulate participating in the Mudarabah business, but he isn`t entitled to a fixed reward against his efforts. And Allah the Almighty knows best.

This answer was collected from the official government Iftaa Department of Jordan.

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