In the Name of Allah, Most Gracious, Most Merciful.

All praise and thanks are due to Allah, and peace and blessings be upon His Messenger.

Thanks for your question, and we implore Allah to guide us to the best way through which we can earn a purely lawful income.

The case referred to in the question is not permissible because the investor bears liability for the capital along with this regular return. This turns the contract into an interest-based loan rather than an investment contract.

The proper procedure implies that the two parties should agree on a fixed proportion related to the profit, for example, one-third, one-half, one-fourth of the net profit or anything else. If the enterprise reaps a profit, then they should share it on the basis of the proportions settled. If there is no profit, then there is nothing for the capital owner.

The issue raised in the above question was discussed in the 14th session of the Islamic Fiqh Academy affiliated to the Organization of the Islamic Conference (OIC), and the following resolution was issued:

It is established that the interest-based loan contract is totally different from the legitimate mudarabah. In loans the profit is for the borrower and he is liable to loss, while mudarabah means to share the profits and carry losses in case that happened. The Prophet (peace and blessings be upon him) is reported to have said, “Revenue goes with the liability for loss” (Reported by Ahmad and others with authentic transmission).

This means that any return, growth, or increase that accrues is lawful for the one who is liable to ruin, destruction, and shortcoming. Jurists have deduced from the above Prophetic hadith the well-known principle of Islamic jurisprudence that “Damage and benefit go together.”

Moreover, the Prophet (peace and blessings be upon him) forbade obtaining profits from an asset for which the person is not liable to profit and loss.

Actually, jurists of all generations and of all schools have unanimously agreed that it is not permissible under mudarabah and all kinds of shirkah (partnership) to settle the investment profit as a fixed sum or a rate of the invested capital because, in this case, liability will be for the basic capital and this contradicts the authentic legal proofs. Moreover, it leads to defeat of the participation in profit and loss, which is the essence of shirkah and mudarabah. This unanimity is confirmed and established, for there is no objection reported. Thus Ibn Qudamah says, “Those from whom knowledge is to be taken [i.e. knowledgeable scholars in the sciences of the Shari`ah] have agreed by consensus that mudarabah is invalid if one partner or both of them stipulate fixed dirhams out of the profit” (Al-Mughni, 3/24).

Finally, the Islamic Fiqh Academy, while unanimously confirming this, urges Muslims to seek lawful earnings and to avoid the forbidden ones for the sake of Allah and His Messenger (peace and blessings be upon him).