I have given my investment capital to a person who trades in medical equipment. He gives me a fixed monthly return based on projected profits. This is easier for him, since he is unable to calculate with any precision the profits he earns in a given month. Moreover, he works with a large number of investors at one time. Experience shows that the business enjoys a sustainable and consistent profitability. Is this set-up Islamically valid?
This type of profit-sharing commercial venture is known in Islamic Law as mudârabah. This is where one party finances the venture and the other engages in the activities of the business. In other words, one party gives money to the other party to do business with it. They agree to share the business profits according to a pre-agreed percentage.
The scholars make it clear that it is absolutely essential for the two parties to agree to divide the profits between them according to a fixed pre-agreed percentage, like 50-50, 60-40, or 70-30.
It is not permissible to guarantee a minimum return on investment, since the profitability of the venture is not guaranteed. It is likewise impermissible to specify a specific sum of money from the profits – like $1000 dollars – as a return for the investor, since this leads to an uncertain percentage share of the profits for both parties.
If the parties have agreed upon a percentage share of the profits, there is no harm if the trading partner provides a fixed monthly sum to the financing partner on the basis of expected profits, if that is convenient. However, at the end of the venture – or for a continuous venture, after a fixed period of time, like six months or a year – any shortfall or excess needs to be paid out. This is to ensure that the financing party receives the agreed-upon percentage share, no more and no less.
And Allah knows best.
Source: Islam Today
-- Al Arabiya Digital