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The Ruling of Islamic Law on the Owner of the Capital Stipulating a Guarantee of the Capital in a Mudarabah Contract
Question :
What is the Islamic ruling on a condition imposed by the owner of the capital, requiring the worker to guarantee the capital in case of loss?
The Answer :
All perfect praise be to Allah the Lord of the Worlds. May His peace and blessings be upon Prophet Mohammad and upon all his family and companions.
A Mudarabah contract is a partnership where the owner of capital Rabb Al-mal) provides funds to an entrepreneur or company (Mudarib) for investment. The profits are shared between the two parties based on a pre-agreed ratio. For this contract to be valid under Islamic law, the following conditions must be met:
1. The mudarib cannot be required to guarantee the return of the capital. The risk of profit or loss is shared between both parties according to the investment's outcome.
2. The capital must be physically transferred to the mudarib. It cannot be represented by a debt.
3. The profits must be distributed proportionally based on the agreed ratio between the rabb al-mal and the mudarib. The division must be a percentage of the actual profits, not a predetermined fixed amount.
4. The profits shared must result from tangible and actual investment activities. Premature distribution of profits, before they are realized, constitutes Riba (usury), which is prohibited.
5. The investment must be in a lawful (Halal) business. Activities involving prohibited industries, such as forex trading, network marketing, pyramid schemes, and Ponzi schemes, are not permissible.
The basic principle in a Mudarabah contract, in the event of a loss, is that the owner of the capital (rabb al-mal) loses their money, while the mudari loses their effort and time. As the latter aren’t not responsible for the loss of the capital unless there is negligence or misconduct. Negligence or misconduct typically involves actions that harm the mudarabah, the owner of the capital, or breach the terms of the contract. This includes failing to act in the best interest of the owner or violating the agreed-upon conditions. The determination of whether there has been negligence or misconduct is left to experts. Al-Imam Al-Nawawi (may Allah have mercy on him) stated: "The actions of the worker are bound by what serves the interest, just as the actions of an agent are." [Rawdat Al-Talibin, Vol.5/P.127].
The Jordanian Civil Code (Article 628) states:
1-The owner of the capital (rabb al-mal) solely bears the loss, and any stipulation to the contrary is not valid.
2. If any part of the mudarabah capital is lost, it is accounted for from the profits. If the loss exceeds the profits, the remaining loss is deducted from the capital, and the mudarib is not held liable for it.
In conclusion, stipulating the guarantee of the capital on the mudarib (worker/investor) invalidates the mudarabah contract. If the contract is deemed invalid, the mudarib is entitled to fair compensation (Ujrat al-mithl), while the owner of the capital (rabb al-mal) loses their capital. However, if it is proven through legitimate means that the mudarib acted negligently or wrongfully, they are obligated to bear the loss to the extent of their negligence or wrongdoing. And Allah The Almighty Knows Best.
Question :
What is the Islamic ruling on a condition imposed by the owner of the capital, requiring the worker to guarantee the capital in case of loss?
The Answer :
All perfect praise be to Allah the Lord of the Worlds. May His peace and blessings be upon Prophet Mohammad and upon all his family and companions.
A Mudarabah contract is a partnership where the owner of capital Rabb Al-mal) provides funds to an entrepreneur or company (Mudarib) for investment. The profits are shared between the two parties based on a pre-agreed ratio. For this contract to be valid under Islamic law, the following conditions must be met:
1. The mudarib cannot be required to guarantee the return of the capital. The risk of profit or loss is shared between both parties according to the investment's outcome.
2. The capital must be physically transferred to the mudarib. It cannot be represented by a debt.
3. The profits must be distributed proportionally based on the agreed ratio between the rabb al-mal and the mudarib. The division must be a percentage of the actual profits, not a predetermined fixed amount.
4. The profits shared must result from tangible and actual investment activities. Premature distribution of profits, before they are realized, constitutes Riba (usury), which is prohibited.
5. The investment must be in a lawful (Halal) business. Activities involving prohibited industries, such as forex trading, network marketing, pyramid schemes, and Ponzi schemes, are not permissible.
The basic principle in a Mudarabah contract, in the event of a loss, is that the owner of the capital (rabb al-mal) loses their money, while the mudari loses their effort and time. As the latter aren’t not responsible for the loss of the capital unless there is negligence or misconduct. Negligence or misconduct typically involves actions that harm the mudarabah, the owner of the capital, or breach the terms of the contract. This includes failing to act in the best interest of the owner or violating the agreed-upon conditions. The determination of whether there has been negligence or misconduct is left to experts. Al-Imam Al-Nawawi (may Allah have mercy on him) stated: "The actions of the worker are bound by what serves the interest, just as the actions of an agent are." [Rawdat Al-Talibin, Vol.5/P.127].
The Jordanian Civil Code (Article 628) states:
1-The owner of the capital (rabb al-mal) solely bears the loss, and any stipulation to the contrary is not valid.
2. If any part of the mudarabah capital is lost, it is accounted for from the profits. If the loss exceeds the profits, the remaining loss is deducted from the capital, and the mudarib is not held liable for it.
In conclusion, stipulating the guarantee of the capital on the mudarib (worker/investor) invalidates the mudarabah contract. If the contract is deemed invalid, the mudarib is entitled to fair compensation (Ujrat al-mithl), while the owner of the capital (rabb al-mal) loses their capital. However, if it is proven through legitimate means that the mudarib acted negligently or wrongfully, they are obligated to bear the loss to the extent of their negligence or wrongdoing. And Allah The Almighty Knows Best.
