Repaying the investment in a Mudarabah transaction

CategoriesTrade, Business & All Things Money [480]

Fatwa ID: 01479

Answered by Mufti Mohammed Tosir Miah

Question:

One person approached one of my friends with a view to investment without informing as to what he was going to invest in as he was holding onto the idea. 

This investment did not materialise due to goods stuck at the port and incurring detention and demurrage charges. When the investor entered into agreement the recipient did not disclose the nature of transaction and was not prepared to disclose his dealing. This dealing has now become apparent that he had imported Garlic out of china and was routing it through Morocco and then to re import it back in to Europe to avoid duty.  

The terms were drafted in haste as the recipient wanted the money quickly and the investor wanted to safeguard his money.
Terms of Agreement: amount £20,000
start date: 12th September.
duration: minimum 6 months.
termination Date: after six months from start of date.
investment returns: returns will be variable £1000 upwards based on invested amount on monthly basis. (term variable was used and left at discretion of recipient as he had forecasted that he could present payout more than £1000 per month). This was offered by the recipient. Payment of returns: payable on due date in cash. Expiry settlement: to be made in the same way as received.
The recipient after the loss informed the investor that he would recover the money back and repay it through doing the same business but now has changed his stance.
The Recipient also requested me to go into this investment again and from every proceeds he would provide the investor with a scheduled payment to the amount lost.
The recipient is now saying that he has lost the money and not prepared to return the money.
The investor is adamant that he is entitled to his money as he had no knowledge of the dealings by the recipient and that the goods are still in tact at the port which means that he has to recover the container by making the port charges.
The recipient has now stopped all communication with the shipping line to resolve this issue. Please provide an Islamic ruling on this matter.

Answer:

Bismillah

In the name of Allah, the most Beneficent, the most Merciful.

The aforementioned question falls under the Islamic rule of Mudarabah. Mudarabah is a special kind of partnership where one partner providers the capital (rabb-ul-maal) to the other (mudarib) for investment in a commercial enterprise.

Types of Mudarabah

  1. The rabb-ul-maal may specify a business in which to invest, in which case the mudarib is restricted only to such business as pointed out by rabb-ul-maal. This is called restricted mudarabah or al-mudarabah al-muqayyadah.
  2. If rabb-ul-maal has not specified a business in which to invest, it is considered an unrestricted mudarabah or al-mudarabah al-mutalaqah.

Distribution of Profit

The distribution of profit must be pre-determined by the two parties. Furthermore, the amount of profit ascribed to either of the parties must be independent of the capital amount, dependent solely on the actual profit realized by the commercial enterprise. That is, the profit assigned to a party cannot be a percentage of capital amount contributed as that would be considered a fixed return, or interest. The profit assigned to either of the parties cannot be a lump sum amount either as this would also constitute interest.

As such, the only determination of profit distribution that is permissible is based on the actual profit earned by the enterprise.

The Shari'ah does not restrict or specify proportions to be distributed between the parties, leaving it to the best judgement of the two independent parties.

There are three main issues from your question.

The first is whether the term “variable” which was used in the drawing up of this venture considered to be valid in line with the principles of Mudarabah or not. The answer is no. As I mentioned above, the profit has to be specifically pre-determined by the parties. The term “variable” is too vague and will not constitute to be a valid Mudarabah contract.

The second issue was whether not knowing what the money is going to be used for rule out the contract of Mudarabah. In general it doesn’t as I explained above and this is known as unrestricted Mudarabah. However, it won’t make a difference in this situation as the Mudarabah contract is deemed invalid because of the vague terms used in the distribution of the profit.

The third and final issue is regarding whether the recipient has to pay back the amount which you gave him. The money you gave him was Amanah (trust). If the recipient purposely destroyed it then he will have to re pay you back otherwise if he genuinely lost it, he is not obliged to pay it back.

A similar comparison can be found in the books of Fiqh regarding zakat, where if a persons wealth is destroyed after zakat has been made wajib then he does not have to give zakat, regardless of whether the time for his giving the zakat has already passed or not.  This is known as Halak.  However if this person is purposefully destroying his wealth for whatever reason, zakat will still be binding upon him as this is Istihlaak.   (Ilmul Fiqh p.29 v.4)

Only Allah Knows Best

Mohammed Tosir Miah

Darul Ifta Birmingham

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