Hadith: Mercy is not taken away except from the wretched.

Passive Partnership for Business

By Mufti Taqi Usmani
Posted: 18 Safar 1423, 1 May 2002

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Q.) 1)  I am a trader here in Mauritius. I am dealing mainly in furniture - both import and manufacturing. There is another brother who propose to do some sort of partnership. He is proposing to finance the projects fully, and on my side I develop the work - selecting models, price calculation, import or manufacture, selling off the goods, credit collect and at the end of the day after net profit calculation, amount to be shared exactly equally i.e. on a 50/50 basis. In other words he only finance the project, and on my side, I invest all – know how, energy, time. Is this way of working acceptable in terms of Shariah? Please advise. Please note that I am not taking any fixed salary whatsoever and that only expenses like transport, repair for defective goods, phone / fax calls are deducted and that the project is not defined as per limit of time to execute. It may last for a fortnight or within one month or more. Is it necessary to do different contract for different projects to be signed eventually? Can you give me a sort of draft specimen to teach me how to do the draft? Up to now alhamdulillah -since 6 months we did it on part time basis as I explained above, all the time we end with net profits. In case there is loss, please explain how are we going to settle the account.   (2)  At times we are having a bigger project but which requires us to look for more " finance people" just to realize the project. So in this way we can have three or four or more people adding their funds together excluding me just to execute the project as I propose. Please advise how are we going to calculate the ' net profit sharing '. And in the same trend, please advise about contract procedures, i.e., must all the shareholders know each other or not, how are we going to present the project in front of each and every one before starting? In case of loss, how are we going to calculate the outcome? Is it necessary that we give them details for each and every expense to be borne by the projects? Please advise. Jazaak Allah Khayrul Jazaa'. Should there be any book(s) from which I can have all details will be highly welcome that you advise so that I can make necessary arrangements to buy it / them. [Iqbal ISMAEL, Mauritius]

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1. According to my understanding you want to have a partnership with your friend in which you will not invest anything. All the capital will come from your friend, while you will contribute your effort and skill to the project. This arrangement is termed in Shariah as Mudarabah. The profit share in this arrangement may be based on mutual consent. If you allocate 50% of the profit for each party it is permissible in Shariah. In the case of loss, all the financial loss will be borne by the investing partner only. The loss of the working partner will be restricted to the loss of his time and effort only.

2. It is also permissible that investors are more than one and the working partner is the same. In this case the investors will have to enter into an agreement of Musharakah then all of them will enter into a Mudarabah with the working partner. The ratio of the profit to be retained by the working partner may be determined with mutual agreement but the profits to be distributed between different investors must be exactly in proportion to their investment. In the case of loss, all investors will have to bear the loss in proportion to their respective investment, while the working partner will not bear any financial loss except to the extent of his time, work and skill having gone to waste.

The basic of principles of Musharaka and Mudarabah are explained in detail in my book "An Introduction to Islamic Finance" which you can consult, if necessary.

Further Reading: An Introduction to Islamic Finance (by Mufti Taqi Usmani - English)