Question Summary:
Is an investment with only profit sharing permissible? How about investment with limited loss sharing?

Question Detail:

Q1. If I take 100,000 with contract that 20% profit will be given for 1 month, if loss happen in business, your 100,000 will be given. Is it riba? So, is only profit sharing- no loss sharing will be riba?
Q2. If I contract 20% profit and 1% loss sharing. Is this system will be riba or not?

Answer :

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1.      We understand from your question that the investor will forward you 100,000 on condition that he will receive 20% of the profits. However, should you incur any losses, then you will be liable to pay back the whole capital.
If the above understanding is correct, then this is a loan with a condition of 20% excess. The 20% profit will be pure interest (ribā).[1]
The deal could be adjusted to be made Sharī῾ah Compliant through Mudārabah. Please read through the detail guideline on the Mudharabah contract at :http://daruliftaa.net/sharcompliancy/Download-document/Mudarabah-Agreement.html
Also read detail guidelines on both Musharakah Partnership and Mudarabah Partnership at :http://daruliftaa.net/sharcompliancy/Download-document/Musharakah-and-Mudarabah-Excerpt-from-Introduction-to-Finance.html
2.      According to the rules of Mudharabah, if the Mudaarib (party in whom investor invested, i.e. yourself) incurs a loss on the dealing, then it is first and foremost deducted from the profits, and thereafter from the capital amount. One cannot restrict this loss to a percentage.[2]
E.g. An investor invested R100,000 with condition of 20% in the profits. Now if the Mudarib incurs a loss in the business, then this loss will be deducted from the capital, and Mudarib will not have any share at all.
However, if the business makes profits for first couple of months, and then incurs a loss then this loss will be first deducted from the profits from previous months. If these profits have been given out to the parties then they will have to pool back the profits and calculate “net profit”. Then this “net profit” can be shared in the agreed ratio between Rabbul Maal (investor) and the Mudaarib. In case there is a “net loss” then this loss will be taken out from the capital, and mudarib will not earn anything.
We encourage you to review the documents provided above and revert to us with a drawn up contract. In this manner we will be able to guide you in adjusting the contract to suit your requirements while staying within the guidelines of Shariah.
And Allah Ta’āla Knows Best
Mawlana Faisal bin Abdul Hameed
Student, Darul Iftaa
Canada
Checked and Approved by,
Mufti Ebrahim Desai.
www.daruliftaa.net