Question Summary:
Musharakah Agreement

Question Detail:

 I have entered into an agreement with a friend where I would give him R100 000 which he would use in his current construction contract. We agreed that he would give me a return of R50 000 on my capital investment after three months i.e in total R150 000. The return that I would generate is a share of the profit that he would be generating from this contract. Is this transaction permissible?

Answer :

In the Name of Allah, the Most Gracious, the Most Merciful.
As-salamu ‘alaykum wa-rahmatullahi wa-barakatuh.
The agreement in reference is a Musharakah agreement.
 
Musharakah is a joint commercial enterprise enacted by mutual agreement wherein two or more partners invest some of their capital or undertake to render some services to customers in which all the partners share the profit or loss of the joint venture on an agreed ratio.
In reference to your query, a fixed return of R50 000 on your initial capital investment of R150 000 is not Shariah compliant. As a partner/shareholder in a Musharakah agreement, the profit or loss is based on an agreed ratio. As such, a stipulation of a fixed return is not permissible in Shariah.
Furthermore, in order for a Musharakah agreement to be valid, it is important to ascertain the nature of your partner’s investment.
What has your partner invested? Is the nature of his investment liquid or illiquid assets? On what will profit be generated?
You may forward your answers to 313daruliftaa@gmail.com for our consideration. 
And Allah Ta’ala Knows Best
Ismaeel Bassa
Student Darul Iftaa
Durban South Africa
Checked and Approved by,
Mufti Ebrahim Desai.
www.daruliftaa.net