Answered by Sidi Salman Younas
Question: A family member of mine would want to start up a small business. I plan on investing in his business. He has guaranteed me a 50% annual return on my investment for 5 years. In other words, it’s a risk-free investment. I’m guessing this is not a halal investment?
Answer: assalamu `alaykum
I pray you are well.
Stipulating a specific annual return for one of the partners of a joint enterprise is not valid.
One of the conditions for the validity of a partnership (musharaka) is that it be free from assigning a lump-sum return to any one partner, or a set percentage in proportion to his investment.
Rather, the basis of a partnership is profit-loss sharing, where a ratio of profit is determined for each partner in proportion to the actual profit accrued. Whether such a ratio of profit needs to be proportionate with the ratio of capital invested by a partner is the subject of disagreement between scholars with some stating that it must and others stating that it does not have to. However, all the scholars agree that in the case of loss, all partners shall suffer based on their ratio of investment, no less and no more.
As such, it would be necessary for you to alter your agreement with your family member by stipulating a ratio of profit in proportion to the actual profit that the business will accrue.
[Taqi Usmani, introduction to Islamic Finance]
Checked & Approved by Faraz Rabbani