Can a Trading Platform That Takes Profits for Signal-Based Trading Without Sharing Losses?

Answered by Shaykh Muhammad Carr

Question

I invested $1,500 in a trading platform that provides expert trading signals. Each participant allocates 1% of their capital per trade. When a profit is made, the platform and the expert take 40% of the gain as compensation for their research and analysis. Is this form of investment permissible under Islamic finance principles?

Answer

In the Name of Allah, the Most Merciful and Compassionate.

I pray you are in good faith and health. Thank you for your question.

Allah says,

“O you who believe, devour not your wealth between you through falsehood; but only through trade by your complete mutual consent.” [Quran, 4:29]

Based on your description, this form of investment is impermissible due to:

• Non-risk-sharing profit arrangement
• Performance-based fees without exposure to loss

Shari‘a Principles in Mudaraba Partnerships

Islamic finance is founded on principles of justice, transparency, and risk-sharing. In Shari‘a-compliant partnerships such as mudaraba (en-commandite partnerships), the working partner is not guaranteed a return. They may only earn a share of the profit and must bear the risk of loss (lost effort and time). Additionally, the capital must be placed at the disposal of the working partner.

According to AAOIFI standards:

 “7/4 For a Mudaraba contract to be valid and for the Mudarib to be considered as having control over the capital, the capital must be, wholly or partially, put at the disposal of the Mudarib, or the Mudarib must have free access to the capital.”

This key requirement appears to be absent in the structure described above.

Why the Structure Does Not Qualify as a Sharika (Partnership)

This arrangement cannot be classified as a sharika (partnership), as the working party does not contribute any capital. A key distinction between a sharika and a mudaraba lies in the capital contribution:

• In a sharika, all partners contribute capital and share in both profit and loss.
• In a mudaraba, only the investor provides capital, while the working partner contributes effort and expertise.

Shari‘a Ruling on Service-Based Contracts and Performance-Linked Fees

In this case, the arrangement defaults to a service-level contract. According to Islamic law, fees for services, such as advisory or research, must be fixed in advance and cannot be contingent upon the investment’s outcome.

Tying compensation to uncertain results introduces gharar (excessive uncertainty), which the Prophet (Allah bless him and give him peace) explicitly prohibited. [Muslim]

Therefore, from a Shari‘a perspective, service providers may only charge fixed fees. Percentage-based profit shares are only permissible when the provider shares in the investment risk, such as in a valid mudaraba or sharika arrangement.

And with Allah alone is our success.

I pray this is of benefit and that Allah guides us all.
[Shaykh] Muhammad Carr
Checked and Approved by Shaykh Faraz Rabbani

Shaykh Muhammad Carr has dedicated his life to studying and transmitting our beautiful deen. His studies have taken him around the globe, where he has benefitted from many luminaries. Under the guidance of his teachers – Shaykh Taha Karan, Shaykh Yaseen Abbas, Shaykh Muadh Ali, and many others – Shaykh Muhammad has grown to appreciate the beauty and benefits of diverse scholarship. He completed his memorization of the Qur’an at Dar al-Ulum Zakariyyah in September 1997 and received an Alimiyya Degree in 2006 from DUAI (Darul Ulum al-Arabiyyah al-Islamiyyah). He is also affiliated with Masjid Auwal in Bo Kaap, Cape Town (the oldest mosque in South Africa), where he serves as a co-imam, and Dar Al-Safa, where he has taught since 2018. As a teacher, he imparts the wisdom of our heritage and tradition by opening the door to students. As an imam, he has the unique opportunity to serve his community in daily life.

In addition to his roles as a teacher and imam, Shaykh Muhammad Carr has contributed significantly to the administrative and advisory aspects of Islamic institutions. Since 2023, he has served as the Administrative Director at The Imam Kurani Institute, contributing to the institution’s growth and development. He continues to pursue traditional Islamic Sciences, possessing a keen interest in Islamic Contract Law and Finance. Shaykh Muhammad has been a Shari‘a Board Member for Islamic Asset Management & Insurance Companies since 2001, aligning financial practices with Islamic principles.