Can an Expected Profit Clause Be Included in a Valid Islamic Contract?


Shafi'i Fiqh

Answered by Shaykh Muhammad Carr

Question 

Can an expected profit clause, such as “The expected profit is X% per month,” be included in a wakala bi al-Istithmar contract without violating the principle that the wakil cannot guarantee profits?

ِ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.

The default ruling in transactions is permissibility. Allah says, “And while Allah has made trade lawful.” [Quran, 2:275]

It is permissible to include an expected profit clause in an investment agency contract (wakala bi al-Istithmar). This clause is a guideline for the type of return the investor desires. However, it is not permissible for the agent to knowingly allocate the funds to an investment that will fail to achieve the expected profit. [AAOIFI Standards]

The Messenger of Allah (Allah bless him and grant him peace) said, “Muslims are bound by their conditions.” [Abu Dawud]

Expected Profit 

As the term implies, the expected profit refers to the anticipated return that the investor aims to achieve. The investor engages in the investment with the intention of earning a return. Therefore, the expected profit merely expresses the desired return without establishing any contractual obligation.

This concept aligns with the Quranic verse: “But only through trade by your mutual consent.” [Quran, 4:29]

‘There is no prohibition against setting an expected rate of return, which is not considered binding if not achieved, even if it is reached through a feasibility study. However, the final distribution of profits should be based on the realization of profit after actual or constructive liquidation, rather than on such expected rate of return’. [AAOIFI Standards]

Although the above quotation specifically pertains to an en-commendite partnership, the matter of profit distribution is equally relevant to the issue at hand.

Fixed Profit

If the agent is required to guarantee the expected profit, the contract becomes null and void. [See AAOIFI Standards]

The Prophet (Allah bless him and grant him peace) prohibited uncertainty and excessive risk (gharar) in contracts. [Muslim]

I pray this is of benefit and that Allah guides us all.

[Shaykh] Muhammad Carr
Checked and Approved by Shaykh Muhammad Abu Bakr Badhib

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 for 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’ah Board Member for Islamic Asset Management & Insurance Companies since 2001, aligning financial practices with Islamic principles.