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Receiving Funding from a Commercial Bank

Ustadh Tabraze Azam is asked about receiving start-up funding from a bank that deals in riba.

I am a revert to Islam doing my Bachelor’s in Computer Science and have been given a project in my field of study by a start-up (let’s call it X). X works in the domain of Computer Science. The owner of X is told that if you complete this project, we may get you funds to start your own company.

X is funded by a bank and, Insha Allah, if I am able to complete the project and be able to start my company, which would be of course dealing with Computer Science, then it will also be funded by the same bank dealing in riba.

Is it permissible for me to go for that startup even if my company-to-be will be doing halal work but will be funded by a riba-earning bank?

Jazak Allah khayr for answering.

Yes, it is permitted to accept funding and remuneration from a conventional bank, particularly when it is an institution which isn’t required to follow the dictates of the Sacred Law (shari‘a).

Among the primary sources of capital for a bank is the cash deposited by its customers. Common interest payments or usurious transactions (riba) would normally form only a portion of the money a bank has at its disposal.

Normally, two matters would dictate the permissibility of employment: (a) the line of work itself, and (b) the source of remuneration. When both matters are acceptable, the line of work is deemed lawful.

(Mufti Taqi Usmani, Fiqh al-Buyu‘: 2.1027/1033)

Please also see Bank Employment When is it Permissible? and Is It Permissible to Work on the Projects of a Riba (Usury) Based Bank? and Working for a Company Providing IT Solutions in Un-Islamic Markets.

And Allah Most High knows best.

Wassalam,

Tabraze Azam

Can I Offer an Incentive When I’m Seeking a Loan?

Answered by Shaykh Faraz A. Khan

Question: What is a halal form of offering incentive to a loaner when requesting a loan. I am a small business owner seeking to purchase a building/shop and I am in need of start up money. Everyone is interested in investing in exchange for a continuous percentage of profit. I am more interested in one-time loans, but I do not know the best way to present it to them in a way they feel benefits them.

 

Answer: Assalamu alaikum wa rahmatullah,

I pray this finds you in the best of health and states.

In Islam, a loan is considered a type of charity, that is to say, no benefit can be attached to it. One simply lends a particular amount of money, and then takes back that same amount of money upon the due date.

There can be no worldly incentive associated with the contract; the only incentive that can be offered is otherworldly, i.e., reward in the next life. Many Companions are reported to have said, “Any loan that comes with a benefit is a form of usury.” [Bayhaqi, Sunan Saghir]

Having said that, the otherworldly incentive is huge. A person who seeks a loan is often in grief or difficulty, and our Beloved Messenger (peace and blessings be upon him) said, “Whoever relieves a believer from a worldly grief, Allah will relieve for him one of the griefs of the Day of Judgment. Whoever provides ease to a person in difficulty, Allah will provide him ease in this world and the next… Allah continues to aid the servant so long as the servant aids his brother.” [Muslim]

Please also see this related answer, specifically dealing with the reward of giving a loan:

Loans Entailing More Reward than Charity and the Validity of an Estate’s Executor Being a Beneficiary in the Will

Finally, one could consider using Islamic alternatives such as financing mechanisms predicated upon profit and loss sharing, such as joint partnership (sharika/musharaka) and silent partnership [of capital and labor] (mudaraba). For more detail, please see An Introduction to Islamic Finance by Mufti Taqi Usmani.

And Allah knows best.
wassalam
Faraz

Checked & Approved by Faraz Rabbani

Is Risk Sharing a Requirement for the Validity of a Musharakah Contract?

Answered by Shaykh Faraz A. Khan

Question: Is risk sharing a requirement for validity of a musharakah contract?

For example; Abdullah buys a house for 100k. He only has $25 k but his uncle offers to finance the remaining 75% of the house by buying shares worth $75K.  Can Abdullah guarantee a certain percentage return on his uncle’s investment as rent?  Can he agree to be solely responsibly for all property taxes and bear all risks (profit or loss)?

Answer: Assalamu alaikum wa rahmatullah,

I pray this finds you in the best of health and states.

Yes, risk sharing is a condition for the validity of a musharakah contract.

Mufti Taqi Usmani, may Allah preserve him, states, “But in the case of loss, all the Muslim jurists are unanimous on the point that each partner shall suffer the loss exactly according to the ratio of his investment. Therefore, if a partner has invested 40% of the capital, he must suffer 40% of the loss, not more, not less, and any condition to the contrary shall render the contract invalid. There is a complete consensus of jurists on this principle.” [citing Ibn Qudama, al-Mughni]

[Usmani, An Introduction to Islamic Finance]

And Allah knows best.
wassalam
Faraz

Checked & Approved by Faraz Rabbani

Can I Invest in a Business for a Guaranteed, Risk-Free Return on My Investment for 5 Years?

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]

Wassalam

Salman

Checked & Approved by Faraz Rabbani