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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

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