Distinction Between Lending with Profit Condition and Muḍārabah

✿ Written by: Saudi Fatwa Committee (Fatāwā)

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❖ Ruling on Lending Money with a Profit-Sharing Condition​

If a person gives money to another as a loan with the condition that he will receive half the profit from a business venture, then this is ḥarām (unlawful).
According to the scholars, there is a well-established principle:

"Every loan that brings a benefit is riba (interest)."

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❖ The Permissible Alternative: Muḍārabah​

It is permissible for someone to say:

“Take this money, engage in business with it, and the profit will be split—half yours and half mine.”
This is a valid Muḍārabah contract, and halāl.

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❖ What's the Difference?​

Someone might ask:

“What’s the difference if I say: I am giving you 10,000 as a loan, and I want half the profit?”

Answer:

That is ḥarām, because:

• It is a loan, and the lender is guaranteeing repayment of 10,000
• In addition to that, he is benefiting from the profit
• Thus, the loan has generated gain, which is riba

In contrast, in Muḍārabah, the arrangement is:

“Here is 10,000. Use it in trade. Half the profit is yours.”

• In this case, no debt is established
• If the business suffers a loss or the capital is lost, the owner of the capital bears the loss, and the working partner's effort is lost, not his wealth
• The working partner (muḍārib) is not liable for the capital

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❖ Summary of the Difference​

Aspect	Loan with Profit Condition	Muḍārabah (Profit-Sharing Investment)
Type of Transaction	Loan	Partnership (Muḍārabah)
Repayment Obligation	Full amount guaranteed	Capital loss borne by investor
Profit Entitlement	Lender takes a share	Based on agreement
Ruling	Ḥarām (riba)	Ḥalāl (permissible)

Reference:

Ibn ʿUthaymīn – Liqāʾ al-Bāb al-Maftūḥ, 9/169