Sharʿi Guidance on an MD Taking Commission in a Joint Factory
Source: Fatāwā ʿIlmiyyah – Tawḍīḥ al-Aḥkām, Vol. 2, p. 223
A factory with around 1,600 shareholders has its current Managing Director (MD) planning to establish a new factory. His proposal includes:
✿ Supplying raw material to the existing factory and selling the surplus to the market.
✿ Personal expenditure on international trips for business purposes.
✿ Claiming he will set up the new factory from his own resources and inviting others to invest.
✿ Two years of unsuccessful attempts to launch, with only some agreements signed.
✿ Proposing to use part of the existing factory’s land and cash (about one-third of the new factory’s capital).
✿ Demanding that all shareholders contribute funds where possible.
✿ Setting a condition that he will receive 5% of the new factory’s total capital in shares, not available to any other shareholder.
✿ Any increase in value before stock exchange listing will be his exclusive right.
Shareholders have objected because:
✿ The MD already receives a full salary and extensive benefits as head of the existing factory.
✿ All agreements were made in his capacity as MD, not personally.
✿ This is akin to a government official using his position for personal gain.
✿ If done personally, commission might be valid, but in the current capacity it is not.
Alternative suggestions by shareholders:
◈ If he wants to run it personally, resign as MD and then invite investment.
◈ As a personal project, he could take 10% commission instead of 5% shares.
◈ As MD, he should not take personal commission—any benefit should go to the factory’s profits for all shareholders.
◈ Initial expenses he covered could be treated as personal investment or reimbursed.
Al-ḥamdu lillāh, waṣ-ṣalātu wa-s-salāmu ʿalā Rasūlillāh, ʿAmma Baʿd!
1. Permissibility of Partnership
A business partnership based on profit and loss sharing, such as establishing a factory, is permissible as long as it is free from interest (ribā), fraud, and deception.
Allah ﷻ says:
﴿وَإِنَّ كَثِيرًا مِّنَ الْخُلَطَاءِ لَيَبْغِي بَعْضُهُمْ عَلَىٰ بَعْضٍ إِلَّا الَّذِينَ آمَنُوا وَعَمِلُوا الصَّالِحَاتِ وَقَلِيلٌ مَّا هُمْ﴾
(Sūrah Ṣād: 24)
2. If All Partners Agree
✿ If all partners mutually agree, they may lawfully allocate a fixed share (e.g., 5%) of profits or capital to the MD.
✿ As the Prophet ﷺ said:
«المسلمون علی شروطهم» – Muslims are bound by their conditions.
(Sunan Abī Dāwūd: 3594, ḥasan; authenticated by Ibn al-Jārūd: 637, Ibn Ḥibbān: 1199; also mentioned by al-Bukhārī before Ḥadīth 2274)
3. If Partners Do Not Agree
✿ If the partners are not satisfied with the MD’s condition or have doubts about it, they have the right to reject it.
✿ The fair principle is that all partners, including the MD, should share profits and losses equally according to investment ratios.
✿ If the MD insists on exclusive benefits without consent, he should leave the project entirely.
4. Sharʿi Principle
✿ The general rule in Sharīʿah is: leave whatever causes doubt or unrest in the heart.
✿ In business, full transparency, consent of all parties, and avoidance of personal benefit from an entrusted position are essential.
ھٰذَا مَا عِندِي وَاللّٰهُ أَعْلَمُ بِالصَّوَابِ
Source: Fatāwā ʿIlmiyyah – Tawḍīḥ al-Aḥkām, Vol. 2, p. 223
Background of the Issue
A factory with around 1,600 shareholders has its current Managing Director (MD) planning to establish a new factory. His proposal includes:
✿ Supplying raw material to the existing factory and selling the surplus to the market.
✿ Personal expenditure on international trips for business purposes.
✿ Claiming he will set up the new factory from his own resources and inviting others to invest.
✿ Two years of unsuccessful attempts to launch, with only some agreements signed.
✿ Proposing to use part of the existing factory’s land and cash (about one-third of the new factory’s capital).
✿ Demanding that all shareholders contribute funds where possible.
✿ Setting a condition that he will receive 5% of the new factory’s total capital in shares, not available to any other shareholder.
✿ Any increase in value before stock exchange listing will be his exclusive right.
Shareholders have objected because:
✿ The MD already receives a full salary and extensive benefits as head of the existing factory.
✿ All agreements were made in his capacity as MD, not personally.
✿ This is akin to a government official using his position for personal gain.
✿ If done personally, commission might be valid, but in the current capacity it is not.
Alternative suggestions by shareholders:
◈ If he wants to run it personally, resign as MD and then invite investment.
◈ As a personal project, he could take 10% commission instead of 5% shares.
◈ As MD, he should not take personal commission—any benefit should go to the factory’s profits for all shareholders.
◈ Initial expenses he covered could be treated as personal investment or reimbursed.
Sharʿi Ruling
Al-ḥamdu lillāh, waṣ-ṣalātu wa-s-salāmu ʿalā Rasūlillāh, ʿAmma Baʿd!
1. Permissibility of Partnership
A business partnership based on profit and loss sharing, such as establishing a factory, is permissible as long as it is free from interest (ribā), fraud, and deception.
Allah ﷻ says:
﴿وَإِنَّ كَثِيرًا مِّنَ الْخُلَطَاءِ لَيَبْغِي بَعْضُهُمْ عَلَىٰ بَعْضٍ إِلَّا الَّذِينَ آمَنُوا وَعَمِلُوا الصَّالِحَاتِ وَقَلِيلٌ مَّا هُمْ﴾
(Sūrah Ṣād: 24)
2. If All Partners Agree
✿ If all partners mutually agree, they may lawfully allocate a fixed share (e.g., 5%) of profits or capital to the MD.
✿ As the Prophet ﷺ said:
«المسلمون علی شروطهم» – Muslims are bound by their conditions.
(Sunan Abī Dāwūd: 3594, ḥasan; authenticated by Ibn al-Jārūd: 637, Ibn Ḥibbān: 1199; also mentioned by al-Bukhārī before Ḥadīth 2274)
3. If Partners Do Not Agree
✿ If the partners are not satisfied with the MD’s condition or have doubts about it, they have the right to reject it.
✿ The fair principle is that all partners, including the MD, should share profits and losses equally according to investment ratios.
✿ If the MD insists on exclusive benefits without consent, he should leave the project entirely.
4. Sharʿi Principle
✿ The general rule in Sharīʿah is: leave whatever causes doubt or unrest in the heart.
✿ In business, full transparency, consent of all parties, and avoidance of personal benefit from an entrusted position are essential.
ھٰذَا مَا عِندِي وَاللّٰهُ أَعْلَمُ بِالصَّوَابِ
