This excerpt is taken from Dr. Yusuf Al-Qaradawi's book Halal and Haram in Islam, translated into Urdu by Muhammad Tahir Naqqash.
Cooperation of Labor and Capital
Some people say that Allah Almighty, according to His wisdom, has bestowed humans with His blessings. Thus, many people have the capability and aptitude for business and trade, but they do not have wealth. Conversely, some others have wealth but lack business skills. The question is, why does the person who has wealth not entrust it to a capable person so that through effort it becomes profitable, and the owner of the wealth shares in the profit in return, so that both can benefit?
In response, we say that Islamic Sharia has never prohibited cooperation between capital and skill, or wealth and labor. Rather, it has established cooperation on the basis of justice and the correct approach. Thus, if the owner of the wealth wants to enter into a partnership with his associate, he must accept the responsibilities of partnership along with all its consequences. For this reason, Islamic Sharia has imposed the condition in such transactions, which jurists call Mudarabah or Qirad, that both parties share in profit and loss, and they mutually agree on the proportion, for example, half or one-third or one-fourth for one party and the remaining share for the other party.
In this way, after the agreement is settled, if there is profit in the business, they will distribute the profit according to the contract. In case of loss, the loss will be deducted from the profit. But if the loss exceeds the profit, it will be deducted from the capital. There is nothing surprising in the fact that the owner of the wealth should bear the loss from his capital because his partner also has to bear the loss of his labor and effort.
This is the law of Islam in this matter. As for the case where the owner of the wealth is given a fixed profit and guaranteed that whether there is profit or loss, he will receive the specified profit, this is explicitly against justice and is equivalent to giving capital undue importance over skill and labor. Moreover, it contradicts the laws of life that provide both profit and loss to humans. It encourages the tendency that income is guaranteed without the need for effort or risk. In reality, this is nothing but wicked usury.
Sayyiduna Abdullah bin Mughaffal (may Allah be pleased with him) says that Thabit (may Allah have mercy on him) believes that the Prophet (peace be upon him) forbade Muzara'ah (sharecropping) and permitted working on rent. He said there is no harm in that.
In Sahih Muslim (page 22 / vol. 5), it is narrated on the authority of Hanzalah bin Qais (may Allah have mercy on him) that he asked Sayyiduna Rafi' bin Khadij (may Allah be pleased with him) about renting out land. Rafi' (may Allah be pleased with him) said that the Prophet (peace be upon him) forbade renting out land. I asked about renting land in exchange for gold or silver, and Sayyiduna Rafi' (may Allah be pleased with him) said there is no harm in that because the prohibition was due to the fact that in the time of the Prophet (peace be upon him), people used to work the land on wages where irrigation was good. Sometimes part of the crop would be lost, sometimes part would remain, so it was prohibited. But when the share of the crop is known, i.e., a fixed portion (half or a third) of the entire produce is determined, then there is no harm.
In one narration, it is said that we used to give land on sharecropping, and we would determine the share of the land, that this is my share and that is so-and-so's. Sometimes one part of the land would produce and the other would not, causing loss, so we were prohibited from that. But if it is done with silver, etc. (i.e., on contract), then there was no prohibition.
I say: This hadith clearly indicates that renting out land is permissible because Sayyiduna Rafi' (may Allah be pleased with him) said that taking land on wages for farming is not harmful, and that renting land for farming in exchange for gold or silver is not harmful. Keep this in mind and then compare it with the author's statement that in the discussion of renting land for cash, he says that not renting land for cash is the transmitted and rationally correct view. Then it will be clear to you what the correct position and thought is and what is wrong. ان شاء الله تعاليٰ
The Prophet (peace be upon him) forbade giving land on sharecropping.
Reference: Muslim, Book of Sales, Chapter on Muzara'ah, Hadith: 1549
That is, such a transaction where one party receives the crop from a specific part of the land or a fixed amount of crop is determined for him because this transaction resembles usury and gambling. It may happen that the production is less than that amount or there is no production at all. In such a case, one party will be entirely in profit and the other entirely at a loss. Obviously, this situation is unfair.
I understand that this corrupt condition of Muzara'ah is based on the consensus of jurists that in Mudarabah, there should not be a fixed profit condition for one party regardless of profit or loss, due to which the Mudarabah transaction is considered invalid. Similarly, the Muzara'ah transaction is also considered invalid. Jurists say: If one party imposes a fixed profit condition of a certain amount of money and the business yields that much profit, it means that the entire profit goes to one party, and it is possible that there is no profit at all. And if more profit is earned, the one who made the fixed profit condition will be at a loss.
Reference: (Al-Mughni - vol. 5, p. 34)
This reason is exactly in accordance with the spirit of Islam. The reality is that all transactions in Islamic Sharia are clear, firm, and based on justice.
Partnership of Investors
Just as it is permissible for an individual to invest their wealth in a lawful activity according to their own will and benefit from it, and also to enter into a partnership (mudarabah) by entrusting their wealth to an experienced and capable person, similarly it is also permissible for investors to collaborate and form a partnership in an industrial or commercial firm or any other business. In fact, many businesses and schemes require many hands, intellectuals, and substantial capital. This need can only be fulfilled through mutual cooperation and partnership. Allah Almighty says:
وَتَعَاوَنُوا عَلَى الْبِرِّ وَالتَّقْوَى
“Cooperate in righteousness and piety.”
Reference: (Surah Al-Ma'idah: 2)
And every act that leads to the welfare of individuals or society or repels evil is a work of righteousness and piety, provided it is done with good intention.
Islam not only permits partnership but also considers it a source of blessing and promises divine assistance in this world and reward in the Hereafter, provided that the partnership business is conducted within the limits of permissibility, completely avoiding interest (riba), deceit, oppression, greed, and betrayal. The Messenger of Allah (peace be upon him) said about such business partners:
يد الله على الشريكين ما لم يخن أحدهما صاحبه فإذا خان احدهما صاحبه رفعها عنهما
“Allah’s hand is over the partners as long as they do not betray one another. But if any partner betrays his companion, Allah removes His hand.”
Reference: Sunan al-Dar Qutni: 3/35, and its chain is weak
The hand of Allah here means His guidance, assistance, and blessing. The Prophet (peace be upon him) narrates from his Lord that He says:
أنا ثالث الشريكين ما لم يخن أحدهما صاحبه فإذا خان احدهما صاحبه خرجت من بينهما وجاء الشيطان
“I am the third partner of two partners as long as one of them does not betray the other. But when one betrays, I withdraw from among them and Satan comes in.”
Reference: Abu Dawood, Book of Sales, Chapter on Partnership, Hadith: 3383; Mustadrak Hakim: 52/2, its chain is weak
