Impermissible to guarantee capital in a Mudhaarabah contract

22-1-2014 | IslamWeb

Question:

Assalam o alekum, I invested the money in a mutual fund named "Islamic Principal Preservation Fund". They have the Fatwa from a Mufti saying it is according to sharia. My questions are. 1. Is it Islamic when principal/capital amount is protected/guaranteed. (Profit is not fixed & guaranteed) 2. If it is not who will be responsible for that sin, myself or the Mufti who signed that Fatwa. 3. How an individual can himself check that an Islamic bank or financial institute (Asset Management company, Mutual fund Managers) is doing according to sharia or not. Normally they have Fatwa, can we believe that & proceed.? Or what to do.? Please advise & guide Jazaak Allah Khair Muhammad Irshad

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Answer:

All perfect praise be to Allaah, The Lord of the Worlds. I testify that there is none worthy of worship except Allaah, and that Muhammad is His Slave and Messenger.

It is impermissible to stipulate a guarantee of the capital paid for investment in the Mudhaarabah contract (a form of Islamic equity-based partnership contract, also referred to as profit-sharing). Even if this guarantee is to be paid as a donation on part of the Mudhaarib (the fund manager or body partner in a Mudhaarabah contract), it is still impermissible. That is because including that donation in the Mudhaarabah contract as a guarantee of the capital renders it a binding stipulation that must be fulfilled. The Islamic Fiqh Academy issued a resolution pertaining to Mudhaarabah Sukuk (certificates of equal value evidencing the certificate holder’s undivided ownership in the Mudhaarabah venture). The resolution states the following: “It is impermissible to stipulate in the prospectus of the issue or in the document of Muqaaradhah (Mudhaarabah) Sukook a guarantee for capital or a guarantee for a  profit which is fixed or a percentage of the capital. If the prospectus includes any explicit or implicit statement to the effect of stipulating a guarantee for the capital, such a stipulation is considered invalid and the Mudhaarib is entitled to a profit equal to the profit of a similar investing.”

For more benefit, kindly refer to Fataawa 5160  and 81579.

The mistake of the Mufti in this regard does not deem it allowable for a person to do so nor does it relieve the doer who is aware of the Mufti's mistake of the liability (of such a sin). However, if the person is ignorant of the religious ruling in this regard and adopted the opinion of the Mufti, then he bears no sin for that and the Mufti bears the sin for such a mistake, unless he has a legitimate excuse for issuing his Fatwa.

Therefore, it is impermissible to invest in such a fund, referred to in the question, as long as the prospectus includes the stipulation of a guarantee of the capital. If a person already invested his money in such a fund, some scholars hold the opinion that the Mudhaarabah contract is valid in this case, yet the condition of the guarantee is invalid. Shaykh Wihbah Az-Zuhayli wrote, “If it is stipulated that the Mudhaarib guarantees the capital in case of loss, the condition is considered invalid, yet the contract is valid according to the Hanafi and Hanbali schools of Fiqh.” [Al-Fiqh Al-Islaami wa Adillatuh]

As for the conditions on dealing with the financial institutions that claim following the Islamic Sharee'ah in their transactions, we have highlighted them in Fataawa 90054 and 86266. Accordingly, a Muslim should educate himself about the teachings of his religion so as to know what is lawful and what is unlawful. When a person consults a trustworthy scholar, in whose knowledge and religiosity he trusts, about the permissibility of a given act, there is no harm for him to follow his Fatwa; Allaah, The Exalted, says: {...So ask the people of the message if you do not know.* [We sent them] with clear proofs and written ordinances...} [Quran 16:43-44]

Allaah Knows best.