Is Guaranteed Income from Investment Property Company Permissible?
Shafi'i Fiqh
Answered by Shaykh Irshaad Sedick
Question
Suppose I buy an investment property from a company. The company said they guarantee an income of five percent per year for the first five years.
Is it permissible to buy this investment property?
Answer
In the Name of Allah, the Most Merciful and Compassionate. May Allah guide us to the belief and way of life that is pleasing to Him.
Earning a fixed, stipulated, or “guaranteed” return rate on an investment is unlawful in Sacred Law. In legitimate investments, there should always be the potential for profit and the risk of loss, and all investing parties must share these, and Allah knows best.
What is an Investment Property?
According to Investopedia: “an investment property is a real estate purchased to earn a return on the investment either through rental income, the future resale of the property, or both. The property may be held by an individual investor, a group of investors, or a corporation.”
How Does Sacred Law View an Investment Property?
Investing in an investment property appears to take the form of either a musharaka or mudaraba model, both of which are partnerships.
Musharaka is when two or more partners put up capital (money or another fungible commodity) and earn profit /incur loss accordingly.
Mudaraba is when one partner, X, puts up capital while the other, Y, does business with it because X will take a percentage of the profit/loss. [Misri, ‘Umda Al-Salik]
Rules of Musharaka and Mudaraba (Profit-Sharing Models)
The Basic Rules of Musharaka
1. Musharaka or shirka al-amwal is a relationship established by the parties through a mutual contract. First, all the necessary ingredients of a valid contract (according to Sacred Law) must be fulfilled.
For example, the parties should be capable of entering into a contract; the contract must take place with the free consent of the parties without any coercion, fraud or misrepresentation, etc.
But certain ingredients are peculiar to the contract of “musharaka.” They are summarized here:
Distribution of Profit
2. In the Shafi’i School, the proportion of profit to be distributed between the partners must be in proportion to the percentage of capital each party puts up. [Misri, ʿUmda Al-Salik]
In the Hanafi and Hanbali Schools, any proportion agreed upon when effecting the contract is valid. If no such proportion has been determined, the contract is not valid according to Sacred Law. [Keller, Reliance of the Traveler & Usmani, An Introduction to Islamic Finance]
3. Each partner’s profit or loss ratio must be determined in proportion to the actual profit or loss to the business and not in proportion to the capital invested by him. It is not allowed to fix a lump sum amount for any one of the partners or any rate of profit tied up with his investment. [Usmani, An Introduction to Islamic Finance]
Distribution of Profits in the Mudaraba Model
For the validity of ‘mudaraba,’ all parties must agree (at the outset) on a definite proportion of the actual profit entitled to them.
Sacred Law has prescribed no particular proportion; instead, it has been left to their mutual consent. They can share the profit equally or allocate different proportions for the rabb al-mal (financer/owner of the capital) and the mudarib (entrepreneur).
However, they cannot allocate a lump sum amount of profit for any party, nor can they determine the share of any party at a specific rate tied up with the capital.
[Keller, Reliance of the Traveler; Usmani, An Introduction to Islamic Finance]
I pray this is of benefit and that Allah guides us all.
[Shaykh] Irshaad Sedick
Checked and Approved by Shaykh Faraz Rabbani
Shaykh Irshaad Sedick was raised in South Africa in a traditional Muslim family. He graduated from Dar al-Ulum al-Arabiyyah al-Islamiyyah in Strand, Western Cape, under the guidance of the late world-renowned scholar, Shaykh Taha Karaan.
Shaykh Irshaad received Ijaza from many luminaries of the Islamic world, including Shaykh Taha Karaan, Mawlana Yusuf Karaan, and Mawlana Abdul Hafeez Makki, among others.
He is the author of the text “The Musnad of Ahmad ibn Hanbal: A Hujjah or not?” He has served as the Director of the Discover Islam Centre and Al Jeem Foundation. For the last five years till present, he has served as the Khatib of Masjid Ar-Rashideen, Mowbray, Cape Town.
Shaykh Irshaad has thirteen years of teaching experience at some of the leading Islamic institutes in Cape Town). He is currently building an Islamic online learning and media platform called ‘Isnad Academy’ and pursuing his Master’s degree in the study of Islam at the University of Johannesburg. He has a keen interest in healthy living and fitness.
