Dr. Monzer Kahf, a prominent economist and counselor states: “Joint venture can take either of two forms: capital and entrepreneurship from both parties; or all capital from one side and entrepreneurship from the other. In both forms, net profit can be distributed in proportions different from the proportion of capital contribution, provided that a party who contributes both capital and entrepreneurship together is not assigned any percentage that is less than the percentage of her/his capital to total capital. In both forms, losses must always be distributed in proportion to capital.

In the second form (that is called mudarabah), expenses that are chargeable to the partnership venture vary according to the nature of the venture. The principle is that any expense that replaces the responsibility of the entrepreneur must be charged to the entrepreneur alone, not to the collective venture.”

For more elaboration on the whole issue of joint venture in Islam, we’d quote the words of the eminent Muslim scholar Sheikh Yusuf Al-Qaradawi in his well-known book, The Lawful and the Prohibited in Islam:

“Partnership Between Capital and Labor: It may be said that Allah Subhanahu wa Ta’ala has distributed talents and wealth among human beings according to a wise plan of apportionment. We find many a talented and experienced individual who does not possess much wealth or none at all, while others have a great deal of money but little or no talent. Why, therefore, should not the wealthy person turn over to the one possessing talents some of his wealth to invest in a profitable business, so that the two may benefit from one another and share the profits according to some agreed-upon formula? In particular, business ventures on a large scale require the cooperation of many investors. Among the populace we find a large number of people who have savings and excess capital but who lack time or the capability of investing it. Why should not this money be pooled and placed under the management of capable people who will invest it in significant, large-scale projects?

We maintain that the Islamic Shari`ah did not prohibit cooperation between capital and management, or between capital and labor as these terms are understood in their Islamic legal sense. In fact, the Shari`ah established a firm and equitable basis for such cooperation: if the owner of capital wishes to become a partner with the working man, he must agree to share all the consequences of this partnership. The Shari`ah lays down the condition that in such a partnership, which is called al-mudarabah or al-qirad, the two parties should agree that they will share the profit if there is profit and loss if there is loss in a proportion agreed upon in advance. This proportion can be one-half, one-third, one-fourth, or any other proportion for one party and the remainder for the other party. Thus the partnership between capital and labor is that of two parties with joint responsibility, each having his share, whether of profit or loss, and whether much or little. If, in the balance, the losses exceed the profits, the difference is to be charged against the capital. This arrangement is not surprising, for while the owner of the capital has suffered a loss in his wealth, the working partner has lost his time and effort.

This is the law of Islam concerning partnership contracts. Conversely, were the owner of the capital to be guaranteed a fixed profit on his capital regardless of the magnitude of the profit or loss, it would be a clear violation of justice and a bias in favor of capital against investment experience and labor; it would also be contrary to the realities of investment, which always contain elements of risk. To guarantee profit to the person who did not toil or take any risk is the very essence of abominable riba (interest).

The Prophet (peace and blessings be upon him) forbade the type of partnership on cultivable land which was known as al-muzara`ah (a type of share-cropping) (reported by Muslim), in which the contract would give one partner the produce of a specified area of a farm or a fixed amount of grain. He prohibited this because such a transaction is similar to riba (interest) or gambling, for if the farm produced less than the specific amount or nothing at all, one partner would still get his share, while the other would suffer a total loss, which is contrary to justice.

The explicit hadith invalidating this type of share-cropping because of this condition is, in my opinion, the basis of consensus among jurists that no partnership is valid which specifies a fixed profit for one partner in every case, regardless of whether or not the investment was profitable. They say, “Suppose one of the partners makes a condition that he is to receive a specified amount of money. In case the profit does not exceed that amount, he would receive the entire profit, and even if there is no profit, he would receive that much; on the other hand, if the profit is large he will be hurt by the condition of getting only the specified amount.” (In his treatise, Al-Islam wa Mushkilatin al-Mu`asirah [Islam and Contemporary Problems], Dr. Muhammad Yusuf Musa quotes Sheikh Muhammad `Abduh and Sheikh `Abdul Wahhab as disagreeing with the jurists concerning partnership contracts. They argue that this has no basis in the Qur’an and the Sunnah. With due respect to their opinions, I maintain that the analogy to [this type of] share-cropping is sufficient to apply it to other partnershi
ps. But Allah knows best.) This reasoning is in accordance with the spirit of Islam, which bases all human affairs on clearly defined principles of justice and fairness.

Partnership Among Owners of Capital

Just as it is lawful for the Muslim to use his own wealth for any permissible purpose or to give it to a capable, experienced person to invest in a joint venture, it is also lawful for him to pool his capital with the capital of others for investment, trade, or any lawful business ventures.

There are all kinds of activities and projects, some requiring intensive labor, others intensive mental expenditure, and still others large capital. By themselves individuals may not be able to accomplish much, but when joined with others, they can achieve many things. Allah Most High says,“…and help each other in righteousness and God-consciousness.” (Al-Ma’idah: 2)

Any deed which produces good results for the individual or society, or which removes some evil, is righteousness, and a righteous deed becomes piety if a good intention is added to it. Islam is not content with merely allowing such joint endeavors but encourages and blesses them, promising Allah’s help in this world and His reward in the Hereafter as long as these endeavors are within the sphere of what Allah has made halal, far removed from riba (interest) and from ambiguity, injustice, fraud, and cheating in any form. In this connection the Messenger of Allah (peace and blessings be upon him) said, “Allah’s hand is over two partners as long as one of them does not cheat the other, but when he cheats his partner, He withdraws it from both.” (Reported by Ad-Darqutni.)

“Allah’s hand” refers to His help, inspiration, and blessing. The Prophet (peace and blessings be upon him) also stated in a qudsi (divine) hadith that Allah, the Great and Glorious, says, “I make a third with two partners as long as one of them does not cheat the other, but when he cheats him I depart from them.” (Reported by Abu Dawud and by Al-Hakim, who calls it sound.) Razi’s version adds, “and Satan comes.” (Reported by Razi in his Jami`ah.)”