The Ruling on Profit and loss Accounts

Dr. Monzer Kahf, a prominent economist and counselor, said:

Profit/loss sharing accounts are based on the Mudarabah contract that is compliant with Shari`ah. Its essential idea is that one may earn return if one owns a property that produces added value or creates profit. The relationship between the investor and the manager is a partnership one. The manager takes a percentage of the profit if and when a profit exists. The owner of course takes the remaining percentage. In this contract the investor remains the owner of the money and the owner of assets purchased with that money. This is what justifies earning profit because profit is an increase that is generated in the property owned by the investor.
On the other hand, in any scheme that is based on lending, (conventional bank deposits) the loan contract transfers ownership. The lender becomes an owner of a debt on the borrower unlike the case of profit and loss accounts. In this case, the borrower becomes the owner of cash (and at the same time a debtor to the lender). Consequently any value created in this money (by means of buying goods/assets and selling them or selling their products) is thus the property of the borrower and the lender cannot make any claim on this increment that is owned solely by the person who owned the property that creates the increment/value. This means that there is a pre-fixed and this pre-fixed return in the scheme is a return on a loan that is guaranteed too (because this is implied in giving a fixed increment above the principal). This return is pure Riba (interest) indisputably, and there is not a single Shari`ah scholar who knows what Riba is can claim that this pre-fixed return above guaranteeing the principal is any thing other than Riba. By the way, only very few Muslim countries have such a scheme, it does not exist in most of Africa and the Middle East, only in some Asian countries.”