A friend of mine, thanks to Allaah, owns a commercial enterprise that yields profits. However, my friend underwent financial hardship and, to get over the problem of liquidity, he offered me to partnership in his project for one year. I paid him a sum of money and we agreed that it represents a certain part of the capital of the project, and consequently my share of the profits should be commensurate with my part of the capital. When the partnership year ends, both parties, if we wish, may continue or either of us may end the partnership. In this case, I have the right to restore my full capital that I had paid (which means that the capital is guaranteed) in addition to the profits that have been earned during the year. What is the ruling on this deal?

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, sallallaahu ‘alayhi wa sallam, is His Slave and Messenger.

This deal is, in principle, permissible if it is void of a forbidden condition, namely guaranteeing the capital because this condition will get the deal out the framework of partnership or Mudhaarabah (equity finance) and make it a loan, which if followed by profit or interest, will be forbidden because it is based on interest (Riba). However, this deal has a valid form that might be similar to the forbidden form. That is, the two parties agree not to guarantee the capital during the investment year, and both of them should be liable to loss and profit, each according to his share. At the end of the year, both parties have the option of either continuing the partnership for another period or ending the partnership by taking the capital and the consequent profits of loss.

The forbidden form of the deal is that the two parties agree to invest the sum for one year and, after the year ends, the entire capital is restored even if there has been loss, as well as the profit if there is any. This is an interest-based deal.

Allaah Knows best.