Invalidity of the Guaranteed Profit without Undertaking any Obligation in Islamic Financial Markets

Abstract

Invalidity of the guaranteed profit without undertaking any obligation, risk or charge (Botlane rebhe ma lam yozman) is an extractive (Estyady) rule derived from the Hadith of the Prophet (PBUH). According to this rule wherever profits or proceeds on capital (money), arise from the contractual relations without undertaking any risk, act or economic activity by the investors, must be considered as usury (Reba), which is absolutely forbidden in Islamic law. A clear example of this rule is guaranteed or fixed rate of interest through interest loans. The rule applies on all fields of financial instrument, securities, options, and debt documents, contracts, banking operations, productions and financial services. In Mudaraba contracts, e.g., parties’ interests (capital, interests entitled by trusteeship, agencies or management services) cannot exclude from the business normal risk. In other words, the agent (the party who manages the business in return of the portion of the acquired profit) cannot be obliged to guarantee the project profitability, or to pay a fixed rate on this business. So, no party can be completely excluded from the risks, or losses arise. Consequently, such damages or losses should be allocated to all parties respectively.

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