Let us try to understand today’s question through an interesting story.
Yaqub is indebted to his old friend Yamin by way of a Qard Hasan (interest-free loan). An amount of US$50,000 was lent by Yamin four years ago for a period of six months to aid Yaqub in coping up with a bit of a crunch situation in his electrical contracting business. The debt has since long become hardcore, or in pure banking terms, ‘past due’. Being an old pal, Yamin has exhibited great flexibility to Yaqub in that he has not taken any legal action for the recovery of the amount.
However, it is about time that this age-old unwarranted chapter is closed in the books of Yamin since his wife keeps reminding him to recover the amount from his friend. As such, a meeting is called wherein Yaqub submits a proposal that Yamin should consider converting the debt as the Mudarabah capital which shall also entitle him to claim the profit in Yaqub’s business. After discussing the proposal at home, Yamin conveys his consent and a Mudarabah contract is signed between the two parties.
A year passes and there is no news from Yaqub. Yamin calls Yaqub expecting by now the financial year must have been closed and Yaqub shall be preparing a cheque being his share in the profit. To Yamin’s utter surprise, he comes to know through the accountant that they closed the year in a loss situation which has been debited to the equity account thereby eroding it by about 30%. This translates to Yamin washing his hands of US$15,000. He realizes the mistake of converting the debt of US$50,000 into Mudarabah capital and losing a chunk of it in the very first year.
Yamin discusses the situation with a friend working in the same Islamic bank where he has an account so as to understand if there is any way to restore his claim against Yaqub to the original amount of US$50,000. The bank staff arranges Yamin’s meeting with one of the Shariah board scholars.
After listening to Yamin and examining the Qard Hasan document and the recently signed Mudarabah contract, the respected sheikh gave the Fatwa that the Mudarabah contract is void and the parties (Yamin and Yaqub) are restored to the pre-Mudarabah contract status. In other words, the sheikh scrapped the Mudarabah arrangement between the parties and reinstated their original relationship of a debtor and a creditor.
Yamin takes the Fatwa to Yaqub whose face drops upon reading the verdict. However, he comes up with a gem of an excuse which is that since Yamin maintains a healthy account relationship with the Islamic bank, he has been given the Fatwa as a special favor. This frustrates Yamin who requests his banker friend to intervene. The friend arranges the meeting of both parties with the respected sheikh who had issued the Fatwa.
The sheikh explains the basis of his Fatwa as follows:
• The basis for not allowing an old debt owed by Yaqub to Yamin as the Mudarabah capital is because, as a Shariah principle, the Mudarabah capital must be available as a fresh amount in cash or an asset at the time of conclusion of the Mudarabah contract so that it can be utilized to start the agreed investment transaction/project.
• In other words, the Mudarabah capital cannot be an amount or asset which had already been deployed in the past in the business. Thus, a debt owed by Yaqub fails to meet this requirement since the borrowed amount was already used by Yaqub in the business four years ago.
• This amount is the receivable for Yamin and was not available for deployment by Yaqub in the business when the Mudarabah contract was concluded.
• Considering a debt as capital of Mudarabah leads to the involvement in potential interest or usury. This is because the creditor (Yamin) may be suspected of having extended the debt tenure in order to get additional consideration (ie Mudarabah profit which is tantamount to interest) from the debtor (Yaqub) under the guise of a Mudarabah contract.
• Also, Shariah requires the capital to be applied for new transactions of economic development which a debt cannot fulfill.
• This is also to protect the interest of the creditor (Yamin) since by doing so, the debt (which is a liability or the credit risk by Yamin on Yaqub) shall get converted into capital (which shall not be a liability on Yaqub but an equity risk by Yamin), thereby absolving the debtor (Yaqub) of his liability toward the creditor (Yamin).
Yaqub was speechless at such an elaborate explanation by the sheikh and with his own pen, put a big cross on his copy of the so-called Mudarabah contract. He agreed before the sheikh that he would certainly return the entire amount of US$50,000 borrowed by him from Yamin within a month’s time by selling his downtown property.
The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinions of the Dubai Islamic Economy Development Centre, nor the official policy or position of the government of the UAE or any of its entities. The purpose of this article is not to hurt any religious sentiments either consciously or even unwittingly.
Next week: I hope you have enjoyed the story. See you next week with some other interesting points on Mudarabah.