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http://www.daruliftaa.com/question.asp?txt_QuestionID=q-19540138

Partnership and Taking out an Interest-Based Loan

Question #: q-19540138

Date Posted: 2006-06-14

QUESTION

A friend of mine does real-estate business with conventional mortgage. Recently he has

found a great opportunity and I want to be a part of it, too. However the Islamic institutions

are unable to provide us with a shariah compliant loan.

I would like to know if it is haram if I invest with him (just as an investor in the project)without worrying how he gets the loan (which I know will most likely be conventional), and

share the profit/loss with him. Honestly (and Allah knows best) my intention is to do

business purely without interest (not even with the partner like in this case) in future but I

need to start somewhere. My friend has asked me to find out from my mufti/scholars and let

him know if I am interested. He will be doing this with or without me.

If your answer to the above is "yes, it is haram" then I would like to know how is it different

than doing Islamic financing from banks such as DevonBank or BroadwayBank in the US,

which are approved by most Mufti hazrats, when these banks mostly do conventional

banking and the money they lend for Islamic financing also comes from unlawful sources. In

that type of Islamic financing also, they become joint owner of the house with us like in thiscase.

ANSWER

In the name of Allah, Most Compassionate, Most Merciful,

Taking out an interest-based loan in order to finance a business is decisively prohibited and

sinful in Shariah, because of the many texts found in the Qur'an and Sunna in this regard. No

sin has been given a more severe warning, with a declaration of war from Allah Almighty

and His beloved Messenger (Allah bless him & give him peace) to those who involve

themselves in this evil act. As such, it is not allowed for one to borrow money from a bank

on interest regardless of whether one borrows the money for a personal need or to set up a

business.

It should be noted, however, that the main reason for the prohibition of taking out an

interest-based loan from a conventional bank is the actual giving and taking of interest. The

basis of this prohibition is not the source of the loan. If one was to take out an interest-free

loan from a conventional bank, then that would be permissible. Scholars explain that not all

the money stored in a conventional bank is interest and filthy money; rather, money stored ina bank comprises of the depositors depositing their money in various accounts, capital

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invested by the owners of the bank and also interest money. In fact, the proportion of non-

interest money is usually more in comparison to interest money.

This explanation should answer your query as regards to why contemporary scholars permit

taking out a loan from a conventional bank if it is based on Islamic principles of financing.

Remember, borrowing money from a conventional bank does not become unlawful merelybecause it is a conventional institution where the source of income is haram, but rather on

the actual agreement of interest. If the loan taken is interest-based, it will be haram and

sinful, and if it is interest-free, it is halal, provided no other principle of Shariah is violated.

Keeping this in mind, it would be unlawful and greatly sinful for your friend to take out an

interest-based loan for his business project. Similarly, it will not be permitted for you to be a

partner with him in this business. You state that most likely he will be taking out an interest-

based conventional loan, thus if you invest with him and become a partner in his business,

you will also be guilty of the sin of Riba.

According to Shariah, all the partners in a business partnership are considered to be agents(wakil) of one another, since all policy-decisions are taken with the consensus of all the

partners, and each partner has a veto power with regards to the policy of the business. As

such, all the actions of a partnership are rightfully attributed to each partner. (See:

Mukhtasar of Imam al-Quduri, 2/56)

As a result, If you were to invest in your friend's business project and he takes out a interest-

based loan, it will be as though you have, as an agent, given him the permission to take out

this loan. The sin of being involved in Riba will apply to you as much as it will apply to him.

Therefore, until you are not convinced that your friend will refrain from taking out a

conventional interest-based loan, it will not be permitted for you to be part of his business

project. Even after you invested your money in the project, you came to know that he

intends taking out such a loan, you will have to oppose him, otherwise walk out of the

partnership.

Finally, it would be wise for you to explain to your friend that it is highly sinful for him to

take out an interest-based loan. Remind him of the many texts found in the Qur'an and

Sunna in this regard. He should try and look for halal alternatives to finance his business, for

which he may refer to an Islamic bank or financial institution.

And Allah knows bestMuhammad ibn Adam

Darul Iftaa

Leicester , UK