Risk for Return

Risk for Return

Factors justifying return or profit
1.Work or labour provided
2.Assumption of liability (dhoman) or guarantee (sharikat al-wujuh).
3.Assumption of risk of loss of asset or capital.
4.Alkharaj biddhoman (return for risk of loss).
5.Alghurmu bilghunmi (return for risk of liability)

Sales of goods

1-Transfer of ownership by sales
2-Shariah recognized khiyar (options) to the buyer/seller or both.
Liability on loss caused by ‘act – of – god’ <(marks deducted if this term act of god is used, since all things are act of god. Use natural disaster etc whatever.
The jurist differs in their opinion:
a-To the buyer, (the jurist consider the buyer is the legit owner) so any increment or loss belongs to him.
b-To the seller, (the jurists consider the seller is still the owner since the contract is still not completed).
c-Legal ownership is suspended pending finalization of option;
i.If the disaster happened while the item is still in the seller’s possession, he is to bear any loss or profit
ii.If the buyer has taken delivery, the jurists again differ in opinion:
- according to maliki school, the seller shall bear the consequences since the buyer take possession as a trustee
- for the hanafi, the buyer shall bear the consequences if the option is for his benefit. If the option is for the benefit of the seller, the buyer has to pay the market value, not the original price.
-for shafie school, the buyer is liable to pay the market price if the option is for the benefit of seller or both of them. If the option is for the buyer’s benefit, he has to pay the price to the seller.
-benefit of option comes with readiness to bear the risk.

Mudharabah – profit/loss sharing based on trust

-A type of syarikah
-Trust financing; different from equity or debt financing
-Capital provided by rabbulmal, effort and labor by the mudarib
-Rabbulmal assumes the loss, mudarib bears fault-based
-Profit is shared on pre-agreed ratio
-Guarantee to the capital is not allowed
-If for some reason the mudarabah becomes fasid, the mudarib is entitled for a fair remuneration (ujrat al-mithl).

Musharakah

The issues of preference share
-General rule in musyarakah is: - profit based on agreement, loss based on capital portion
-Preference share gives special treatment to holders in term of:
oPriority in dividend payment
oPriority in capital reimbursement upon dissolution of the company or sharikah @ winding up (partial protection of capital)
-As such, PSs is considered not permissible according to the view of majority comtemporary jurists as the practice is not in line with the risk for return principle.