Is Islamic law biased towards the poor?

Net profit vs sharʿī profit:

Net profit in accounting terms is that which is left over at the end of a financial period after all the variable costs (not the total investment) have been deducted from the revenue. However, in sharīʿah, profit in a partnership is that which is left over after the total capital investment has been deducted from the total revenue at the end of the partnership tenure. This is one of the fundamental rules of partnership and is mainly based on the following hadith.

Projected quarterly profits

The following solution is widely adopted in Islamic finance industry and requires all partners’ understanding and agreement. For clarity, the proposed procedure of this solution is presented in 3 steps to be followed in order. For the sake of this example, let’s increase the investment to 10 million and make the partnership a rent-a-car business instead of uber.

Step 1: Reasonable partnership duration:

Estimate a time that partners (P&R) think is realistically long enough to recover the capital investment and make some profit as well, then set that period as partnership duration. For example, if the average projected net profit is 1500000/quarter, it would take (10000000/1500000= ~6.7) approximately 7 quarters for the business to recover the principal amount of 10 million. This means that the partnership duration should be at least for 2 years (8 quarters).

Step 2: Distribute projected profits on provisional terms:

Carry out the quarterly profit-distribution in the 3:7 ratio as agreed. However, the profit share that P&R receive will not be considered an actual profit share but rather will be counted as a projected profit share paid in advance and will be payable to the partnership in case of loss. This will become clearer in the next step.

Step 3: Calculate profit/loss at maturity on capital-recovery-first principle:

At the end of the 2-year tenure, we will calculate the profit/loss on the basis of capital-recovery-first principle in order to decide if and how much of reimbursement is needed. All three possible scenarios have been illustrated below detailing the method of calculation for each.

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H. Afridi

H. Afridi

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Interested in everything good under (and above) the sun. Seeker of truth. Entrepreneur. Health, environment & grassroots sports enthusiast. Productivity freak