Introduction to Mudaraba
In this section, we will explore the contract of mudaraba, following the sequence of Imam al-Ghazali, in his renowned work Ihya Ulum al-Din, particularly in the section about al-kasb (earning). Imam al-Ghazali divided six common contracts that people frequently use in business transactions. We have already discussed most of them, and now we turn to the final one: mudaraba.
Mudaraba is classified as a trust-based contract (ʿAqd Amanah). It is a special type of transaction with its own distinct definition and principles. Scholars describe mudaraba as a unique kind of partnership in which one party provides the capital while the other contributes labour and expertise to engage in a commercial venture.
According to Shaykh Taqi Usmani, in his book An Introduction to Islamic Finance, mudaraba is defined as:
“A special kind of partnership where one partner gives money to another for investing in a commercial enterprise.”
An earlier definition by Imam al-Quduri, a scholar of the fourth century Hijri, states:
“Mudaraba is a contract of partnership in profit, with capital from one person and work from the other.”
Hence, mudaraba can be described simply as a profit-sharing partnership. It is an arrangement between two parties, one who possesses capital but lacks business experience, and another who possesses business experience but lacks capital.
Terminology and Usage
In the terminology of fiqh, this arrangement is called mudaraba, especially within the Hanafi school. However, in the Shafi‘i and Hanbali schools, it is commonly referred to as Qirad. Thus, in their books, you will rarely find the term mudaraba; instead, you will find Qirad, though both refer to the same concept.
In essence, mudaraba is a contract between two individuals:
- One has experience but no capital.
- The other has capital but no experience.
These two come together under a shared agreement to engage in trade. Sometimes both may have experience, but in its simplest form, one provides the money, and the other provides the skill.
Conditions and structure
Trust plays a crucial role in this contract. The investor must have confidence in the trader’s honesty and competence. The investor should conduct proper due diligence, asking about the trader’s background, ensuring he has a good reputation and a record free from fraud or dishonesty. Once satisfied, the investor may entrust him with the money.
The capital (raʾs al-mal) in a mudaraba must be in the form of money, either physical or digital. It can also include equivalents widely accepted as currency, such as cryptocurrencies, provided they are recognised by the public.
The division of profits is determined by mutual agreement between the two parties before the transaction begins. In this partnership:
- The person who provides the capital is known as رَبُّ الْمَالِ (rabb al-mal), the owner of the capital.
- The person who engages in trade and business using that capital is known as مُضَارِب (mudarib), the working partner or entrepreneur.
The mudarib manages the business on behalf of the rabb al-mal, and both share the profit according to the ratio they agreed upon at the outset.
Profit sharing and negotiation
In a mudaraba partnership, there are two parties: رَبُّ الْمَالِ (rabb al-mal), the owner of the capital, and مُضَارِب (Mudarib), the working partner who invests and manages the capital. The division of profit between them is determined by mutual agreement.
For example, the Mudarib, being the expert managing the business, may request 70% of the profit, while the Rabb al-Mal receives 30%. Alternatively, they might agree on 50–50, or any other ratio they both find acceptable. This is a negotiable arrangement, and either party has the right to reject terms they consider unfair. If the mudarib insists on a specific percentage, the rabb al-mal may choose not to proceed, and vice versa.
Profit and loss
Both parties share the profit based on the pre-agreed ratio. However, if the business makes no profit, the mudarib receives no payment, and the rabb al-mal regains only his original capital.
One of the essential conditions for the validity of a mudaraba is that the mudarib cannot guarantee the capital. If he does so, the contract becomes invalid. This is because mudaraba is classified as an ʿAqd Amanah (trust-based contract), meaning that the mudarib’s role is based on trust, and his hand over the capital is considered an entrusted hand.
However, if negligence, dishonesty, or misconduct can be proven, such as recklessness, fraud, or misuse of funds, the mudarib then becomes liable for the loss. As the Prophet ﷺ said:
لَا ضَرَرَ وَلَا ضِرَارَ
“There should be neither harm nor reciprocating harm.” (Sunan Ibn Majah)
If the mudarib acted responsibly, followed best business practices, and yet the market conditions caused losses, he is not responsible for the financial loss. In such a case, the rabb al-mal bears the monetary loss, while the mudarib bears the loss of his time, labour, and effort. Both parties therefore experience loss, but of different kinds, one material, one non-material.
Types of Mudaraba
Mudaraba contracts are divided into two main types:
1. Restricted mudaraba (mudaraba Muqayyadah)
In a restricted mudaraba, the rabb al-mal sets specific conditions on how and where the funds should be invested. For example, he may instruct:
“I want you to invest my money in livestock, only in sheep and camels.”
In this case, the mudarib is not permitted to invest in anything outside those conditions. He cannot buy cattle, textiles, electronics, or other products unless explicitly authorised. Restriction ensures that the investment aligns with the owner’s wishes and risk preferences.
2. Unrestricted mudaraba (mudaraba Mutlaqah)
In an unrestricted mudaraba, the rabb al-mal grants the mudarib full discretion to invest in any lawful and profitable area. The investor may say,
“Use your business experience to invest in any profitable venture but avoid excessive risk.”
Here, the mudarib may trade in electronics, vehicles, textiles, or any field that aligns with his expertise and market insight. This flexibility allows the mudarib to seize opportunities across different sectors, provided all activities remain halal and within Islamic business ethics.
Duration and completion of the contract
The mudaraba contract can also be time-bound. The parties may agree that it lasts for six months, one year, or two years, depending on the business cycle. When the term ends, the mudaraba concludes, but if there are still unsold goods or ongoing transactions, the contract continues until those are settled and profits (or losses) are finalised.
There are, of course, additional conditions in classical fiqh governing mudaraba, such as transparency, record-keeping, and adherence to Sharia principles, which ensure fairness and trust between both parties.
Duration and continuation of the contract
In a mudaraba, the two parties may agree on a fixed period for the contract, such as six months, one year, or two years. When this term ends, the mudaraba is considered finished. However, if there are still ongoing transactions or unsold goods, the contract continues until all business activities are completed and profits or losses can be accurately determined.
The rabb al-mal (owner of the capital) may specify a particular area of investment, such as livestock, textiles, or trade in specific goods. In this case, the mudarib (the working partner) must restrict his investments to that agreed area only. Alternatively, the rabb al-mal may leave it open, allowing the mudarib to invest wherever he sees fit, based on his professional judgement, provided all ventures remain halal and ethical.
Agreement on profit distribution
A key condition of mudaraba is that the profit-sharing ratio must be clearly agreed upon at the beginning of the contract. For example, they may agree that the mudarib will take 60% of the profit and the rabb al-mal 40%, or they may agree on 50–50. What matters is that this percentage is set before the business begins.
It is not permissible for the rabb al-mal to demand a fixed monthly return, such as saying, “I gave you £100,000, so I want £10,000 every month.” This is invalid and constitutes riba (usury). Instead, profit can only be a percentage of the actual profit earned through business activity.
For example, it is valid to say,
“I want 30% of the profit,”
but not valid to say,
“I want 10% of my capital as a return.”
The Prophet ﷺ said:
كُلُّ قَرْضٍ جَرَّ نَفْعًا فَهُوَ رِبًا
“Every loan that draws a benefit is riba.” (Bayhaqi, Shuʿab al-Iman)
Hence, any guaranteed or fixed return on capital violates the principles of mudaraba.
In practice, Islamic banks and investment portfolios often achieve returns ranging from 3% to 10%, and occasionally up to 15% under exceptional circumstances. These profits are based on actual business performance, not on fixed interest-like returns.
Clarifying the scope of partnership
It is important to understand that the mudarib is not a partner in the capital itself. His partnership exists only in the profit. For instance, if the rabb al-mal invests £100,000 and the business earns £10,000 profit, only that £10,000 is shared between them according to their agreed ratio, say 60:40.
Thus, the mudarib’s share applies only to the profit, not to the original investment. He has no ownership of the capital, only a right to a portion of the returns it generates.
Market practice and unspecified ratios
If the parties begin a mudaraba without agreeing on a profit ratio, due to oversight or ignorance, the default approach is to refer to customary market practice (‘urf). For instance, if it is widely accepted that the mudarib usually takes 60%, that ratio can be applied. However, scholars emphasise that it is always better to agree explicitly at the outset to prevent disputes later.
Profit-sharing percentages vary according to the nature of the business, the level of risk, and the expertise of the mudarib. Each case may differ based on circumstances and market norms.
Termination of the mudaraba
The contract may be terminated if it has no fixed duration, but if the mudaraba is time-bound, neither party may withdraw before the end of the agreed period.
For example, if they agreed on a one-year term, the rabb al-mal cannot demand withdrawal after six months unless the mudarib consents. If the mudarib already has active contracts and obligations, he is entitled to continue until the end of the period. However, if both parties agree, they may mutually end the mudaraba early.
Mudaraba in Islamic Banking
Modern Islamic banks frequently use the mudaraba model. When depositors place funds into an investment account, the bank acts as the mudarib, and the depositors are the rabb al-mal. The bank invests the pooled funds in Sharia-compliant ventures, and any profit is shared according to a pre-agreed ratio, while losses, if incurred without negligence, are borne by the depositors in proportion to their investment.
This structure reflects the same principles found in classical Islamic jurisprudence, maintaining fairness, transparency, and trust in financial dealings.
Modern application of mudaraba
Not all Islamic banks operate strictly through mudaraba contracts, but whenever a depositor opens a mudaraba-based account, each depositor becomes a رَبُّ الْمَالِ (rabb al-mal), the owner of the capital.
For instance, if you deposit £10,000 or £5,000, you are the rabb al-mal, while the bank acts as the مُضَارِب (mudarib), the working partner. From the moment you sign the account agreement, the bank must clearly state the profit-sharing ratio, specifying what percentage goes to the depositor and what percentage to the bank.
In such arrangements, profits are usually calculated on a monthly, semi-annual, or annual basis, depending on how long the depositor locks their funds. Generally, the longer the investment period, the higher the potential profit, as the mudarib has greater flexibility to engage in more profitable ventures.
This demonstrates how mudaraba has evolved from its classical form, once used mainly in trade, sales, and physical products, to a modern financial model applied in Islamic banking and investment portfolios.
Practical examples
The mudaraba model can still be applied to traditional business ventures. Suppose someone wishes to open a barbershop or a small halal grocery, but lacks the skills or time to manage it. They may know someone with relevant experience who is currently unemployed and lacks capital. In this case, the investor can say:
“I will provide the capital, and you will manage the shop. We will share the profit according to an agreed percentage.”
This arrangement is a valid mudaraba. The mudarib manages the business, pays all expenses (such as rent, electricity, bills, and taxes) from the gross revenue, and then divides the net profit according to the agreed ratio.
For example, if the gross profit is £5,000 but after deducting all expenses the net profit is £2,000, the profit-sharing applies only to the £2,000.
Liability and responsibility
In the course of trade, the mudarib may sell for cash or on deferred payment. However, if the rabb al-mal explicitly instructed,
“Do not sell on deferred payment, only for cash,”
and the mudarib violates this condition, he becomes liable for any resulting losses.
If a deferred payment sale defaults and the mudarib acted against instruction, he must repay the loss from his own pocket. This is because mudaraba is a contract of trust (ʿAqd Amanah), and as the Qur’an commands:
إِنَّ اللَّهَ يَأْمُرُكُمْ أَنْ تُؤَدُّوا الْأَمَانَاتِ إِلَى أَهْلِهَا
“Indeed, Allah commands you to render trusts to whom they are due.” (Surat al-Nisa 4:58)
Thus, violating agreed conditions breaches that trust, and financial accountability follows.
Collateral and pledges
A common question arises: can the rabb al-mal request a pledge or collateral (rahn) from the mudarib, such as his car, property, or valuable assets, to safeguard the investment?
The answer is yes, this is permissible as a precaution, but the collateral may not be used or sold unless the mudarib is proven to have committed misconduct, negligence, or breach of contract. Only in such cases can the pledged assets be sold to recover losses.
This practice is also common among Islamic banks, where the bank acts as rabb al-mal and invests funds through external mudaribs. To mitigate risk, the bank often requests collateral to protect its capital in case of proven misconduct or negligence.
In essence, mudaraba continues to embody the principles of trust, fairness, and shared risk, whether applied in small businesses or large-scale financial institutions.
Guarantees and risk management
In business, some level of risk is inevitable, and losses may occur naturally without fault. However, if the mudarib (working partner) is proven guilty of negligence, misconduct, or violation of agreed conditions, the rabb al-mal (capital provider) has the right to recover his losses from the pledged assets.
Collateral or pledges serve as protection mechanisms to safeguard capital in uncertain situations. These measures are permissible in Islam as a precaution, but they can only be enforced when wrongdoing or breach of trust has been established. As Allah says:
يَا أَيُّهَا الَّذِينَ آمَنُوا أَوْفُوا بِالْعُقُودِ
“O you who believe, fulfil your contracts.” (Surat al-Ma’idah 5:1)
Thus, mudaraba does not resemble interest-based loans, where returns are guaranteed regardless of performance. The spirit of mudaraba is based on trust, transparency, and shared risk, not guaranteed profit or capital protection.
In the case of Islamic banks, the money being invested often belongs to shareholders or depositors, so it is a fiduciary duty to put safeguards in place. Yet even there, any collateral can only be used when misconduct or contractual violation is proven.
Termination of the mudaraba
A mudaraba contract may be terminated in several legitimate ways:
- Expiry of the agreed duration, When the fixed period (for example, one year) comes to an end, the mudaraba concludes automatically.
- Mutual notice, Either party may give notice to end the contract. If the mudarib can sell remaining products or settle existing business obligations within the notice period, the termination is valid. Otherwise, ongoing contracts must be honoured until completion.
- Death of the mudarib, The mudaraba automatically terminates upon the death of the mudarib. It cannot be transferred to his heirs, spouse, or partners.
- Proven misconduct or negligence, If it is shown that the mudarib acted dishonestly or recklessly, the rabb al-mal may terminate the mudaraba to prevent further loss.
These conditions ensure that both sides remain protected while maintaining the ethical integrity of the contract.
Relevance and contemporary use
Although mudaraba is an ancient Islamic contract, its relevance continues in the modern era. It was widely practiced during the lifetime of the Prophet ﷺ and remains a cornerstone of Islamic finance today. Over time, it has been revitalised and adapted to modern business structures, particularly within Islamic banking and entrepreneurial ventures.
Mudaraba offers a powerful mechanism for those with business experience but no capital to partner with investors who have capital but no expertise. It promotes cooperation, reduces inequality, and encourages ethical enterprise. When conducted with mutual trust and clear terms, both parties benefit: the investor gains lawful profit, and the entrepreneur gains the opportunity to rebuild and grow.
Core principle of profit sharing
If a business venture under mudaraba yields no profit, the mudarib receives no payment, and the rabb al-mal simply recovers his capital (if no loss occurred). The Prophet ﷺ’s statement applies here:
الْخَرَاجُ بِالضَّمَانِ
“Entitlement to profit comes with liability for loss.” (Sunan al-Tirmidhi)
This reflects the very soul of the contract, a partnership in profit, not a guaranteed return.
Role of each party
The rabb al-mal is a silent partner. He provides capital but may not interfere with the mudarib’s day-to-day management. If he begins to actively manage the business, the contract is no longer considered a mudaraba, it transforms into another form of partnership, such as musharaka.
Hence, the rabb al-mal must remain non-interfering, allowing the mudarib the freedom to operate within the agreed terms, while both share in the profit or loss in accordance with Islamic principles.
In summary, the mudaraba contract remains an ongoing example of how Islamic finance combines trust, accountability, and social justice. It bridges traditional ethics with modern economic realities.
Contemporary practice of mudaraba
In modern settings, the most common example is when you deposit money into an Islamic bank. The bank acts as the mudarib, investing the money in Sharia-compliant ventures, while you, the depositor, are the rabb al-mal. You remain a silent partner, and the bank conducts the business. Profits are then shared according to a pre-agreed ratio, while the bank takes its share for managing the investment.
Comparison with conventional fund management
This model can appear similar to modern asset management or investment funds, where managers receive a percentage of the profit. The difference, however, lies in the principle of risk and profit-sharing. In mudaraba, both parties share the actual business risk, the rabb al-mal risks his capital, and the mudarib risks his time and effort.
There is no fixed or standard ratio such as “20%” or “2%”. The profit share is determined entirely by mutual agreement, provided it is fair and not exploitative. As the Prophet ﷺ said:
إِنَّمَا الْبَيْعُ عَنْ تَرَاضٍ
“A sale is only valid with mutual consent.” (Sunan Ibn Majah)
Thus, if the Mudarib asks for 70% and the Rabb al-Mal agrees, it is valid, as long as both find the arrangement equitable and transparent.
Salary or payment to the mudarib
The majority of scholars agree that the mudarib does not receive a salary in addition to his share of the profit. His reward is tied solely to the success of the venture. However, the mudarib may legitimately claim necessary expenses, such as travel costs or business-related spending, provided they are within reason.
Some scholars, particularly within the Hanbali school, have allowed limited concessions, permitting a basic allowance for the mudarib in certain cases to cover essential living expenses during long-term projects. But if the mudarib receives a fixed salary alongside profit, he ceases to be a true partner; the nature of the contract changes.
Relationship with modern investment models
At its core, mudaraba is indeed a form of investment partnership. However, Islamic financial institutions may use other structures too, such as wakala (agency), where the investor appoints the bank as an agent rather than a partner.
Both models, mudaraba and wakala, are legitimate under Islamic law, though they differ in how risk and profit are distributed. mudaraba is a profit-sharing partnership, while wakala is a fee-based agency.
So when you see major Islamic investment firms or Sharia-compliant funds such as iShares promoting Sharia-compliant investments, they usually employ one of these two mechanisms: mudaraba or wakala, ensuring that all activities remain free from riba (interest), gharar (excessive uncertainty), and haram sectors.
Summary
In essence:
- Mudaraba remains widely practiced today, especially in Islamic banking and investments.
- It is a silent partnership, where the investor does not interfere in business management.
- The profit ratio is negotiable and must be agreed upon at the start.
- The mudarib usually receives no salary but may cover necessary expenses.
- Modern Sharia-compliant funds often operate through either mudaraba or wakala structures to conform with Islamic ethics and law.
Sharia-compliant investment companies
In recent years, a number of institutions have developed Sharia-compliant investment platforms, making it easier for Muslims to invest ethically and in accordance with Islamic principles. Some of the more established names include:
- Wahed Invest (Wahed) – One of the most recognised global Islamic investment platforms, originally launched in the United States and now active in the UK, Malaysia, and several other countries. Wahed offers diversified portfolios that avoid riba (interest), gharar (excessive uncertainty), and companies involved in haram sectors such as alcohol, gambling, and conventional finance. Their UK office is located near Baker Street in London.
- Oasis Crescent – Based in South Africa, Oasis manages a range of Sharia-compliant funds, including equity, property, and income portfolios. However, investors should always review the fund’s holdings and fee structures carefully, as past criticism has been directed at high management charges and unclear screening of some companies.
- iShares (by BlackRock) – Offers a small range of Sharia-compliant ETFs, usually available through Vanguard, AJ Bell, or other brokers. These funds are screened against Islamic guidelines and follow the Dow Jones Islamic Market Index or FTSE Sharia Index. The selection is limited (around four funds) but provides easy access for UK investors.
- Amana Mutual Funds – An American-based Sharia-compliant investment group run by Saturna Capital. They have long experience in ethical Islamic investing, with funds available to international investors through certain brokers.
- ICD and IIFM-linked Funds – Some products are associated with the Islamic Corporation for the Development of the Private Sector (ICD) and International Islamic Financial Market (IIFM), which support Sharia-compliant investments at a larger institutional scale.
These examples show that Sharia-compliant investing is becoming increasingly mainstream, though still limited compared to conventional markets. Investors should always review each fund’s Sharia screening methodology, fees, and ethical compliance reports before investing.
Guidance on sharia screening
For a fund to be genuinely Sharia-compliant, it must meet the following key criteria:
- No investment in haram sectors – including alcohol, gambling, pork, adult entertainment, arms manufacturing, or interest-based financial services.
- Debt ratios must remain within Islamic limits, typically less than 33% of total assets.
- Interest income or non-permissible gains must be purified through charitable donations.
- Transparent governance – the fund must have a Sharia Supervisory Board (SSB) to oversee and certify compliance.
While there are global standards, notably from AAOIFI (Accounting and Auditing Organization for Islamic Financial Institutions) and IFSB (Islamic Financial Services Board), the reality is that screening can still vary between providers. Some firms remain cautious about naming specific prohibited companies for political or commercial reasons, preferring to adjust quietly behind the scenes.
Mudaraba in non-Islamic contexts
The principle of mudaraba, one party providing capital and the other providing labour or expertise, is not unique to Islamic finance. Similar arrangements exist in conventional business, such as venture partnerships, property development deals, or joint ventures where one partner invests money and another contributes skill or management.
However, what makes mudaraba distinctively Islamic is its ethical and contractual framework:
- There is no guaranteed return or fixed payment to the investor.
- Interest-based financing or debt instruments are excluded.
- The arrangement is grounded in trust (amanah) and risk-sharing, as required by Islamic commercial law.
Thus, even if a conventional joint venture mirrors the structure of mudaraba in practice, it would only qualify as a true mudaraba if it also adhered to Islamic principles, free of riba, gharar, and dhulm (injustice).
In short, mudaraba provides a universal business model based on fairness, transparency, and shared risk, principles that could benefit any economic system, Islamic or otherwise.
Debt finance and leverage in Islam
In conventional finance, leverage refers to borrowing money to amplify potential returns, for example, using £2 million as collateral to borrow £20 million and invest it for profit. However, this mechanism almost always involves interest-bearing loans, which are strictly haram in Islam.
The Qur’an explicitly forbids such arrangements:
يَا أَيُّهَا الَّذِينَ آمَنُوا اتَّقُوا اللَّهَ وَذَرُوا مَا بَقِيَ مِنَ الرِّبَا إِن كُنتُم مُّؤْمِنِينَ
“O you who believe, fear Allah and give up what remains due to you of interest, if you are truly believers.” (Surat al-Baqarah 2:278)
Therefore, any contract that includes or depends upon interest (riba) is impermissible, regardless of how profitable or widespread it may be. Modern leverage, margin trading, and debt-based growth all fall into this category, as they rely on borrowing money with interest and repaying more than was borrowed.
The ethical contrast
Indeed, this is how the modern financial world multiplies wealth, but it is done through riba, speculation, and risk transfer, not genuine value creation. Islam, in contrast, bases finance on real assets, shared risk, and lawful trade. The Qur’an draws a clear distinction:
لَا يَسْتَوِي الْخَبِيثُ وَالطَّيِّبُ وَلَوْ أَعْجَبَكَ كَثْرَةُ الْخَبِيثِ
“The bad and the good are not equal, even though the abundance of the bad may please you.” (Surat al-Ma’idah 5:100)
Muslims may seem at a financial disadvantage when avoiding riba-based systems, but the ethical and spiritual integrity of halal finance brings barakah (divine blessing) and long-term sustainability.
The need for Islamic alternatives
Avoiding interest does not mean isolation or passivity. Muslims are commanded to be active, creative, and competitive within the boundaries of Sharia. The goal is to build halal alternatives, strengthen Islamic financial systems, and promote collective growth.
As the discussion highlighted, the issue is not that the Islamic system is weak, it is that it has not been fully implemented. The system exists in theory; the problem lies in the lack of unified application.
“We have the system, but we don’t have the application.”
To compete globally, the Ummah must act collectively, pooling resources, investing ethically, and creating joint markets. If Muslim nations united their capital, the Islamic financial world could form a powerful independent alternative to conventional systems.
The role of Islamic development institutions
One such effort already exists in the form of the Islamic Development Bank (IDB), established under the Organization of Islamic Cooperation (OIC), which brings together 57 Muslim-majority countries. The IDB’s mission is to provide interest-free development finance, promote trade among Muslim countries, and support Sharia-compliant investment.
In principle, the IDB serves as a halal counterpart to the IMF or World Bank, offering development funding to member nations. However, its impact remains limited because:
- Many Muslim countries still rely heavily on conventional debt financing.
- There is insufficient coordination among Islamic economies.
- Global markets are still dominated by riba-based systems.
Towards a unified Islamic capital market
The ideal long-term solution is for Muslim countries to form a shared financial market, a global Islamic fund where individuals, businesses, and governments can borrow or invest purely through halal means.
Such a system would use models like mudaraba (profit-sharing) and musharaka (joint partnership) rather than debt-based leverage. It would encourage real economic activity, trade, innovation, and entrepreneurship, without the injustice of interest.
Until that vision is realised, Muslims can still invest through genuine Sharia-compliant institutions like Wahed, iShares, Amana, and Oasis, while continuing to advocate for broader, unified Islamic economic reform.
In short, Islamic finance does not forbid growth, it forbids unethical growth. True prosperity, in Islam, comes not through leverage and speculation but through trust, fairness, and shared effort under the blessing of Allah.
The question of stock market investments
Are stocks and shares traded on global markets halal, given that most listed companies operate within a debt-based system? It is true that nearly all public companies, directly or indirectly, rely on interest-bearing loans, credit facilities, or financial instruments that involve riba (interest). This reality makes investing in them ethically complex from an Islamic perspective.
From a purist standpoint, bearer assets, such as physical gold, silver, property, or Bitcoin, are indeed cleaner and more halal forms of investment. These assets have intrinsic value, involve no interest, and are owned outright. The Prophet ﷺ said:
الذَّهَبُ بِالذَّهَبِ، وَالْفِضَّةُ بِالْفِضَّةِ… مِثْلًا بِمِثْلٍ يَدًا بِيَدٍ
“Gold for gold, silver for silver… equal for equal, hand to hand.” (Sahih Muslim)
This hadith reflects the principle of real, tangible exchange, free from speculation and delay, the very foundation of halal trade.
Screening and halal stock criteria
However, Islamic scholars and economists have developed screening criteria to identify shares that, while not perfectly pure, are acceptably compliant within the modern economy. This is how indices such as the Dow Jones Islamic Market Index and the FTSE Shariah Index were established.
These screening systems analyse each company according to three main filters:
- Sector screening – Excluding companies engaged in prohibited industries (alcohol, gambling, weapons, conventional finance, entertainment, etc.).
- Financial ratio screening – Allowing only limited levels of interest-bearing debt (usually below 30–33% of total assets).
- Purification of income – Any small amount of impermissible income must be donated to charity to cleanse the investment.
As a result, some shares can be conditionally halal if they pass these filters. Major technology and healthcare companies, for instance, may appear on Sharia-compliant lists if their core business is halal and their debt exposure is within permissible limits.
Modern Screening Platforms
There are a number of apps and online tools that help Muslims assess whether a company or fund is Sharia-compliant:
- Zoya – A mobile app that screens individual stocks for halal compliance based on AAOIFI standards.
- Islamicly – Another comprehensive app used by many investors for real-time halal screening and portfolio tracking.
- Wahed Invest – Offers fully screened portfolios managed according to Islamic investment principles.
- FTSE Shariah Index and Dow Jones Islamic Index – Official benchmarks listing companies that meet Sharia criteria.
These tools typically rate each stock as green (halal), amber (doubtful), or red (haram). The “amber” zone often includes companies with minor involvement in interest or questionable subsidiaries, requiring extra caution or purification.
The cautionary view
That said, many scholars, especially traditional jurists, remain cautious. Even if screening filters make some shares technically acceptable, the systemic link to riba-based financial markets remains. As you noted, the deeper infrastructure of global finance is inseparable from interest, leverage, and speculation.
The Prophet ﷺ warned that such times would come:
يَأْتِي عَلَى النَّاسِ زَمَانٌ لَا يَبْقَى أَحَدٌ إِلَّا أَصَابَهُ مِنَ الرِّبَا غُبَارُهُ
“A time will come when no one will remain who is not affected by riba, even if only its dust reaches him.” (Musnad Ahmad)
Therefore, the safest approach remains to prioritise real, tangible, and debt-free assets such as:
- Gold and silver
- Property
- Productive businesses (based on mudaraba or Musharaka)
- Halal commodities
- Decentralised assets like Bitcoin, provided they are not used for speculation
Striving for purity and balance
The reality is that absolute purity in today’s financial system is nearly impossible. What Islam requires is that we make the best available halal choice, avoiding what is clearly haram and staying cautious about doubtful matters. As the Prophet ﷺ said:
دَعْ مَا يَرِيبُكَ إِلَى مَا لَا يَرِيبُكَ
“Leave what causes you doubt for what does not cause you doubt.” (Sunan al-Tirmidhi)
So, while halal stock screening offers a practical middle path for Muslim investors, the highest standard remains ownership of real, riba-free assets that carry no trace of interest or debt, embodying the spirit of justice, balance, and self-sufficiency that Islamic finance was built upon.
Bearer ownership and the modern financial system
The question of bearer ownership versus custodial or paper ownership is becoming one of the most critical discussions in both Islamic and conventional finance today. It strikes at the very heart of what it means to own an asset.
When Muslims raise concerns about shares, ETFs, or other financial products, even those labelled Sharia-compliant, they are often pointing out a deeper structural problem: you don’t actually hold your shares in your hand; they are recorded within centralised settlement systems such as DTCC (Depository Trust & Clearing Corporation) in the US or Euroclear in Europe. These institutions act as custodians or intermediaries, and legally, what you own is often just a claim or an IOU within a layered, debt-based system.
From an Islamic standpoint, that is a legitimate concern. True ownership (milk tam) means having direct possession and control over the asset, not a paper promise or digital record that can be frozen, reset, or tokenised.
The Qur’an stresses the principle of clear and lawful ownership:
لَا تَأْكُلُوا أَمْوَالَكُم بَيْنَكُم بِالْبَاطِلِ إِلَّا أَن تَكُونَ تِجَارَةً عَن تَرَاضٍ مِّنكُمْ
“Do not consume one another’s wealth unjustly, except through trade by mutual consent.” (Surat al-Nisa 4:29)
If the system obscures who truly owns what, or allows third parties to seize, suspend, or reassign assets, it naturally creates doubt (shubha) under Islamic law.
Why the concern matters
These systems were built on centralisation, credit expansion, and counterparty risk. When you buy a share through a broker, it is almost never registered in your name directly. It is held in street name, meaning your broker or the clearinghouse is the legal owner, and you have a beneficial interest only.
So, if central banks or regulators shift towards tokenised settlement or programmable money, they could, in theory, freeze or reassign ownership without your consent. That is what many critics, including Muslim thinkers, refer to when they say, “you can be reset.”
In contrast, bearer assets, like physical gold, silver, real property, or Bitcoin held in self-custody, give the owner direct possession. No intermediary, no promise, no counterparty risk. You truly own it.
Balanced view
In principle, bearer ownership is superior and far cleaner Islamically. Gold, silver, property, and Bitcoin are all examples of tamlik haqiqi (true ownership), provided they are acquired lawfully and without speculation.
However, Islamic finance is still developing its infrastructure. The aim is not to copy the Western system with a halal label, but to build parallel systems rooted in genuine ownership, transparency, and fairness.
“We are trying our best to find alternatives and invest in halal and avoid the haram as much as possible. Do we have mistakes and issues to improve? Of course.”
So while we must be cautious of the flaws in centralised settlement, we should also recognise that the Islamic finance community is working toward more decentralised, trust-based models.
The role of Bitcoin and real assets
Bitcoin, when understood and held properly, reintroduces the concept of self-sovereign ownership. Holding it in cold storage (private wallet, not an exchange) means you own it outright, just as you would own a gold coin or a piece of land.
The Prophet ﷺ said:
الْمُسْلِمُونَ عَلَى شُرُوطِهِمْ
“Muslims are bound by their conditions.” (Sunan Abu Dawud)
In that sense, Bitcoin fulfils one of the highest principles of Islamic finance, no counterparty, no riba, no deception, and transparent ledger-based accountability. However, it also carries its own risks (volatility, regulatory uncertainty, misuse for speculation), so education and prudence are essential.
A way forward
The ideal Islamic economy would integrate both:
- Real assets (gold, silver, land, trade goods, and productive ventures).
- Decentralised digital assets (Bitcoin, tokenised halal contracts) that preserve true ownership and eliminate intermediaries.
Until then, Muslims must navigate a mixed system, engaging cautiously with what exists, supporting Islamic alternatives, and continuing to develop halal, bearer-based financial models that restore what the Prophet ﷺ called “trade by mutual consent.”
So the future of ethical Islamic finance will depend on returning to real, decentralised, and accountable ownership, and the rise of technologies like Bitcoin may actually be part of that journey.
Delivered by Shaykh Haytham Tamim on 11th November 2025 to the Convert Club.
Disclaimer: Any financial institutions or companies mentioned in this book are included for informational purposes only and do not constitute endorsements or investment recommendations.
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https://www.utrujj.org/major-principles-in-islam-having-halal-income/
https://www.utrujj.org/major-principles-in-islam-seeking-halal-income-part-2/
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