BENEFIT 1: Profit and Loss Sharing Between Two Independent Companies

Question: I have a question about a specific transaction, may you kindly address it. There are two independent parties. Company A is looking to hire a bulk cargo ship for 1 year. Company B is looking to sign a contract with a cargo trader to move their cargo at a specified price and quantity for 1 year (called a Contract of Affreightment). Both companies want to minimise on the market risk. For example, if the price to hire a ship decreases (market), company A loses money, as they will have to sublet the ship at a loss. If price to hire a ship increases, company B loses money, as they will have to pay extra to a shipowner to perform their contract to move the cargo. Is it permissible for both companies to work with each other and come to an agreement that, how much ever the market goes up or down, the Company that benefitted from the market gives part of or their full market linked profit to the Company that lost money from the market? Although both party can’t profit from their main contract to hire a ship and to ship the cargoes, the reason why they would come to this agreement is to (i) reduce risk (ii) increase their market share (iii) profit from operational efficiency, independent of market influences. ___ Sheikh Muḥammad Al-’Ansi ḥafidhahullāh: The issue of one company taking into account the profits and losses of another company, without there being a formal partnership or shared operations between them, [is problematic]. If the two companies are engaged in joint activities and both cater to the same clientele for shared profits and losses—such as operating the same ships, where either ship is sourced from a common origin—then there is no issue. This is akin to an individual using some of their machinery to compensate for the work of other machinery, or engaging in various activities such as land development, real estate sales, and other ventures. In such a case, the individual’s overall profits and work are consolidated, and compensations are internal. However, if the two companies are independent in their operations, such as shipping, trade, imports, and marketing, and there is no shared connection, then it is impermissible under Islamic law for one company to guarantee the losses of another. This applies particularly if both companies belong to Muslims. If such arrangements occur between non-Muslims, we cannot comment on their practices, as non-Muslims do not adhere to Islamic legal principles. For companies owned by Muslims, it is not permissible for one entity to guarantee the losses of another with which it has no partnership or relationship, nor for one company to ensure another’s profitability or indemnify its losses. For instance, if one company profits and compensates another that incurs losses, or vice versa, this arrangement is not valid. Such agreements may lead to disputes and are not justified, especially if treated as binding obligations. This would be considered an unjust practice. However, if the arrangement is structured as a loan—where one company provides compensation as a loan to be repaid without any additional benefits—then this would be acceptable. But agreements aimed at profit-sharing or other similar objectives in this manner are not permissible under Islamic law. And Allāh knows best. Source: https://t.me/madrasatuna/4332 #كتاب_البيوع