5 months ago
Variable vs. Fixed Returns in Halal Investing
I notice some pools have 'fixed' returns (e.g., Murabaha) and others are 'variable' (e.g., Mudarabah). How can a return be fixed without it being Riba? Doesn't that mean it's guaranteed?
10 Answers
Excellent question. This is a crucial distinction. In a Murabaha (cost-plus sale), the 'fixed return' is actually pre-agreed *profit* on the sale of a real asset. For example, we buy a machine for $100 and sell it to you for $110 on credit. That $10 is our profit from a trade, not interest on a loan. The amount is fixed because the sale price is fixed. It's not a return *on money*, but a return *on a sale*. A Mudarabah's return is variable because it's a share of the *actual profit* generated by the business, which can go up or down.
JazakAllah Khair, that is crystal clear. The key is the underlying transaction being a trade, not a loan. Thank you!
Think of it this way: Murabaha is like selling a house for a fixed price. You know exactly what you'll get. Mudarabah is like renting the house out - your income will vary based on tenants and expenses.
Sounds like a semantic game to me. A fixed return is a fixed return.
The semantics are the foundation of the contract's nature. Is it a loan of money or a sale of goods? They are fundamentally different transactions with different risk profiles. In a Murabaha, the financier takes ownership risk of the asset before selling it. That risk justifies the profit. In a loan, there is no such risk.
So you take 'risk' for the 5 minutes you own the asset before flipping it? Come on.
The duration of ownership is irrelevant. If the asset were destroyed in those 5 minutes, the loss would be on the financier. That risk, however brief, is what legitimizes the transaction.
I've always been wary of Murabaha for this reason. It feels too close to a loan. I prefer the clear risk-sharing of Musharakah.
Different contracts for different needs. Murabaha is great for asset financing where the user wants a fixed, predictable cost. Musharakah is for equity-style investing where you share in the upside and downside.
That's a great point. It's a toolkit, and you use the right tool for the job.