Islam and Personal Income Sharing Agreements: A Preemptive Strike Before The Coming Revolution

An Income Sharing Agreement (or “ISA”) is a financial vehicle in which an individual or organization gives a fixed amount of money to a recipient who, in exchange, agrees to pay back a percentage of his/her income for a fixed number of years.(1)

For the past five years I have worked on familiarizing consumers in general and the Muslim community in particular with the usefulness of using Income-sharing agreements.

While advocating for Income-Sharing Agreements, like with all new products and ideas, I came across many nay-sayers that questioned the product’s wisdom and fairness.

I will attempt to answer all of the objections I’ve encountered so that the reader is armed with the knowledge they need in case someone tries to convince them that ISAs are unfair or unIslamic.

I received the comments below (In bold) in response to requests for opinion on an income-sharing agreement I set up with my parents. The emails I received are listed at the bottom of this post.

“As described, the scheme is impermissible [in Islam] to execute or market, as it is an exchange contract characterized by riba and major uncertainty.“

The commentator has managed to contradict themselves in the same sentence. On one hand they claim there is major uncertainty and on the other they claim it involves a predetermined return for the use of money (riba). So which is it dude? Is it a predetermined return or an extremely uncertain one?!?

Truth is it’s neither.

In terms of uncertainty, wage levels are more predictable than a particular company’s performance. On any given day the stock price of a company may go up or down but employee wages largely resist responsiveness to market conditions, especially deteriorating ones. Economists call this phenomenon “Sticky wages”. Assuming the commentator hasn’t banned investing in companies because the results are uncertain, he cannot ban investing in wages because they are more predictable than companies are.

To say that it’s riba (interest) is wrong too. Interest is a guaranteed return for the use of money. No return is guaranteed in an income-sharing agreement; only what percentage of the financed person’s income will be shared with the investor. Future wages, while predictable to a certain degree, aren’t knowable ahead of time.

“It appears to be an exchange of money for an indeterminate future income stream. It fails to fulfill the conditions of validity for a currency exchange transaction and violates the conditions of a loan.”

“An exchange of money for an indeterminate future income stream” is a reasonable definition for any financial investment. Let’s hope the commentator understands that investments are not prohibited in Islam. It sure as hell isn’t a currency exchange and it’s not a loan either, this is correct. It’s also not a tree.

“If conceived of as a mudarabah, it fails to meet a basic condition, i.e. that there be defined ratios of *profit* assigned to investor and entrepreneur.”

Hello?? There are defined ratios of profit. The financed shares a fixed percentage of their income with the financier. That’s a defined ratio.

“It can not be conceived of as an employment contract, because it is a money-money exchange, not a money-service exchange.”

It’s not a money-money exchange, it’s an investment! The financier is investing in the financed, not purchasing money from them. And yes, It’s not a traditional money-service exchange either, it’s also not a bicycle.

“You may make a lot when you start your job and you may make nothing if you don’t find a job. This may lead to strained relations between you and your father. Islam has prohibited all kinds of ignorance and uncertainty which may lead to dispute.”

Really? So if I invest money into a business am I supposed to be guaranteed a profit? Wouldn’t it be riba (interest) if I was?

If I enter into a business partnership wherein I provide money and my partner provides labor and we agree to split the profits according to an agreed upon ratio, am I guaranteed how much profit, if any, I will earn? Is it not possible for my relationship with my partner to be strained if things don’t go as planned? Islam never prohibited all kinds of ignorance and uncertainty that may cause dispute. Islam only prohibits ignorance and uncertainty which can be avoided without a major loss of value creation in society. Considering most other personal “Islamic” finance solutions are complete nonsense (e.g. Murabaha), banning income-sharing would deprive Muslim consumers from using the only financing product that actually makes sense.

Is the commentator prepared to ban all partnership contracts in order to be consistent with his spurious claim that Islam prohibits all kinds of uncertainty?

Nowhere in the Quran or the life of the prophet or anywhere in Islam is there anything to substantiate this off-the-wall bizarre claim that Islam bans all uncertainty.

The prophet’s first wife Khadija, hired him to trade for her in Syria. With no guarantees that the prophet, peace be upon him, would return with a profit. It is conceivable that such an arrangement leaves room for the same kind of strained relations the commentator alludes to in their disastrous claim about Islam and uncertainty. So was the prophets agreement with Khadija ill-formed?

Gharar is clear in this contract because the place where the person is going to work is unknown as is there salary, so the amount of uncertainty is too much and corrupts this contract.”

Determining the place or the field where the financed should work creates innumerable problems.

If you determine the company they should work for, that company may go out of business or move or the worker may want to move or be unhappy with their job there or be fired etc.

If you determine the field the person is obligated to work in then similar problems occur. The specified profession may lay off many workers and be hard to find work in e.g. real estate agents in the U.S. during the great recession of 2008. The profession may turn out to be something that the financed doesn’t want to work in. Imagine if a student received financing for their college education, agreed to work in a certain profession and then after graduating finds out they don’t like the field or they like a different field more.

There are countless other problems that arise, like determining the scope of a profession, but you get the point.

So not specifying where the financed should work does not qualify as uncertainty which can be avoided without loss of value and therefore is not gharar. Further, i’m not sure the investor or the financed would gain anything from making such a specification. The structure of income-sharing agreements all but guarantees the financed is going to try to maximize the return for their investor because it’s dependent on their income and who doesn’t want to maximize their own income?

As for the unspecified salary, that’s what makes the contract permissible in Islam! If a salary was specified, then the investor’s return would be predetermined and it would be riba (interest).

Regarding the uncertainty being “too much”, compared to what? what metric was used to determine that it was “too much”? As I mentioned earlier, wages are actually considerably more predictable than companies are. Annual volatility of the S&P 500 is around 20% whereas its only 5% for U.S. household incomes. So if investing in companies isn’t too uncertain, investing in wages definitely isn’t either.

“As for you saying that its not a loan, this requires review on your part, because your father is paying money and expecting money in return. If trade happens among things of the same nature [suggesting that this is an exchange of money for money] then it must be from hand to hand and immediate.”

If a loan is marked by “paying money and expecting money in return”, how does the commentator distinguish between a loan and an investment? Is there any difference between the two in their mind?

Income-sharing agreements are not trades of money. They are an investment of money in the hopes of earning more money. Like any other investment.

“As for your suggestion that this harmonizes the well being of the capital owner and the well being of the skilled worker, or whoever has skills but does not have capital, the Shariah has already proposed a method to do this called Mudarabah. In a Mudarabah contract money is given to someone to trade with it. The work in a mudarabah contract is known i.e. trade and turning it over through selling and buying with the intention of producing a profit. The profits are shared based on agreed upon percentages and the losses are on the capital provider (while the trader loses their effort).”

Great. Consider income-sharing agreements a mudarabah contract where someone is trading in their skills in the hope of making a profit and sharing it with the capital owner. That’s actually a good way of looking at it.

“As for your assertion that the prophet Moses made a similar arrangement wherein he agreed with his future wife’s father to work for him for 8 years and for his future work to be in place of the Mahr [a mandatory payment, in the form of money or possessions paid by the groom to the bride] , this is an erroneous analogy. This is because the work Moses was going to do was known and he was in service of the father for whatever the father asks for. Therefore the object of the contract was the benefit that bride’s father was going to receive from Moses’s work and not an amount of money. The father did not tell Moses to go work wherever you like and give me a share of what you earn, so observe the difference!”

Yes, in Moses’s arrangement, he was working directly for the father whereas the investor in an income-sharing agreement is telling the financed to work wherever they please. So what?

The commentator admits that Moses was “in service of the father for whatever the father asks for”. So assume the father told Moses he has the option of going to the nearest city and working in whatever he wanted to and sharing with him whatever he earns. Is that a violation of the agreement? Quite the contrary, it gives Moses more options.

As for the statement “the object of the contract was the benefit the bride’s father was going to receive and not an amount of money”, there are two things wrong with this statement:

1. Moses’s work could be considered a form of money equal to the amount the father would have had to pay someone to do the same work.

2. Income sharing agreements do not promise an amount of money to the investor. If things go well, the investor does well, if they don’t go well, the investor doesn’t do well. Capiche?

I have had many other correspondences with people who call themselves “scholars” but the objections I’ve mentioned above cover all the ones I’ve heard.

I encourage readers, and the Muslim community in particular, to lead the revolution that will take place shortly in the world of finance wherein interest-bearing debt is replaced with income-sharing agreements.

Email # 1

“1. As described, the scheme is impermissible (i.e. to execute or market), as it is an exchange contract characterized by riba and major gharar.

1.1 It appears to be an exchange of money for an indeterminate future income stream. It fails to fulfill the conditions of validity for a currency exchange transaction and violates the conditions of a loan.

1.2 If conceived of as a mudarabah, it fails to meet a basic condition, i.e. that there be defined ratios of *profit* assigned to investor and entrepreneur.

1.3 It can not be conceived of as an employment contract, because it is a money-money exchange, not a money-service exchange.”

Email # 2

“The description of contract that you have mentioned in your question is not allowed according to the Islamic law for various reasons. For example, the amount of return by you (borrower) is not fixed and known. You may make a lot when you start your job and you may make nothing if you don’t find a job. This may lead to strained relations between you and your father. Islam has prohibited all kinds of ignorance and uncertainty which may lead to dispute.”

Email # 3 [translated from Arabic]

“The arrangement you’ve described requires a thorough re-evaluation because of the existence of gharar which corrupts a contract in Islam. Just as a Muslim investor avoids riba [interest] he must avoid gharar too. Gharar is clear in this contract because the place where the person is going to work is unknown as is there salary, so the amount of uncertainty is too much and corrupts this contract.

As for you saying that its not a loan, this requires review on your part, because your father is paying money and expecting money in return. If trade happens among things of the same nature [suggesting that this is an exchange of money for money] then it must be from hand to hand and immediate.

As for your suggestion that this harmonizes the well being of the capital owner and the well being of the skilled worker, or whoever has skills but does not have capital, the Shariah has already proposed a method to do this called Mudarabah. In a Mudarabah contract money is given to someone to trade with it. The work in a mudarabah contract is known i.e. trade and turning it over through selling and buying with the intention of producing a profit. The profits are shared based on agreed upon percentages and the losses are on the capital provider (while the trader loses their effort).

As for your assertion that the prophet Moses made a similar arrangement wherein he agreed with his future wife’s father to work for him for 8 years and for his future work to be in place of the Mahr [a mandatory payment, in the form of money or possessions paid by the groom to the bride] , this is an erroneous analogy. This is because the work Moses was going to do was known and he was in service of the father for whatever the father asks for. Therefore the object of the contract was the benefit that bride’s father was going to receive from Moses’s work and not an amount of money. The father did not tell Moses to go work wherever you like and give me a share of what you earn, so observe the difference!”

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: