Human Capital Mudarabah allows investors to invest in people’s earning potential. Through HCM agreements, in return for financing, the financed person commits to paying their investor(s) a fixed percentage of whatever they earn for a fixed period of time in which they are fully employed.
The benefits of investing in HCM agreements include:
1. Diversification of investment portfolios.
HCM agreements allow investors to invest in a unique asset class they previously didn’t have access to e.g. computer programmers.
2. Low risk investment.
Returns from HCM agreements are more predictable than equity. S&P 500 companies have an annualized volatility of 20% compared with an annualized volatility of just 5% for U.S. personal incomes. (Source: U.S. Bureau of Labor Statistics).
3. Potential for positive impact on investment.
Investors can positively affect their returns on HCMs through helping advance the careers of whomever they finance. Alternatively, if they had bought a share in Apple stock for example, they would have no opportunity to influence the outcome of their investment.
Using HCM agreements, Muslim investors can adhere to Islam’s prohibition on charging interest while receiving a relatively predictable return.