A Jurisprudential Inquiry into the Legitimacy of Participatory Contracts

Abstract

The rapid expansion of the economy has led humanity to seek mechanisms for pooling small-scale financial resources, uniting capital, and forming participatory companies to optimize the use of assets. In participatory contracts, individuals gather and combine their capital, labor, and credit, thereby creating opportunities for investment and activity aimed at generating profit. Participatory contracts—such as partnership (sharikat), mudaraba, musāqāt, and muzāra‘a—have long existed, and with the growth of societies, they continue to evolve and advance. However, the overall legitimacy of such partnerships has never been fully inferred. This has prompted jurists and legal scholars to examine the barriers and foundations of legitimacy and illegitimacy in participatory contracts, so that an Islamic society may rely on the principles and foundations of these contracts to advance economic development and greater welfare consistent with their jurisprudential rules. In this article, we seek to answer several questions, including whether these contracts are fundamentally aligned with legal principles or contrary to them; and how issues such as gharar (profit whose occurrence is uncertain) and the transfer of nonexistent property (the transfer of profit that has not yet materialized) can be justified within these contracts. Through examining the views of opponents and proponents of the legitimacy of these contracts, we conclude that meeting the economic needs of society requires dynamic ijtihād in jurisprudence. In principle, the Shariah is compatible with the formation of all contracts unless there is an explicit textual prohibition. Regarding participatory contracts, by clarifying and defining the boundaries and elements of participation, gharar can be moderated and transformed into a tolerable and acceptable level of risk.