Partnership and Taking out an Interest-Based Loan

Taking out an interest-based loan in order to finance a business is decisively prohibited and sinful in Shariah, because of the many texts found in the Qur’an and Sunna in this regard. No sin has been given a more severe warning, with a declaration of war from Allah Almighty and His beloved Messenger (Allah bless him & give him peace) to those who involve themselves in this evil act. As such, it is not allowed for one to borrow money from a bank on interest regardless of whether one borrows the money for a personal need or to set up a business.

It should be noted, however, that the main reason for the prohibition of taking out an interest-based loan from a conventional bank is the actual giving and taking of interest. The basis of this prohibition is not the source of the loan. If one was to take out an interest-free loan from a conventional bank, then that would be permissible. Scholars explain that not all the money stored in a conventional bank is interest and filthy money; rather, money stored in a bank comprises of the depositors depositing their money in various accounts, capital invested by the owners of the bank and also interest money. In fact, the proportion of non-interest money is usually more in comparison to interest money.

This explanation should answer your query as regards to why contemporary scholars permit taking out a loan from a conventional bank if it is based on Islamic principles of financing. Remember, borrowing money from a conventional bank does not become unlawful merely because it is a conventional institution where the source of income is haram, but rather on the actual agreement of interest. If the loan taken is interest-based, it will be haram and sinful, and if it is interest-free, it is halal, provided no other principle of Shariah is violated.

Keeping this in mind, it would be unlawful and greatly sinful for your friend to take out an interest-based loan for his business project. Similarly, it will not be permitted for you to be a partner with him in this business. You state that most likely he will be taking out an interest-based conventional loan, thus if you invest with him and become a partner in his business, you will also be guilty of the sin of Riba.

According to Shariah, all the partners in a business partnership are considered to be agents (wakil) of one another, since all policy-decisions are taken with the consensus of all the partners, and each partner has a veto power with regards to the policy of the business. As such, all the actions of a partnership are rightfully attributed to each partner. (See: Mukhtasar of Imam al-Quduri, 2/56)

As a result, If you were to invest in your friend’s business project and he takes out a interest-based loan, it will be as though you have, as an agent, given him the permission to take out this loan. The sin of being involved in Riba will apply to you as much as it will apply to him.

Therefore, until you are not convinced that your friend will refrain from taking out a conventional interest-based loan, it will not be permitted for you to be part of his business project. Even after you invested your money in the project, you came to know that he intends taking out such a loan, you will have to oppose him, otherwise walk out of the partnership.

Finally, it would be wise for you to explain to your friend that it is highly sinful for him to take out an interest-based loan. Remind him of the many texts found in the Qur’an and Sunna in this regard. He should try and look for halal alternatives to finance his business, for which he may refer to an Islamic bank or financial institution.

And Allah knows best