Investment Agreement in Saudi Arabia: Mudaraba Profit and Loss

You transferred SAR 200,000 to a relative who trades in perfumes, and you agreed on “a percentage of the profit”. For the first six months you received monthly transfers. Then they stopped, and the answer became: “The market is down and the goods are not selling.” You ask for your capital back, and he says: this is investment risk, and the loss is yours.

If the agreement is a mudaraba, the rule in Saudi law is that the owner of the money alone carries any loss of capital. The person working with the money (the mudarib) is liable for it only if he acted wrongfully, was negligent, or broke the limits of the contract. A fixed amount of profit cannot be promised to either of you, and you have the right to information and an account. So the question that decides the dispute is: was the money lost because of the market, or because the worker did something against what you agreed?

Is every “investment agreement” a mudaraba?

No. Article 550 of the Civil Transactions Law defines mudaraba as a contract in which the owner of the money (rabb al-mal) hands money to someone who works with it in return for a share of the profit. This is only one form of investment. In reality you may be a partner who provides money while the other provides money and work, a buyer of shares in a company, or a lender. The legal description depends on the actual rights and obligations, not on the title of the paper.

This difference has a direct effect. If the other party promised to return your full capital plus a fixed amount every month, that does not fit the rules of mudaraba (Articles 557 and 559). If the court decides the agreement is a loan, Article 385 makes void any condition requiring more than the loan to be repaid, so you are left with the original amount only. Municipal “investment contracts” and government land allocation contracts have their own laws and are not covered here.

Mudaraba is one of the participation contracts that Article 528 requires to be in writing, together with any amendment, or it is void. However, this invalidity cannot be raised against third parties, and between the parties it takes effect only from the date a claim based on it is filed. If the person taking your money collects funds from many people to manage them, ask about his licence from the competent regulator before you transfer a single riyal.

What should the contract say about the money and how it is used?

The owner of the money must hand it over and allow the mudarib to manage it (Article 552). Write the amount and the date of handover, and attach the transfer receipt. If you provide goods or equipment instead of cash, the capital is their value at the time of the contract, or according to valuation rules you agree on (Article 551). The capital may also be a debt owed to you by the mudarib himself.

If you limit the contract to a time, place or type of work, the mudarib must keep to it. If the contract is open, he may act according to custom (Article 555). He may not mix the mudaraba money with his own money or hand it to someone else under another mudaraba, unless custom allows it or you authorised him to act as he sees fit (Article 556). So write down the specific activity, the limit for each deal, the operations that need your approval, and the account in which the money is kept.

Is a fixed profit or guaranteed monthly return allowed?

A condition giving either party a fixed amount of profit is not valid (Article 559). Each party's share is set by agreement, for example 60% for you and 40% for the mudarib, and if you did not agree, custom applies (Article 558). But the law allows flexible forms: profit may be shared and anything above a certain level go to one of you; the percentages may change according to the profit made, based on sound rules; or one of you may receive a fixed fee for specific work in addition to his share of the profit.

As a rule, the share of profit is due when the mudaraba ends, unless you agreed to value it and distribute what is due on set dates during it. Anything distributed during the mudaraba is presumed to be from profit, and neither of you may take his share before it is due without the other's consent (Article 560). So the monthly transfers you received may be counted at the final settlement as part of your share of profit. If no real profit was made, how they are counted may be disputed.

You hand over SAR 200,000 for seasonal trade, with profit shared 60% to you and 40% to the mudarib. At the end of the season he sold goods for SAR 290,000 and paid SAR 30,000 of it in shipping and rent.

Net profit after returning the capital is SAR 60,000: SAR 36,000 for you and SAR 24,000 for the mudarib. If some goods remain unsold, the profit is not settled until they are valued, not according to each transfer that came into the account.

The money was lost: when must the mudarib guarantee the capital?

Article 557 is clear: the owner of the money alone carries any loss of capital, and any condition to the contrary is void. The mudarib does not compensate a loss that happened without wrongdoing or negligence. But if he acted wrongfully or was negligent, he must make good the loss of capital and any harm that resulted.

So a loss alone is not enough to make the mudarib pay, and the words “the market lost” are not enough to excuse him. The party making the claim must identify the wrongful act and its evidence: using the money in an activity that was not agreed, mixing it with his own money without permission, a deal above the agreed limit, or clear negligence in keeping the goods. The mudarib must give you information and present an account when the term ends, or at the end of each year if the contract has no fixed term, unless you agreed otherwise (Article 554).

How does the mudaraba end and how do you get your money back?

A mudaraba for a fixed term ends when the term expires, and one made for a specific task ends when the task is completed (Article 561). If it has no fixed term, either party may withdraw, provided he informs the other a reasonable time in advance and does not withdraw in bad faith or at an unsuitable time. In a fixed-term mudaraba, neither of you may withdraw before the end except by applying to the court with acceptable reasons and compensating the other (Article 562).

When it ends, the mudarib must bring the work he started to a point where the money will not be lost or reduced, must not deal with the mudaraba assets after that, and must turn non-cash assets into cash unless the agreement or the nature of the dealing requires otherwise (Article 563). So ask for a stocktake of the goods and receivables and a final account. Then the capital is returned and anything above it is shared.

This is general information based on the official Arabic texts of Saudi laws, which prevail over any translation. It is not legal advice for your specific case.

Practical solutions for both sides

If you are the owner of the money:

• Do not accept a fixed monthly return under the name of mudaraba. Write a percentage of net profit and how it is calculated.
• Set out in writing the activity, the deal limits and the operations that need your approval.
• Require regular reports and a separate account for the money, and keep everything you receive.
• If you doubt a transaction, ask for the account in writing and name the transaction you object to.
• Check the licence of anyone who collects money from the public before you transfer.

If you are the mudarib (the person investing the money):

• Do not promise to guarantee the capital or a fixed profit. Such a condition is void and may lead the contract to be treated as something else.
• Keep the mudaraba money separate from your own, and do not mix them without clear permission.
• Document every deal and invoice. They are your proof that the loss was not caused by your negligence.
• Present the account on time, and do not take your share of profit before it is due without consent.
• If you want to leave a fixed-term mudaraba, agree it in writing or ask the court with acceptable reasons.

Send us the contract or the chats in which you agreed, with the transfer statement, on WhatsApp, and we will work out with you how the agreement is described in law and what can be claimed before you decide your step.