Can the debt be considered as capital for a Mudarabah transaction?

In-Depth Analysis

Yaqub is indebted to his old friend Yamin by way of a Qard Hasan (interest-free loan). An amount of US$50,000 was lent by Yamin four years ago for a period of six months to aid Yaqub in coping up with a bit of a crunch situation in his electrical contracting business. The debt has since long become hardcore, or in pure banking terms, 'past due.' Being an old pal, Yamin has exhibited great flexibility to Yaqub in that he has not taken any legal action for the recovery of the amount. However, it is about time that this age-old unwarranted chapter is closed in the books of Yamin since his wife keeps reminding him to recover the amount from his friend. As such, a meeting is called wherein Yaqub submits a proposal that Yamin should consider converting the debt as the Mudarabah capital which shall also entitle him to claim the profit in Yaqub's business. After discussing the proposal at home, Yamin conveys his consent and a Mudarabah contract is signed between the two parties. A year passes and there is no news from Yaqub. Yamin calls Yaqub expecting by now the financial year must have been closed and Yaqub shall be preparing a cheque being his share in the profit. To Yamin's utter surprise, he comes to know through the accountant that they closed the year in a loss situation which has been debited to the equity account thereby eroding it by about 30%. This translates to Yamin washing his hands of US$15,000. He realizes the mistake of converting the debt of US$50,000 into Mudarabah capital and losing a chunk of it in the very first year. Yamin discusses the situation with a friend working in the same Islamic bank where he has an account so as to understand if there is any way to restore his claim against Yaqub to the original amount of US$50,000. After listening to Yamin and examining the Qard Hasan document and the recently signed Mudarabah contract, the respected sheikh gave the Fatwa that the Mudarabah contract is void and the parties (Yamin and Yaqub) are restored to the pre-Mudarabah contract status — in other words, the sheikh scrapped the Mudarabah arrangement between the parties and reinstated their original relationship of a debtor and a creditor. The sheikh explains the basis of his Fatwa: the Mudarabah capital must be available as a fresh amount in cash or an asset at the time of conclusion of the Mudarabah contract so that it can be utilized to start the agreed investment transaction; the capital cannot be an amount or asset which had already been deployed in the past; the debt owed by Yaqub was the receivable for Yamin and was not available for deployment; considering a debt as capital leads to involvement in potential interest or usury; and Shariah requires capital to be applied for new transactions of economic development which a debt cannot fulfill.