The Correct Concept of Al-kharaj Bi Al-daman

A man once came to the Messenger of Allah (PBUH) for judgment. Aishah (RA) narrates:

أن رجًلا ابتاع غًلماا فأقام عنده ما شاء هللا أن يقيم، ثم وجد به عيباا فخاصمه إلى النبي(PBUH) فرده عليه، فقال الرجل: يا رسول هللا، قد استغل غًلمي، فقال رسول هللا(PBUH): “الخراج بالضمان“. A man purchased a slave who remained with him for some time as Allah willed. Later, he discovered a defect in the slave and brought the case before the Prophet (PBUH). The Prophet (PBUH) returned the slave to the seller. The buyer then said, ‘O Messenger of Allah, he has benefited from my slave.’ The Prophet (PBUH) replied: ‘Profit is due with responsibility.’ (Abu Dawud, No. 3510)

In Arabic, the root meaning of daman (ضمان) is to assume responsibility.³⁵ Lexicographers explain it as al-kafalah wa al-iltizam—that is, suretyship and commitment. Accordingly, the meaning of al-kharaj bi al-daman in this context is that while the slave was under the buyer’s possession, his food, care, and protection were all the buyer’s responsibility. Justice therefore required that the profit gained during that period also belong to him, for the benefit was a direct and necessary outcome of that responsibility.

This narration, in its original context, was simply a judicial ruling in one particular case. However, later jurists, following their own methods of reasoning, treated it as a general legal maxim. They understood daman here to mean liability for loss, and on that basis derived the principle that the right to profit belongs only to the one who bears the risk of loss. From this interpretation, Hanafi jurists such as Imam al-Sarakhsi and Imam al-Kasani formulated the rule that any financial transaction in which one party does not assume any liability for loss amounts to earning profit on capital alone, which, in their view, constitutes riba (usury).

In our view, this interpretation is questionable on two counts:

First, the jurists restricted the meaning of daman merely to financial loss. Linguistically, however, the term fundamentally signifies taking responsibility. Bearing a loss is only one possible manifestation of that responsibility, not its defining essence. To present it as the primary meaning of the word is to impose one of its logical applications upon the original sense. In reality, the nature of daman varies with each contract:

• In a loan, it refers to the obligation to repay the debt. • In a trust (amanah), it signifies care and safekeeping. • In a sale, it refers to the mutual obligations stipulated between the parties. • In the present Hadith, it pertains to the responsibility for maintenance and protection.

Thus, every transaction defines its own form of “responsibility” in accordance with its nature. It is therefore incorrect—both linguistically and contextually—to universalize one specific form of daman and treat profit as necessarily dependent upon bearing loss.

Second, the jurists applied the maxim al-kharaj bi al-daman to the contract of mudarabah (partnership of capital and labor) and, on that basis, held that the financier (rabb al-mal) bears liability for loss. Since, in their reasoning, profit is always tied to liability, they concluded that the financier is the rightful recipient of profit. But in reality, both parties in a mudarabah assume distinct forms of responsibility:

• The financier undertakes to provide the capital. • The entrepreneur (amil) undertakes to safeguard and employ that capital productively.

Since the amil assumes operational responsibility, any loss in trade naturally falls upon him. Hence, the profit arises from the mutual fulfillment of both responsibilities—the financier’s provision of capital and the entrepreneur’s management and care.

It therefore becomes evident that confining al-kharaj bi al-daman merely to the notion of bearing loss is inconsistent with the Arabic language, incompatible with the context of the narration, and incongruent with the intrinsic logic of contractual responsibilities.