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Al-kharaj bi al-daman refers to benefit from a certain thing is in return for the liability that accompanies that thing.

In other words, the return that one gets should be proportional to the risk assumed. Another similar maxim is gain accompanies loss (al-ghunm bi al-ghurm). Its opposite is (al-ghurm bi al-ghunm) which means that detriment is as a return for the benefit. From the Islamic finance terminology through, al-kharaj bi al-daman is an exposure link to a risk. Meaning to say, someone can claim profit only if someone is ready to bear the business risk, if any. The principle in Islamic jurisprudence that entitlement to return or yield (alkharaj) is for the one who bears the liability (daman) for something, say an asset, and one who does not bear the liability has no claim to the yield. Furthermore, any gain in transactions should observe the liability that comes with the profits.

According to Monzer Kahf and Tariqullah Khan from his survey on the principles of Islamic Finance, he defined Al-Kharaj Bi Al-Daman as entitlement of the return of assets to carry the risks resulting from its possession. It means any benefits lies a liability. According to Mohamed Ali Elgari on Islamic Economic Studies under the title Credit Risk in Islamic Banking and Finance Vol. 10, No. 2, March 2003, Al-kharaj bi al-daman deals with a kind of risk that is inherent in all commutative contracts. This is the risk of destruction of the item prior to its possession by the buyer. The principle al-kharaj bi al-daman is a rule for ensuring justice in relationships between people arising from commutative contracts, while the concept of risk is wider than this and more general. From another aspect, the direct relationship between profit and risk is an established proposition in all financial decisions. As for al-kharaj bi al-daman, it is a legal text that determines the rights of the parties to specific financial dealings and is related to the liability arising from destruction that may afflict the goods that are the subject matter of a contract. Those who uphold this principle have linked the entitlement to profit with the bearing of this liability so that no injustice is caused to one party by the other party.

One of the Shariah concerns regarding this principle is hedging. Hedging is a risk strategy used to limit or offset probability of loss from fluctuation in the prices of securities like a futures contract. However, from the early Shariah opinion, hedging is not permissible and it is violated the principle of al-kharaj bi al-daman.

Besides that, this maxim has a number of interpretations and applications. One sense is that if a party derives the full benefit from an object, then that party should bear the risk of the true owner. In the gratuitous contract of non-fungible loan (ariya), the borrower earns all profits from the loaned property. The maxim then suggests that the borrower should assume the risk of loss. Other contracts such as agency, deposit and pledge also gratuitous, usually do not permit the party holding property (the agent, the bailee, the pledgee) to derive benefit from it. In such cases, the holder not having the profit also does not bear the risk of loss or daman, and remains an amin, trustee, liable not for misadventures but only to abide by the contract and to exercise due care. In partnership, the partner is only amin as to partnership property beyond his share. In contrast, in lease (ijara), since the user has to pay a rental in return for obtaining the benefits from property, the owner continues tobear the risk of loss. Here the rent is seen as the profit, and the risk of loss stays with the lessor; thus the maxim rent and ability for loss do not coincide. These rules affect Islamic banking and finance most in leases and in partnership. For example, the working partner in mudaraba agrees to guarantee the capital of the non-working capital partners, the agreement is void. Since the capital partners investment yields profit, then it must be also liable to loss. The working partner risks only his labor. He becomes liable for capital loss only if he is shown to have been negligent or to have breached the agreement between the parties. Since in leases the tenant cannot be made to bear risk of loss of the property, the provision commonly found in conventional financial leases that imposes all risks on the lessee is unacceptable. In conclusion, to illustrate the concept of al-kharaj bi al-daman in investment, investors need to bear certain risk to gain certain profit from the investment. The higher the risk that investors are willing to pay, the higher gain they will obtain from that investment. However, investors would like to mitigate risk as minimal as possible to gain maximized return. Therefore, they need to find the optimum portfolio from the selected companies. An investor who understands the fundamental principles and analytical aspects of portfolio management has a better chance of earning higher returns. An investor invests his funds in a portfolio expecting to get good returns consistent with the risk that he has to bear. Creation of an optimum portfolio helps to reduce risk, without sacrificing returns.