Is it permissible to convert a merchant's debt to his friend into a share in his business, so that the creditor is given a monthly profit equivalent to investing the debt amount?

A transaction based on making a debt the capital for a Mudarabah (definition) (profit-sharing) partnership is not permissible. There is a near consensus among scholars on this matter. Imam Ahmad explicitly stated this, and most scholars, including Ata, Al-Hakam, Hammad, Malik, Al-Thawri, Ishaq, Abu Thawr, the اصحاب الرأي (scholars of independent reasoning), and Al-Shafi'i, adopted this view. The prohibition is justified because the money in the debtor's possession belongs to him, and it would only become his creditor's upon seizure, but seizure does not occur in this case. It is obligatory for the debtor merchant to repay his debt if he is solvent, and for the creditor to grant him an extension if he is insolvent.