Tournaments and Prizes
These days we find that there are different kinds of tournaments. In some tournaments, every team pays a fee, which goes into a "pot," and the winning team takes all that is in the "pot." In other tournaments, all teams pay except for one, and again, the winning team gets all of the money, or at least most of the money, with the second and third place teams getting the rest. And then there are sporting competitions, wherein the different competitors pay absolutely no fee, with an outside entity paying for the prizes that go to the winners and runner-ups. Which of these is permitted in Islaam?
When an outside entity, i.e. not one of the competitors, pays for the prize that goes to the winners of a tournament, then this does not fall under the category of gambling which is forbidden. But if a competition consists of two teams or more, with each team paying a fee, and with the total amount going to the winners, then this is a form of the gambling which is unlawful, as Allaah Almighty said:
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O you who believe! Intoxicants (all kinds of alcoholic drinks), gambling, AlAnsâb, and AlAzlâm (arrows for seeking luck or decision) are an abomination of Shaitân's (Satan) handiwork. So avoid (strictly all) that (abomination) in order that you may be successful. [Al-Maa'idah 5:90]
The third kind of competition you mentioned - wherein one team does not pay a fee - is permissible in three kinds of sports only: archery, camel racing and horse racing. These are permissible because they all involve skills needed for Jihad. The Messenger of Allaah sallAllaahu 'alayhi wa sallam said,
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"There is no competition except in three: archery, camel racing and horse racing."[Reported by Abu Dawud 2574, At-Tirmtithi no.1700. and An-Nasai' no.3616.]
Therefore this kind of competition is forbidden for all other sports.
Shaykh Muhammad bin Saalih al-`Uthaymeen
Fatawa Islamiyyah vol.8 p.258