Praise be to Allaah.

Competitions – sporting or otherwise – in which competitors pay money then the winner takes all the money, or a prize is bought for him with it, are haraam, and it is not permissible for the Muslim to take part in them or to approve of them, or to help with them in any way. There is no exception from this prohibition except competitions which involve training for jihad for the sake of Allaah, or which encourage people to seek knowledge and refute the specious arguments of the mushrikeen and prove the falseness of their shirk. 

Based on this, the kind of competition mentioned in the question is haraam, and it is a kind of gambling and betting which are haraam.  

Al-Tirmidhi (1700), al-Nasaa’i (3585), Abu Dawood (2574) and Ibn Majaah (2878) narrated that the Prophet (peace and blessings of Allaah be upon him) said: “There should be no (money) prizes for competitions except in archery, camel-racing and horse-racing.”  Classed as saheeh by al-Albaani in Saheeh Abi Dawood. 

These three are all skills used in jihad. Hence some scholars added to these three everything that helps in jihad and spreading Islam, such as competitions in (learning and memorizing) Qur’aan, hadeeth and fiqh, in which it is permissible to offer prizes. 

Shaykh Sayyid Saabiq (may Allaah have mercy on him) said: 

It is not permissible to bet in any case where money is offered by all, so that the one who wins will take all the bets, and if a person loses he will lose to his companions, because this comes under the heading of gambling, which is haraam. End quote from Fiqh al-Sunnah (3/373). 

Shaykh Muhammad ibn ‘Uthaymeen (may Allaah have mercy on him) was asked: 

We have noted recently that many young people form sports leagues for various games, either belonging to a club or at the local neighbourhood level. Each team pays a certain amount of money, and one of the teams does not pay anything, and the organizing team buys the cup and prizes, and the other teams play for these prizes. The winning team gets the cup and the other prizes are distributed to the first place winners and others. Please advise us, may Allaah reward you. 

He replied: 

If the prizes are given by someone who did not take part in the competition, such as someone who was not one of the competitors, if he pays a sum of money to the winner, then this does not come under the heading of gambling which is haraam. 

But if the prize is given by each competing team, e.g. each team pays some money and it goes to the winning team, then this is gambling which is haraam, because Allaah says (interpretation of the meaning):

“O you who believe! Intoxicants (all kinds of alcoholic drinks), and gambling, and Al‑Ansaab (stone altars for sacrifices to idols etc) and Al‑Azlaam (arrows for seeking luck or decision) are an abomination of Shaytaan’s (Satan’s) handiwork. So avoid (strictly all) that (abomination) in order that you may be successful”

[al-Maa’idah 5:90] 

Similarly, if there are three teams and two teams pay but one does not, and the prize is taken by the winning team, this is also haraam, because the Prophet (peace and blessings of Allaah be upon him) said: “There should be no (money) prizes for competitions except in camel-racing, horse-racing and archery.” So the Prophet (peace and blessings of Allaah be upon him) stated that giving prizes is not permissible except in these three cases, and that is because they are things that have to do with jihad for the sake of Allaah. And Allaah is the Source of strength. end quote. 

Fataawa Islamiyyah (4/433). 

And Allaah knows best.