Mudarabah is a profit-sharing partnership in Islamic finance where one party (rabb al-mal) provides the capital while the other party (mudarib) provides expertise, labor, and management. Profits are shared according to a pre-agreed ratio, while losses are borne entirely by the capital provider — the mudarib loses their time and effort but is not financially liable for losses.
This structure is fundamental to Islamic banking. Many Islamic savings accounts and investment deposits are structured as Mudarabah contracts, where the bank acts as the mudarib managing depositors' funds. The returns on these accounts are based on the actual performance of the investment, not a guaranteed interest rate, making them compliant with the prohibition of riba.
Mudarabah is also used in Islamic venture capital, project finance, and some Sukuk structures. It represents one of the core alternatives to interest-based lending, as it ties returns to actual economic performance and incorporates genuine risk-sharing between the parties.