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.
Related Terms
Musharakah(مشاركة)
A joint partnership where all parties contribute capital and share profits and losses according to their investment ratio.
Murabaha(مرابحة)
A cost-plus sale where the seller discloses the original cost and adds an agreed-upon profit margin. Widely used in Islamic banking.
Riba(ربا)
Interest or usury — any guaranteed, predetermined return on a loan or investment. Strictly prohibited in Islamic finance.
Sukuk(صكوك)
Islamic financial certificates, often called "Islamic bonds," that represent ownership in an underlying asset rather than a debt obligation.
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