Partnership and investment

Mudarabah

A partnership of capital and work: profit is shared by an agreed ratio, while financial loss falls on the capital provider.

Mudarabah is a partnership in which a capital provider, the rabb al-mal, contributes capital and an entrepreneur, the mudarib, manages it. Under the IFSB definition, profit is shared according to the percentage specified in the contract, while losses are borne solely by the capital provider unless they result from the mudarib's misconduct, negligence or breach of the contracted terms. Islamic banks use it on both sides of the balance sheet: to take investment accounts and to finance ventures.

Sources

IFSB-23 Revised Capital Adequacy Standard (Banking Segment), 2021: Definitions, Mudarabah

This entry explains a term; it is not a Shariah ruling. Approving a product is for each institution's own Shariah board and regulator.

Related terms

Rabb al-malThe capital provider in a mudarabah, who funds the venture, shares profit by the agreed ratio and bears financial loss.MudaribThe manager in a mudarabah, who runs the venture and earns a share of profit rather than a guaranteed fee.Profit sharing ratioThe agreed split of profit between partners, expressed as a ratio of actual profit, never as a fixed sum or a share of capital.Profit-sharing investment account (PSIA)An account whose funds the bank invests, usually as mudarib, with returns based on actual results rather than a promised rate.MusharakahA partnership in which each partner contributes capital; profit is shared as agreed and loss in proportion to capital.