What is mudarabah (a profit-sharing partnership)?

Mudarabah is a partnership in which one party, the rabb al-mal, provides capital, and the other, the mudarib, provides labor, skill, and management. Profits are shared between them according to a pre-agreed ratio (for example, 60/40), while financial losses are borne solely by the capital provider — unless the loss resulted from the manager's negligence or misconduct, in which case the manager may be liable. The manager's "loss" is simply the time and effort invested without a return. This structure reflects the Islamic preference for risk-sharing over risk-transfer: rather than the capital provider earning a fixed return regardless of outcome (as in interest), their return rises and falls with the actual performance of the business. Mudarabah has ancient roots in Arabian trade practice and is considered one of the foundational contracts of Islamic finance, forming the basis for many Islamic bank investment accounts, where depositors act as capital providers and the bank as manager. It requires clear terms on profit ratios, scope of the business, and duration, since ambiguity in these terms can introduce impermissible uncertainty into the contract.

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