Mudarabah
Mudarabah is an investment partnership in which one party provides the capital and the other provides the management. Profit is shared at an agreed ratio; financial loss falls on the capital provider unless the manager was negligent or in breach.
Also called: mudaraba · trustee partnership · silent partnership · qirad
The capital provider is the rabb al-mal and the managing party the mudarib. They agree in advance a profit-sharing ratio, for example 60:40, never a fixed sum or a percentage of the capital, because a guaranteed return on capital would turn the arrangement back into a loan. If the venture loses money, the investor bears the loss of capital and the manager loses the value of their work.
Islamic banks use mudarabah on both sides of the balance sheet. Many investment accounts are mudarabah contracts in which the depositor is the investor and the bank the manager, which means the depositor's principal is not contractually guaranteed by the bank. To manage the commercial pressure that creates, banks commonly hold profit-equalisation and investment-risk reserves to smooth what they pay out.
Mudarabah is also a common structure for funds and for some sukuk.
In practice
The manager cannot guarantee the investor's capital or a fixed return. A mudarabah that promises either is, in substance, a loan with interest.
Example
An investor puts US$100,000 into a trading venture run by a manager on a 70:30 profit split. A year's profit of US$20,000 gives the investor US$14,000 and the manager US$6,000. If the venture instead loses US$10,000 without fault on the manager's part, the investor recovers US$90,000 and the manager receives nothing.
Commonly confused with
| Term | How it differs |
|---|---|
| Musharakah | In musharakah every partner contributes capital and may take part in management; in mudarabah one side brings only money and the other only work. |
See also
- MusharakahMusharakah is a partnership in which each party contributes capital to a venture. Profit is shared at an agreed ratio, while losses are borne in proportion to each partner's capital contribution.
- WakalahWakalah is an agency contract in which one party, the principal, appoints another, the agent or wakil, to act on its behalf — buying, selling, investing or managing — usually for a fee.
- SukukSukuk are certificates representing undivided ownership interests in assets, usufructs, services or ventures, with returns paid from what those underlying interests generate. "Islamic bond" is useful shorthand but not an accurate legal description.
- IskaAn iska is a Jewish-law investment or venture arrangement in which supplied capital is treated through a combination of investment and, in some forms, loan characteristics.