What Is Mudarabah?
Mudarabah is a partnership where one party (rabb al-mal, the capital provider) contributes money and the other party (mudarib, the entrepreneur/manager) contributes expertise and labor. Profits are shared according to a pre-agreed ratio. If there's a loss, the capital provider bears the financial loss and the manager bears the loss of their time and effort.
The Key Islamic Principle
Mudarabah embodies a core Islamic economic principle: money and entrepreneurship must work together, sharing both upside and downside. The capital provider can't guarantee a fixed return while the entrepreneur takes all the risk (that would be riba). Both parties must have "skin in the game."
Mudarabah in Modern Finance
Islamic Investment Accounts
When you open an Islamic savings account, you're essentially entering a mudarabah with the bank. You provide capital (rab al-mal), the bank invests and manages it (mudarib), and profits are shared. Unlike a conventional savings account with a guaranteed interest rate, returns vary with actual investment performance.
Islamic Mutual Funds
Islamic mutual funds operate on mudarabah principles. Investors provide capital, the fund manager (mudarib) manages investments. Profits are split by a pre-agreed ratio; losses reduce investor principal (the manager lost effort, not money).
Venture Capital
Islamic venture capital mirrors mudarabah closely — investors provide capital, entrepreneurs provide ideas and execution, profits are shared. This is why Islamic finance scholars consider venture capital relatively compatible with Islamic principles.
Mudarabah vs Musharakah
In musharakah, all partners contribute capital AND manage the venture. In mudarabah, one party provides all capital, the other manages. The distinction matters for liability and management rights.
Bottom Line
Mudarabah is the original profit-sharing model of Islamic commerce. Understanding it helps you evaluate Islamic investment products and appreciate why equity investing — rather than lending — is the Islamic approach to building wealth.