Mudaraba is an Islamic silent-partnership contract in which the rabb al-mal entrusts capital to the mudarib, who grows it through his work; profit is shared at a ratio agreed in advance and financial loss stays with the capital provider.
Two roles that never merge
The rabb al-mal provides money and stays out of day-to-day management. The mudarib contributes commercial skill and makes the decisions. This strict separation is the key to the contract: whoever finances does not manage, and whoever manages does not finance.
The mudarib as a trustee
Legally, the manager holds the capital as amana. He does not guarantee it: if the venture fails without fault on his part, he repays nothing. He becomes liable only for negligence, breach of the agreed terms or proven misappropriation of the funds.
Capital that is known, available and handed over
The amount must be fixed on the contract date and actually placed at the mudarib's disposal. A debt the manager already owes the investor cannot be converted into Mudaraba capital, otherwise the transaction would disguise an interest-bearing loan.
Why a fixed profit in euros voids the contract
Sharing must be a percentage of realised profit, such as 70/30, never a fixed sum or a percentage of capital. Guaranteeing 5,000 euros to one party could swallow the other's entire profit and would introduce a return resembling interest.
What happens when the venture loses money?
A loss is first set against undistributed past profits, then against capital. The capital provider alone bears the financial loss, while the mudarib has worked without reward. Risk is therefore shared, but in two different forms.
Business expenses and the manager's reward
Costs directly tied to the venture, such as transport or storage, are charged to the fund. The mudarib, however, receives no fixed salary and no guaranteed fee: his only reward is his share of the profit actually generated.
May the mudarib invest his own money?
Yes, with the rabb al-mal's consent. He then also becomes a capital partner, combining Mudaraba with Musharaka: he takes his manager's share of profit plus a share proportional to his contribution, and bears losses on that contribution.
When is profit actually earned?
Until the original capital has been restored, no final profit exists. Interim distributions remain provisional and can be clawed back if a loss occurs before liquidation or the final valuation of the fund, which jurists call tandid.
Two-tier Mudaraba inside Islamic banks
The bank receives depositors' funds as mudarib, then places them with entrepreneurs as rabb al-mal. It keeps the spread between the two profit-sharing ratios, which forms one of its intermediation revenues, alongside fees on other services.
Restricted or open: a choice made at signing
The investor can leave the manager free to choose transactions or limit the mandate to a sector, region or period. That choice changes the mudarib's liability, since stepping outside an agreed restriction makes him guarantor of the capital.
Ending the contract and winding up the fund
Either party may terminate the Mudaraba by giving notice, unless a minimum term was agreed. Non-cash assets are then sold or valued, capital is returned first to the provider, and any remaining surplus is split at the agreed ratio.
Points to have a Sharia board confirm
Before signing, check how profit is calculated, how expenses are treated, which events count as manager fault, how often reports are issued and which sector is financed. Final compliance is determined by the institution's Sharia board, not by the client.
Specialist external source
IFSB standards set out how banks treat funds received on a Mudaraba basis, particularly regarding capital adequacy, governance and disclosure to investment account holders.