Ethica Institute of Islamic Finance™

How does Mudarabah work as an Islamic mode of financing?

A Mudarabah agreement creates a partnership business whereby an investing partner (rab al maal) brings capital and a working partner (mudarib) brings time and effort to share in profits according to a percentage agreed upon beforehand.

The investor has no direct involvement with the management of the business after the investment is made, though there are restricted Mudarabahs that specify the kind of venture intended, and unrestricted Mudarabahs that leave all discretionary powers in the hands of the worker to invest capital in the most productive manner possible.

The investor has the right to oversee business activities and, to the extent agreed upon by the mudarib, work directly with the mudarib. The worker has a fiduciary responsibility to the investor to maximize profits, within the parameters of the Shariah, because the investor is the one owning all the assets and bearing all the losses.

There is no salary for the worker in a Mudarabah; he takes only that share of the profits to which he is entitled, while expenses relating to the business come from the business itself.

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