Ethica Institute of Islamic Finance™

How is profit and loss distribution measured in a Mudarabah?

It is central to the validity of the Mudarabah that distributions be measured as a percentage of profit and loss, not as a fixed amount, percentage of total capital, total revenue or some other absolute amount.

For wholly-owned Mudarabahs, profits and losses are netted against one another, whereas for different businesses, as differentiable by the fact that they hold separate Mudarabah agreements, profits and losses are treated separately for separate businesses.

At any point during the agreement’s tenure, either the investor or the worker can give notice and leave the Mudarabah. Of whatever remains of the business, non-liquid assets are liquidated and combined to yield a total value for the business. In order, the investor has first rights to his principal amount, the remainder of which is divided between the investor and mudarib(s) according to their respective shares.

If the business incurs only losses, and only a portion of the original principal remains, the amount goes entirely to the investor and the mudarib receives nothing.

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