Mudaraba
In one sentenceA contract in which one party provides the capital (rabb al-mal) and the other provides the work and management (mudarib), with profit shared between them at an agreed ratio.
Simply put
The mudarib contributes no capital, only his expertise and effort. If the project makes a profit, they share it at the ratio agreed in advance, not as a fixed amount; if it makes a loss, the capital provider bears the loss and the mudarib loses his effort, unless misconduct or negligence by the mudarib is proven.
Islamic banks use Mudaraba in investment accounts: the depositor is the capital provider and the bank is the mudarib.
Worked example
An investor gave 200,000 SAR to an experienced trader to trade in perfumes on a Mudaraba basis, with profit split 60% to the investor and 40% to the mudarib. The trade made a net profit of 40,000 SAR.
Net profit40,000 SAR
Capital provider's share: 40,000 × 60%24,000 SAR
Mudarib's share: 40,000 × 40%16,000 SAR
Amount returned to the capital provider: 200,000 + 24,000224,000 SAR
Formula: Each party's share = net profit × its agreed ratio
Don't confuse it with
MusharakaIn Musharaka all parties contribute capital and bear losses according to their shares; in Mudaraba the capital comes from one party and the work from the other.