One of the essential modes of profit/loss-sharing in Islamic finance, which is based on the concurrence of capital providers (called rab-ul mal) with those who have expertise and entrepreneurship capabilities (known as the agent or mudarib) in order to establish an enterprise aiming to make permissible profit. The two sides will share profits in accordance with agreed upon ratios. However, if the enterprise ends up with losses, the capital provider will bear all such losses, whilst the agent doesn’t receive any reward for his efforts, time and expertise.
Mudarabah is considered to be the most widely applied mode of partnership between Islamic banks and their customers (depositors). Depositors tender their money to banks as capital providers, while banks assume the role of mudarib and invest the pooled money on the basis of profit-sharing according to predetermined ratios as set out by both sides. The other way around, Islamic banks may take on the role of capital provider, financing thereby the needs of traders, craftsmen, and other professional businesses (such as the practices of physicians and engineers) in exchange for a preset share in the profit.
Mudarabah (مضاربة) is an Arabic term that denotes a profit sharing contract or trust financing.
Comments