Mudarabah is a partnership arrangement recognized in Islamic finance in which one party, known as the rabb al-mal, contributes the capital, while the other party, known as the mudarib, contributes managerial expertise, labor, and effort.
Profits generated by the venture are distributed according to a pre-agreed ratio between the parties. Financial losses, however, are borne solely by the capital provider unless they result from negligence, misconduct, or a breach of contract by the manager.
Mudarabah reflects the Islamic principle of risk-sharing and has historically been used in trade and commercial activities. In modern Islamic banking, it is commonly employed in investment accounts, asset management, and certain financing structures.
Unlike conventional debt-based financing, Mudarabah aligns the interests of investors and managers by linking returns to the underlying venture's actual performance.