Profit and Loss Sharing

Instead of one party in a transaction holding all the risk, the risk must be shared by all parties. There must be the possibility of profit and loss all parties.

In the context of Islamic banking, this means that unlike conventional banking where the lender seeks a fixed return regardless of the borrower's success, Islamic finance emphasizes that the financier and the customer should share the risks and rewards of a venture.

• Mudarabah: One party (the capital provider, e.g., the bank) provides the capital, and the other party (the entrepreneur/manager) provides expertise and labor. Profits are shared according to a pre-agreed ratio, but losses are borne by the capital provider (unless due to the manager's negligence).

• Musharakah: A joint venture where all partners contribute capital and share profits and losses based on their respective contributions and pre-agreed ratios. This promotes true partnership and shared responsibility.