What is Mudarabah (Islamic Partnership)?
Mudarabah is a Sharia-compliant profit-sharing contract between two parties: the capital provider (rab al-mal) supplies the funds, and the entrepreneur (mudarib) supplies the management and expertise, with profits shared per a pre-agreed ratio and losses borne solely by the capital provider unless caused by mudarib negligence.
How It Works
- Capital provider supplies funds; entrepreneur provides expertise.
- Profit shared per pre-agreed ratio (e.g., 70/30, 60/40).
- Losses borne by capital provider unless from mudarib negligence.
- Used in Islamic banking deposits, investment funds, and project finance.
Saudi Context
Saudi Islamic banks (Al Rajhi, Alinma, Bilad) use mudarabah as the underlying contract for investment deposit accounts: the depositor is the rab al-mal, the bank is the mudarib, and profit is distributed monthly per the published ratio. SAMA regulates the structure, and Sharia supervisory boards within each bank ensure compliance.
Example
A Saudi investor deposits SAR 500,000 into an Al Rajhi mudarabah investment account with a 70/30 profit ratio (depositor/bank). If the underlying pool generates SAR 25,000 profit, the depositor receives SAR 17,500 and the bank SAR 7,500.