What is Mudaraba?
Mudaraba is a Sharia-compliant profit-sharing contract in which one party (the rabb-al-mal) provides capital and the other (the mudarib) provides expertise and management. Profits are shared according to a pre-agreed ratio. Losses are borne entirely by the capital provider, except where the mudarib is found negligent or in breach of contract. Mudaraba underpins Islamic deposit accounts, investment funds, and venture financing.
How It Works
- Capital provider deposits funds with the mudarib.
- Mudarib invests and manages the funds in agreed activities.
- Profits are shared in the agreed ratio (e.g., 70% to rabb-al-mal, 30% to mudarib).
- Losses are borne by the capital provider unless caused by mudarib negligence.
- Mudaraba is restricted (specific activity) or unrestricted (general investment mandate).
Saudi Context
Saudi Islamic banks structure their investment deposit accounts as Mudaraba: the depositor is the rabb-al-mal, the bank is the mudarib. Profit shares are declared periodically per the agreed ratio (e.g., 30% to depositors, 70% to the bank, with the bank’s profit share funding its costs and shareholder returns). Mudaraba sukuk are also issued in the Saudi Debt Capital Market.
Example
An investor deposits SAR 500,000 with a Saudi Islamic bank under a 12-month Mudaraba investment account. Agreed profit share: 60% depositor, 40% bank. The bank invests in Sharia-compliant activities yielding SAR 25,000 net profit. The depositor receives SAR 15,000 (60%) and the bank retains SAR 10,000 (40%) as mudarib fee.