Islamic Finance

Mudaraba is a special kind of partnership where one partner gives money to another for investing it in a commercial enterprise. The investment comes from the first partner who is called rabb-ul-mal, while the management and work is an exclusive responsibility of the other, who is called mudarib.

The rabb-ul-mal may specify a particular business for the mudarib, in which case he shall invest the money in that particular business only. This is called mudaraba al-muqayyadah (restricted mudaraba). But if he has left it open for the mudarib to undertake whatever business he wishes, the mudarib shall be authorized to invest the money in any business he deems fit. This type of mudaraba is called al-mudaraba al-mutlaqah (unrestricted mudaraba)

Mudaraba is widely used for equity financing in the form of start up capital, venture capital or a mixture of both.

It is necessary for the validity of mudaraba that the parties agree, right at the beginning, on a definite proportion of the actual profit to which each of them is entitled. The losses however are entirely assumed by the Rabb ul mal, and the mudarib looses his time and effort only.