SS 13 · Partnership

SS 13: Mudaraba

What this standard is about

Mudaraba (also called qirad) is a partnership between capital and skill. The capital provider (rab al-mal) gives money to the manager (mudarib), who invests it. Profits are shared according to the agreement. Financial losses fall on the capital provider — unless the manager was negligent or broke the agreed terms.

Why it exists

Mudaraba lets people with money and people with skill cooperate without interest. The manager puts in effort, the investor puts in capital, and both share the outcome. Islamic banks use mudaraba to manage their customers' investment accounts.

The key rules, simply put

The profit-sharing ratio must be agreed upfront as a percentage. It cannot be a fixed amount of money.
The manager cannot guarantee the capital.
Losses are borne by the capital provider, except when caused by the manager's misconduct, negligence, or breach of the agreed conditions.
The capital provider may restrict the investment to certain activities (restricted mudaraba) or leave it open (unrestricted mudaraba).
The bank, as manager of investment accounts, is not liable for investment losses except through its own misconduct or negligence.

An everyday example

Layla gives $100,000 to Karim, an experienced trader, under mudaraba with a 60/40 profit split. If the investment earns $20,000, Layla gets $12,000 and Karim gets $8,000. If it loses $10,000 through normal market moves, Layla bears the loss and Karim loses his effort.

Words to know

Mudaraba (qirad) — a trustee partnership of capital and work.
Rab al-mal — the capital provider.
Mudarib — the manager who invests the capital.

Source

AAOIFI Shariah Standard No. 13 — https://islamicmarkets.com/publications/mudarabah-appendix-b-the-shariah-basis-for-the-standard