SS 40 · Partnership

SS 40: Distribution of Profit in Mudarabah-based Investment Accounts

What this standard is about

When you put money in an Islamic bank's investment account, the bank does not pay you interest. Instead, it invests your money and shares the actual profit with you. This is usually done through mudarabah: you are the capital provider (rabb al-mal), the bank is the working partner (mudarib).

This standard is the rulebook for that relationship. It covers the two types of investment accounts (mudarabah-based and investment-agency-based), how profit is realized and shared, which expenses and reserves can be deducted first, and what happens with losses. It also clarifies the position of ordinary current accounts, which are treated as loans the bank must repay in full.

Why it exists

Millions of depositors trust Islamic banks with their savings. Without standard rules, a bank could deduct unfair expenses, change profit ratios mid-way, or blur the line between guaranteed deposits and risk-bearing investments. The standard protects account holders by fixing how profits are calculated and shared.

The key rules, simply put

Investment accounts come in two types: mudarabah-based accounts and investment-agency (wakalah)-based accounts.
The profit-sharing ratio must be agreed at the very beginning. It cannot be a fixed lump sum, and it cannot be tied to the capital (for example, "10% of your deposit").
The bank (mudarib) cannot take a salary or fee for its work on top of its agreed profit share.
Expenses and reserves are deducted from the profit before distribution, according to clear rules.
Profits are shared; losses are borne by the account holders (rabb al-mal) — unless the loss came from the bank's negligence or misconduct.
The bank is not obliged to return the investment amount itself. It only guarantees repayment if it was negligent.
Ordinary current accounts are different: they are loans (qard) to the bank, which must repay them in full on demand.
Different profit ratios may be agreed for different periods or different types of activity.

An everyday example

Sara puts $10,000 in the bank's one-year mudarabah investment account with an agreed ratio of 60% for her and 40% for the bank. The bank invests the pooled money in halal businesses. After deducting agreed expenses, the pool earns $1,000 attributable to Sara's share of funds. Sara receives $600 and the bank keeps $400. If the investments had lost money without any negligence by the bank, Sara would bear the loss.

Words to know

Mudarabah — a partnership where one side provides money and the other provides work; profits are shared.
Rabb al-mal — the capital provider in a mudarabah; provides the money, bears the loss.
Mudarib — the working partner in a mudarabah; manages the money, shares the profit.
Wakalah (investment agency) — appointing an agent to invest your money for an agreed fee or share.
Qard — a loan; in a current account, your deposit is a loan the bank must repay in full.
Riba (interest) — any guaranteed extra charged on a loan. Not allowed in Islamic finance.

Source

AAOIFI Shariah Standard No. 40 — https://resources.quizalize.com/view/quiz/aaoifi-shariah-standard-no-40-distribution-of-profit-in-mudarabahbased-investment-accounts-dr-ahmad-asad-4ee8e39b-74b7-409e-940a-10ef69b4bdd4
Mudarabah profit distribution rules — https://islamicmarkets.com/education/mudarabah-distribution-of-profit