Mudarabah Partnership
Mudaraba — The Partnership between Capital and Labor
📖 The Scene: The Trading Caravans of Quraysh — Mecca before the Revelation
In the house of Khadija bint Khuwaylid, may Allah be pleased with her, one of the noble women of Quraysh and the wealthiest among them...
Maysara (Khadija's servant): O my lady, there is in Mecca a young man called Muhammad ibn Abdullah, they call him the Truthful, the Trustworthy!
Khadija: And what about him?
Maysara: People entrust him with their wealth, and he has never betrayed anyone! And he is skilled in trade.
Khadija (reflecting): I want him to go with my wealth to Syria to trade, and I will give him more than I give others...
The Narrator: So Muhammad ﷺ went with Khadija's wealth to Syria, and returned with profits she had never seen before. This was a mudaraba — the capital from Khadija and the labor from Muhammad ﷺ!
Definition of Mudaraba
📜 Linguistic and Technical Meaning
Linguistically: Mudaraba comes from "darb fil-ard" (striking the earth), meaning traveling for trade. Allah says: ﴿And others who travel through the land, seeking Allah's bounty﴾
In legal terminology: A profit-sharing partnership contract between the capital owner and the worker, where the capital owner gives his money to the worker to trade with, and the profit is shared according to what they agree upon.
Alternative name: Also called Qirad in the language of the people of Hijaz.
💰 Mudarabah Formula
Capital Owner
Provides capital and financial expertise
Worker (Mudarib)
Provides work and trading effort
Profit
Shared according to agreed ratios
Legitimacy of Mudaraba
From the Quran
📜 Proofs from the Book
﴿There is no sin upon you to seek bounty from your Lord﴾
— Al-Baqara: 198
﴿And others who travel through the land, seeking Allah's bounty﴾
— Al-Muzzammil: 20
From the Prophetic Sunnah
📜 Proofs from the Sunnah
It is reported that Al-'Abbas ibn 'Abd al-Muttalib, may Allah be pleased with him, when he gave money in mudaraba, stipulated to his partner:
- Not to travel by sea with it
- Not to descend into a valley with it
- Not to buy any animal with it (lit.: anything with a moist liver)
If he did so, he would be liable. These conditions reached the Messenger of Allah ﷺ who approved them.
— Narrated by al-Bayhaqi
📖 The Story of Al-'Abbas's Conditions — Smart Protection of Capital
Al-'Abbas ibn 'Abd al-Muttalib, may Allah be pleased with him — the Prophet's ﷺ uncle — was among the wealthy of Quraysh and the most knowledgeable in trade...
Al-'Abbas (giving his money to a young trader): Take this money and trade with it, and the profit is between us. But I have conditions!
The trader: What are they, O uncle of the Messenger of Allah?
Al-'Abbas:
- Do not travel by sea with it — for the sea has the risk of drowning!
- Do not descend into a valley with it — for valleys have the risk of floods!
- Do not buy any animal with it — meaning animals that might die!
The trader: And if I do?
Al-'Abbas: If you do that, you will be liable!
The Narrator: Al-'Abbas's conditions reached the Messenger of Allah ﷺ... and he approved them!
The Consensus
The Companions, may Allah be pleased with them, are unanimous on the permissibility of mudaraba. The orphans of 'Abdullah ibn 'Umar and 'Abdullah ibn Mas'ud would give their wealth in mudaraba.
Reason
The need calls for mudaraba:
- The capital owner may not know how to trade
- The worker may not have capital
- In mudaraba there is combination of both interests!
The Pillars of Mudaraba
🏛️ The Four Pillars of Mudarabah
Known cash delivered
Independent lawful trade
Known shared ratio
Offer and acceptance
First Pillar: The Capital
📖 Conditions of the Capital
① That it be in cash
- It cannot be in goods according to the majority
- Wisdom: ease of evaluating profit and loss
② That it be known
- Known quantity: 100,000 riyals ✅
- Known type: dollar or riyal ✅
③ That it be specified
- Not a debt
- Pointed to or delivered
④ That it be delivered to the worker
- So he can dispose of it freely
- It does not remain under the capital owner's hand
Second Pillar: The Work
| Condition | Detail |
|---|---|
| That it be lawful | Mudaraba in alcohol and gambling is forbidden |
| That the worker be independent | He has freedom to buy and sell |
| That it be in trade | Buying and selling, not manufacturing or agriculture according to the majority |
Third Pillar: The Profit
✅ Profit Conditions
It must be known by percentage
- •Half ✅ Third ✅ Quarter ✅
- •Fixed amount ❌ (e.g.: 10,000 riyals for you)
It must be shared
- •Neither party can monopolize it
- •"All profit for me" ❌
It must be from profit not capital
- •We divide the increase over capital
- •Capital is returned first
📜 What Invalidates the Mudaraba
❌ Forbidden in profit sharing:
- Setting a fixed amount for one of them
- Guaranteeing the capital to the worker
- Guaranteeing a fixed profit rate (e.g.: 10% annual guaranteed)
The reason: This transforms the mudaraba from a partnership into a usurious loan!
Fourth Pillar: The Formula
Mudaraba formulas:
- "I give you this money in mudaraba"
- "Take this money and trade with it, and the profit is between us"
- Or what indicates that in word or deed
Types of Mudaraba
📊 Types of Mudarabah
Unrestricted Mudarabah
Without conditions
Any trade
Any place
Any time
Restricted Mudarabah
With specific conditions
Specific trade
Defined place
Defined time
Free Mudaraba (Mutlaqa)
📖 Example of Free Mudaraba
Sa'id (the capital owner): Take this money and trade with it, and the profit is between us fifty-fifty.
Khalid (the worker): In what type of trade?
Sa'id: Whatever you want! You know the market better.
Khalid: And may I travel with it?
Sa'id: Do what you see is in the best interest.
✅ This is a free mudaraba — the worker is free to dispose in all types of trade.
Rules of free mudaraba:
- The worker can trade in all types of commerce
- He can travel with the money
- He can sell cash or on credit according to custom
Restricted Mudaraba (Muqayyada)
📖 Example of Restricted Mudaraba
Ahmad: Take this money and trade with it, but with conditions:
- Trade only in real estate
- Do not travel with the money outside the city
- Do not sell on credit
Muhammad: And if I don't comply?
Ahmad: If you don't comply, you will be liable!
Rule when conditions are violated:
- If the worker violates the conditions, he is liable in case of loss
- Because he exceeded what the capital owner stipulated
Rules of Mudaraba
Distribution of Profit and Loss
⚖️ Profit and Loss Distribution
Profit
Shared per agreement
Ex: 60% to capital owner
40% to worker
Loss
On capital only
Worker: loses effort only
No liability except for transgression
📜 Golden Rule
Profit protects the capital
Meaning that profit first covers the loss, then what remains is shared.
Example: Capital 100,000 → Year 1 profit 20,000 → Year 2 loss 15,000
- Result: Net profit 5,000 to be shared according to agreement
Guarantee in Mudaraba
📜 The Fundamental Rule
The worker is a trustee, he only guarantees in case of abuse or negligence
| Type of breach | Example | Rule |
|---|---|---|
| Abuse | Violating the owner's conditions | Liable |
| Abuse | Trading in the unlawful | Liable |
| Abuse | Lending the money to others | Liable |
| Negligence | Leaving the money unprotected | Liable |
| Negligence | Neglecting trade until goods spoiled | Liable |
| Without abuse | Market loss | Not liable |
Expenses of Mudaraba
| Type of expense | Who bears it? |
|---|---|
| Normal business expenses | The capital |
| Storage and transport rent | The capital |
| Employee salaries | The capital |
| Worker's personal expenses at home | His own funds |
| Worker's expenses while traveling | Disagreement (most correct: the capital) |
Termination of Mudaraba
⏰ Causes of Mudarabah Termination
Termination by one party
- •Mudarabah is a terminable contract
- •Company must be liquidated
Death of one party
Insanity of one party
Destruction of capital
- •Before use: Mudarabah ends
- •After use: continues with remainder
Liquidation Procedures
- Sell the goods and convert to cash
- Collect outstanding debts
- Calculate profit and loss precisely
- Return the capital to the owner first
- Divide the profit according to agreement
Difference Between Mudaraba and Usurious Loan
⚖️ Lawful Mudarabah VS Usurious Loan
Lawful Mudarabah
✅ Halal
Money for trade
Profit not guaranteed
Loss on capital
Real partnership
Profit by percentage
Usurious Loan
❌ Haram
Loan for consumption
Interest guaranteed
Borrower guarantees all
Creditor-debtor relation
Fixed interest
📖 From the Stories of the Salaf: The Mudaraba of Khadija and the Prophet ﷺ
📖 The Story of the Mudaraba That Changed History
Fifteen years before the Revelation, in Mecca...
Maysara (Khadija's servant): O my lady, you sent me with Muhammad ibn Abdullah on the journey to Syria...
Khadija (eager): How did you find him?
Maysara: O my lady, I have never seen anyone as trustworthy as him! And trading with him profits double what we profit with others!
Khadija: How is that?
Maysara: He doesn't cheat, doesn't lie, doesn't betray... And people trust him and buy from him!
The Narrator: Khadija then desired to marry him... Thus the mudaraba was the cause of the blessed marriage from which came the lineage of the Prophet ﷺ!
📜 The Lesson Learned
Honesty is the worker's capital!
Muhammad ﷺ did not own money, but he owned what is more precious: truthfulness and honesty. With them, the mudaraba succeeded and Khadija profited, and Islam profited from this blessed marriage!
Contemporary Applications of Mudaraba
Islamic Investment Funds
🏦 Islamic Investment Fund Structure
Investors
Capital owners provide funds
Fund
Mudarib invests in projects
Distribution
Profits or losses per agreed ratios
Conditions for validity:
- Clarity of profit ratios
- No guarantee of capital
- Investment in the lawful
Investment Deposits in Islamic Banks
| Element | Islamic Deposit | Usurious Deposit |
|---|---|---|
| Relationship | Mudaraba (partnership) | Loan (debt) |
| Capital | Not guaranteed | Guaranteed |
| Profit | Variable percentage | Fixed interest |
| Loss | Borne by depositor | No loss |
| Rule | ✅ Lawful | ❌ Forbidden |
🎯 Contemporary Cases: Judge for Yourself!
Case 1: Investment in an Islamic Fund
❓ The Question
I placed 100,000 riyals in an Islamic investment fund. The fund takes:
- 2% annual management fees
- 20% of profits
After a year, the fund lost 10%. Who bears the loss?
The Answer:
✅ You bear the loss on capital — because you are the capital owner.
| Element | Rule |
|---|---|
| Management fees (2%) | Due — because they are fees for work |
| The 20% of profits | Not due — because there is no profit |
| Capital guarantee | If the fund guarantees it = against Sharia ❌ |
Case 2: Financing a Friend's Project
❓ The Question
My friend has an excellent project idea but has no money. I want to finance him with 50,000 riyals on condition we share profits fifty-fifty.
Is this permissible?
The Answer:
✅ Permissible — this is a valid Islamic mudaraba. But be careful:
| ✅ Correct | ❌ Wrong |
|---|---|
| Percentage of profit (50%) | Guarantee of capital |
| Document the agreement in writing | Fixed profit (10% annually) |
| Define the type of trade | Fixed amount (5000 for you) |
Case 3: The Investment Deposit
❓ The Question
The Islamic bank offers an "investment deposit" with an expected return of 5% annually.
The conventional bank offers a "deposit" with a guaranteed return of 5%.
What is the difference?
The Answer:
Fundamental Difference Between Islamic and Usurious Deposit
Islamic bank ✅
- •5% expected not guaranteed
- •May increase, decrease or lose
- •Relation: partnership (Mudarabah)
Usurious bank ❌
- •5% guaranteed no matter what
- •Doesn't change or lose
- •Relation: loan with interest
⚠️ If "Islamic" bank guarantees return = disguised usury!
Case 4: Crowdfunding Platforms
❓ The Question
An electronic platform collects investors' funds and finances small projects. It gives investors 12% fixed annual return.
Is this lawful?
The Answer:
❌ Forbidden — the fixed guaranteed return = usury!
Conditions of Islamic mudaraba:
- ✅ A percentage of profit, not a fixed amount
- ✅ Possibility of loss
- ✅ Transparency about funded projects
- ❌ "12% guaranteed" = explicit usury
Case 5: Real Estate Investment
❓ The Question
I gave someone a million riyals to buy real estate and rent it. We agreed:
- The rent is for me
- The property belongs to him at the end
Is this valid?
The Answer:
⚠️ This is not a valid mudaraba — because:
- Mudaraba concerns trade (buying and selling), not renting
- Agreeing that the property belongs to him = guaranteeing the capital (forbidden!)
✅ The correct alternative:
Partnership in the property:
- Rent is shared according to shares
- At sale, the price is shared according to each one's capital
💡 Stop and Reflect
📜 Great Legal Maxim
"Al-ghunm bil-ghurm" (Profit with risk)
Meaning: whoever wants profit must bear the possibility of loss.
Reflect on your investments:
🔹 Are you looking for a "guaranteed investment with fixed return"?
- If you find one, know that it is probably disguised usury!
🔹 Real investment involves risk. Are you ready to bear potential loss?
🔹 When you give your money to someone to invest it:
- Do you document the agreement?
- Do you follow the performance of the investment?
- Do you know where your money is invested?
Remember: Lawful money may decrease but it is blessed, and unlawful money may increase but it is destroyed!
🔑 Lesson Summary
🎯 Summary: Mudarabah Rules
| Élément | Statut | Notes |
|---|---|---|
| Mudarabah = partnership of capital and work | ✅ Halal | |
| Capital: known cash delivered to worker | ✅ Halal | |
| Profit: divided by ratios not fixed amounts | ✅ Halal | |
| Loss: on capital, worker loses effort | ✅ Halal | |
| Guarantee: worker trustee except for transgression | ✅ Halal | |
| Guaranteed fixed return | ❌ Haram | = usury! |
Lord, increase me in knowledge