In brief
In mudarabah, one party provides the capital and the other makes it grow through his work. The profit is shared according to an agreed percentage; any loss falls on the capital, unless the manager is at fault or negligent. It is the basis of Islamic banks’ investment accounts (International Islamic Fiqh Academy, resolution 86, 1995).
The principle
The Qur’an mentions those who travel through the land seeking the bounty of Allah (al-Muzzammil 73:20), and jurists linked to this pursuit the contract of qirad or mudarabah, which was practised before Islam and is accepted by consensus.
- Profit is shared in percentages (for example 70% for the capital provider, 30% for the manager), never as a fixed amount.
- Loss is borne by the capital; the manager loses his work.
- The manager is a trustee: he guarantees the capital only in the event of misconduct, negligence or breach of the conditions.
In Islamic banks
The International Islamic Fiqh Academy ruled that deposits placed with a genuinely Islamic bank under an investment contract are a mudarabah, whose capital cannot be guaranteed by the bank (resolution 86 (3/9), 1995). Current accounts, by contrast, are loans to the bank and earn nothing. Mudarabah certificates (sukuk al-muqarada) follow the same rules (resolution 30 (5/4), 1988).
In practice, banks smooth returns using reserves and display an “expected profit rate”. This rate is not a promise: if there are losses, the capital can go down.
Example
A saver entrusts 10,000; the business makes a profit of 800; with a 70 / 30 split, the saver receives 560 and the bank 240. If the business loses 500, the saver gets back 9,500 and the bank receives nothing.
The verses
إِنَّ رَبَّكَ يَعْلَمُ أَنَّكَ تَقُومُ أَدْنَىٰ مِن ثُلُثَىِ ٱلَّيْلِ وَنِصْفَهُۥ وَثُلُثَهُۥ وَطَآئِفَةٌ مِّنَ ٱلَّذِينَ مَعَكَ وَٱللَّهُ يُقَدِّرُ ٱلَّيْلَ وَٱلنَّهَارَ عَلِمَ أَن لَّن تُحْصُوهُ فَتَابَ عَلَيْكُمْ فَٱقْرَءُوا۟ مَا تَيَسَّرَ مِنَ ٱلْقُرْءَانِ عَلِمَ أَن سَيَكُونُ مِنكُم مَّرْضَىٰ وَءَاخَرُونَ يَضْرِبُونَ فِى ٱلْأَرْضِ يَبْتَغُونَ مِن فَضْلِ ٱللَّهِ وَءَاخَرُونَ يُقَٰتِلُونَ فِى سَبِيلِ ٱللَّهِ فَٱقْرَءُوا۟ مَا تَيَسَّرَ مِنْهُ وَأَقِيمُوا۟ ٱلصَّلَوٰةَ وَءَاتُوا۟ ٱلزَّكَوٰةَ وَأَقْرِضُوا۟ ٱللَّهَ قَرْضًا حَسَنًا وَمَا تُقَدِّمُوا۟ لِأَنفُسِكُم مِّنْ خَيْرٍ تَجِدُوهُ عِندَ ٱللَّهِ هُوَ خَيْرًا وَأَعْظَمَ أَجْرًا وَٱسْتَغْفِرُوا۟ ٱللَّهَ إِنَّ ٱللَّهَ غَفُورٌ رَّحِيمٌۢ ٢٠
Indeed, your Lord knows, [O Muḥammad], that you stand [in prayer] almost two thirds of the night or half of it or a third of it, and [so do] a group of those with you. And Allāh determines [the extent of] the night and the day. He has known that you [Muslims] will not be able to do it and has turned to you in forgiveness, so recite what is easy [for you] of the Qur’ān. He has known that there will be among you those who are ill and others traveling throughout the land seeking [something] of the bounty of Allāh and others fighting for the cause of Allāh. So recite what is easy from it and establish prayer and give zakāh and loan Allāh a goodly loan. And whatever good you put forward for yourselves - you will find it with Allāh. It is better and greater in reward. And seek forgiveness of Allāh. Indeed, Allāh is Forgiving and Merciful.
Frequently asked questions
The return on a profit-sharing account looks like an interest rate: is that a problem?
Diyanet considers that the profit share being close to interest rates does not turn the transaction into interest, provided the bank respects the profit-sharing contracts (fatwa of 2018). What matters is that the capital is not guaranteed and that the return is linked to actual results.
Can the manager guarantee the capital?
No: guaranteed capital plus a profit would turn the mudarabah into an interest-bearing loan. According to some standards, however, an independent third party may undertake to make good a loss.