What Is Mudarabah (Labour-Capital Partnership)?

Mudarabah: A type of partnership implemented before and also approved by Islam. In this type of partnership, one party provides the capital for the labour of the other party. In the mudarabah contract, in which the owner of the capital is called rabbu'l-mal, and the party operating the capital is called mudarib or amil, the main purpose is to make and share profit among the parties. The profit can be shared at various rates that the parties agree on during the contract. But no party can be deprived of profit altogether. There are certain conditions for the mudarabah contract to be valid in Islamic law regarding the profit and the mudarib. Lack of any of these conditions will render the mudarabah partnership vicious.

In addition to its function in the past, mudarabah is regarded as one of the basic principles on which Islamic banking is built today. It is applied in Islamic finance institutions as an alternative to interest-based banking. However, this application comes with certain risks and cannot be as popular as the conventional methods due to certain obstacles it faces in banking regulations. So, murabahah and musharakah methods can be said to be in more demand in Islamic banks. It is required to come up with legal regulations that will ensure the guarantee of both parties, reduce the tax burden on Islamic banks, create a wider scope for financial investments, and train competent and qualified employees for mudarabah transactions in order to raise the method to the desired levels.