Mudarabah is a type of Islamic finance transaction where there is a contract between 2 parties. One of the parties will give the capital and the other will supply the labor. This type of partnership of Islamic finance is compliant with the shariah. This agreement is a type of profit sharing one and the split of the profit is determined before the contract is signed.
There are a couple of types of Mudarabah Islamic finance business, which are restricted and unrestricted. In the restricted type, the provider of the capital will lay out any kind of business where the capital will be invested. In the unrestricted type, the one who provides the capital will allow a mudarib, who is the manager to the person who finances the venture, to invest the money in any kind of business they want.
As mentioned before, the Mudarabah is a profit sharing transaction and the payment to the person financing the venture will not be able to be an amount that is fixed or a percentage if the capital. The profits that are earned with the Mudarabah cannot be given out until the time when all the expenses have been paid for in the terms in this Islamic finance agreement.
The mudarib will take care of the business undertaking and they will also be a part of the profit sharing. They are a kind of trustee for the invested capital and their actions have to conform to the goal of the contract. While the mudarib can shape in the profit in this Islamic finance transaction, they will not share any of the financial losses. The losses they do take are seen to be the cost of the workforce that has not generated the money for the that are shared by the original two parties in the contract. Basically, if the partnership does not make any money, the mudarib will not make any money.
A Mudarabah contract is one that can be terminated by either of the parties involved. The Mudarabah can be terminated, but there has to be given notice to do so in terms that are in the contract. The maximum term of the contract will be set up after it is terminated. Also, for the distribution of the profits before the contract is terminated the assets, such as a business or Muslim mortgage, have to be liquidated in a way that is agreed upon in the original contract. A final settlement in this Islamic finance transaction can only take place when the business venture is terminated. This is in order to follow shariah law properly.