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Mudharabah
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Mudharabah

Mudarabah is an arrangement or agreement between the bank, or a capital provider, and an entrepreneur, whereby the entrepreneur can mobilize the
funds of the former for its business activity. The entrepreneur provides expertise, labor and management.

Profits made are shared between the bank and the entrepreneur according to predetermined ratio. In case of loss, the bank loses the capital, while the
entrepreneur loses his provision of labor. That justifies the bank's claim to part of the profit. The profit-sharing continues until the loan is repaid. The
bank is compensated for the time value of its money in the form of a floating rate that is pegged to the debtor's profits.

The Practical steps of Mudharabah:
Establishing a Mudharabah project
The bank: provides the capital as a capital owner.
The Mudharib: provides his effort and expertise for the investment of
capital in exchange for a share in profit agreed upon.

The results of Mudharabah
The two parties calculate the earnings and divide profits at the end of
Mudharabah. This can also be done periodically in accordance with the
agreement and legal compliance.

Payment of Mudharabah capital
The bank: Recovers the Mudharabah capital it contributed before
dividing the profits between the two parties because profit is
protection to capital. In case of agreement to distribute profits
periodically before the final settlement it must be on account until the
security of capital is assured.

Distribution of wealth resulting from Mudharabah

In case of loss, the capital owner (the bank) bears the loss.

Profits are divided between the two parties in accordance with the agreement between them with observance to the principle "profit is protection to capital".


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