Short answer
Mudarabah is a partnership where one side gives the money and the other does the work. Profit is shared by an agreed percentage. If there is a loss, the investor loses the money and the worker loses his effort, unless the worker was negligent or broke the terms.
Mudarabah is a valid contract. The capital must be cash, known and handed to the worker (mudarib). Profit must be shared as a percentage of actual profit; fixing a set amount or a percentage of capital for either side makes it invalid. Financial loss falls on the capital owner (rabb al-mal) alone, and the mudarib is a trustee who is liable only for negligence or breach.
The four schools agree on this.
Explanation
Mudarabah (also called qirad) was practised before Islam and continued by the Companions, and the scholars agree it is lawful. Imam Malik records that when two of Umar's sons traded with money from the public treasury, Umar, on a companion's advice, treated the deal as a qirad: he took back the capital and half of the profit for the treasury and left them the other half.
How it works:
- Capital: the investor (rabb al-mal) hands over a known amount of money.
- Work: the manager (mudarib) runs the business or trade. He may be given free rein or restricted to certain goods, places or times.
- Profit: shared by a ratio agreed at the start, such as 60:40. It must be a share of profit, never a fixed sum.
- Loss: any loss is first covered from past profit, then by the investor. The manager loses his time and effort but repays nothing, unless he was negligent, dishonest or broke the agreed conditions.
- Expenses: the manager cannot take a salary on top of his share, though Hanafi jurists allow his travel costs on business trips.
Today mudarabah is used for Islamic bank savings and investment accounts (the depositors are the investors and the bank is the manager), for investment funds, and for small business deals between friends. A common mistake is promising the investor a fixed monthly return, which turns it into an interest loan. See Is a fixed return on investment halal?
If both sides put in money, it is musharakah instead. The four schools agree on the core rules above. For a real contract, have a scholar check the terms.
Ask a mufti about your own case. This answer explains the general ruling. When the details of your situation matter, as they do here, ask a qualified mufti and give them the full facts. Where to ask a scholar.
The evidence
Quran, Surah An-Nisaa 4:29
يَٰٓأَيُّهَا ٱلَّذِينَ ءَامَنُوا۟ لَا تَأْكُلُوٓا۟ أَمْوَٰلَكُم بَيْنَكُم بِٱلْبَٰطِلِ إِلَّآ أَن تَكُونَ تِجَٰرَةً عَن تَرَاضٍۢ مِّنكُمْ ۚ وَلَا تَقْتُلُوٓا۟ أَنفُسَكُمْ ۚ إِنَّ ٱللَّهَ كَانَ بِكُمْ رَحِيمًۭا ﴿٢٩﴾
O you who have believed, do not consume one another's wealth unjustly but only [in lawful] business by mutual consent. And do not kill yourselves [or one another]. Indeed, Allah is to you ever Merciful.
A partnership of money and work is lawful trade by consent.
Quran, Surah Al-Maaida 5:1
بِسْمِ ٱللَّهِ ٱلرَّحْمَٰنِ ٱلرَّحِيمِ يَٰٓأَيُّهَا ٱلَّذِينَ ءَامَنُوٓا۟ أَوْفُوا۟ بِٱلْعُقُودِ ۚ أُحِلَّتْ لَكُم بَهِيمَةُ ٱلْأَنْعَٰمِ إِلَّا مَا يُتْلَىٰ عَلَيْكُمْ غَيْرَ مُحِلِّى ٱلصَّيْدِ وَأَنتُمْ حُرُمٌ ۗ إِنَّ ٱللَّهَ يَحْكُمُ مَا يُرِيدُ ﴿١﴾
O you who have believed, fulfill [all] contracts. Lawful for you are the animals of grazing livestock except for that which is recited to you [in this Qur'an] - hunting not being permitted while you are in the state of ihram. Indeed, Allah ordains what He intends.
The agreed terms of the partnership are binding.
Muwatta Malik 1386
Graded in the Muwatta... فقال عمر قد جعلته قراضا فأخذ عمر رأس المال ونصف ربحه ...
"Umar said: I have made it a qirad. So Umar took the capital and half of its profit."
The Companions used mudarabah (qirad) and shared its profit by ratio.
Where the ruling is recorded
- al-Hidaya, Kitab al-Mudaraba. Conditions on capital, profit-sharing and the mudarib's liability.
- AAOIFI Shari'ah Standards, Standard on mudarabah. Modern rules for mudarabah accounts and funds.
- Mufti Taqi Usmani, An Introduction to Islamic Finance, Chapter on musharakah and mudarabah. Use of mudarabah in Islamic banking.
This answer is pending review by the scholars on our team. Quran translation by Sahih International. Hadith Arabic from the standard editions of the six books and the Muwatta, with gradings as recorded there; the English is our own rendering. Spotted a mistake? Tell us.