Fiqh al-Mudarabah — The Profit-Sharing Partnership in Islamic Law: The Mudarabah Contract (One Party Provides Capital, the Other Provides Labor and Expertise; Profit Is Shared by Agreed Ratio; Loss Falls on Capital Provider Unless the Mudarib Was Negligent), Its Role as the Foundation of Islamic Finance's Equity-Like Instruments, and How It Differs From Interest-Based Lending

Fiqh al-Mudarabah (فِقهُ المُضَارَبَة — Jurisprudence of Profit-Sharing Partnership; *mudarabah*: from *d-r-b*: to travel, to strike; the mudarib [working partner] travels to conduct commerce; the contract is also called qirad [in Maliki terminology] or muqaradah; the Prophetic basis: the Prophet himself conducted mudarabah before prophethood with Khadijah's capital; Khadijah was the rabb al-mal [capital provider]; the Prophet was the mudarib [working partner]; the structure: [1] rabb al-mal [capital provider]: contributes the capital; bears the financial risk of loss; cannot participate in the day-to-day management; [2] mudarib [working partner]: contributes labor, skill, and entrepreneurship; receives no salary; is compensated only from the profit-share; [3] profit: shared between rabb al-mal and mudarib in an agreed ratio [must be stated as a fraction: 1/2, 1/3, etc.; not a fixed amount]; [4] loss: falls on the rabb al-mal [who loses some or all of capital]; the mudarib loses only their time and effort; EXCEPTION: if the mudarib was negligent [taqsir] or violated the contract terms, they become liable for the loss; types: [1] mudarabah mutlaqa [unrestricted]: the mudarib has full freedom to conduct any permissible commercial activity; [2] mudarabah muqayyada [restricted]: the rabb al-mal specifies the type of business, the geographic area, or the time period; the mudarib cannot act outside these constraints; the Hanafi position is that the mudarib is an ameen [trustee] of the capital — not a debtor; only if the mudarib breaks the terms does the capital become a loan obligation; conditions for valid mudarabah: [1] capital must be fungible cash [or gold/silver]; general Hanafi position: goods cannot be the capital because valuation creates uncertainty; some later opinions allow goods with proper valuation; [2] the profit-sharing ratio must be specified; [3] the mudarib must have the legal capacity to trade; [4] the contract should be clear on restrictions; why mudarabah differs from riba: in mudarabah, return to the capital provider is uncertain — profit only if the venture succeeds; in riba-based lending, the creditor receives a guaranteed return regardless of the borrower's success; the mudarib's failure means the rabb al-mal loses; the risk-sharing structure is the essential difference; modern Islamic finance applications: [1] investment accounts in Islamic banks: the depositor is rabb al-mal; the bank is mudarib; profit is shared; the depositor absorbs loss in principle [though deposit protection schemes complicate this]; [2] two-tier mudarabah in Islamic banks: the bank takes mudarabah deposits [from depositors] and then places the capital in mudarabah investments with entrepreneurs; [3] sukuk mudarabah: sukuk structured around mudarabah principles; the sukuk holders are rabb al-mal; the sukuk issuer is mudarib; the historical importance: pre-Islamic Arabian commerce already used mudarabah-like structures; the Prophet's endorsement established it as a permissible and noble contract; medieval Islamic merchant networks across the Indian Ocean and Central Asia operated extensively on mudarabah principles) is Islamic finance's foundational equity contract.