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Wednesday word: mudarabah

October 5, 2011

Mudarabah should not be confused with murabaha, which we covered last week (here and here).  Mudaraba is the sharia financial concept of profit sharing.

If a bank finances a venture for a private individual, they split the profits under a mudarabah arrangement.  In this fashion, the extra money given back to the bank for financing the project is deemed not to be a haram interest payment, but a halal share of the profits.

Many sharia financial transactions, not just business loans, are based on the concept of profit sharing.  Islamic finance lawyer John Dewar defines it this way:

An investment fund arrangement under which the financiers act as the capital providers (rab al-mal) and the client acts as the mudareb (akin to an investment agent) to invest the capital provided by the rab al-mal and manage the partnership.  The profit of the venture, which is based on the amount yielded by the fund that exceeds the rab al-mals‘ capital investment, can be distributed between the parties at a predetermined ratio but with any loss (subject to whether the loss is caused by the mudareb‘s negligence) being borne by the rab al-mal.*

Al Baraka offers this visual:

Islamic profit sharing arrangement

The problem with mudarabah, like murabaha, is that the profits are disgorged back into the strongboxes of the sharia banks to further propagate radical Islam.

* Dewar, John, International Project Finance: Law and Practice (New York:  Oxford University Press, 2011).

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