Mudharabah

UAE Laws and Islamic Finance

Firenze

Thoughts from Iraj Toutounchian’s Islamic Money & Banking, Integrating Money in Capital Theory

Mudarabah, the most-widely known Islamic contract, is a profit sharing contract in which one party (the Rab al Maal) provides funds and the other (the managing trustee, the Mudarib or Ameel) management expertise.  This contract is believed to come from the Arabic word darb, which means walking and traveling on the earth.  (The Mudhrabah is sometimes known as Qirad).

While the literature extends this contract to include investment and launching a project, we confine ourselves here to trade activities.  Profits are shared between the Rab al-Maal and the Mudarib in a proportion agreed in advance.  Losses, if any, are the liability of the former, and the latter loses his share in the expected profits.  If, however, the Mudarib is proven to be guilty of willful negligence, fraud, or a breach of…

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