In Islamic fiqh, mudharabah refers to the contract of a special kind of partnership where one partner gives money to another for investing in a commercial enterprise for the yield of profits that will be divided between the two parties. In other words, mudharabah is a partnership in which the investment comes from one partner and the management and work is an exclusive responsibility of the other, with a percentage of the profits yielded that the two have previously agreed on being given to the latter in return for his services. The owner of the money is called the “Malek” (owner) and the one doing business and trade with the money, is the “Amel” (operative).
One reminder and point that is good to be made here is that just as Islam pays attention to issues pertaining to worship, it pays attention to livelihood and financial matters and the issues related to them as well. Clearly, the prosperity of a society is based on the worship, work and economy of those living in it. The basis of the glory and honor of the Muslim nation, lies in their relationship with their creator (swt) plus sound and wise trade, work and business, as the Quran and traditions say: “رِجالٌ لا تُلْهِیهِمْ تِجارَةٌ وَ لا بَیْعٌ عَنْ ذِکْرِ اللَّهِ وَ إِقامِ الصَّلاةِ” (men whom neither trading nor bargaining distracts them from the remembrance of Allah, and the maintenance of prayer and the giving of zakat), “فَإِذا قُضِیَتِ الصَّلاةُ فَانْتَشِرُوا فِی الْأَرْضِ وَ ابْتَغُوا مِنْ فَضْلِ اللَّهِ” (And when the prayer is finished disperse through the land and seek Allah's grace, and remember Allah greatly so that you may be felicitous), and “من طلب الحلال فهو من اللَّه عزّ و جل صدقة علیه”, etc. Clearly, the aim of mudarabah is to strengthen the economy and put money to use, instead of keeping it idle, and to prevent the decline of the rate of work and effort in society. Mudharabah makes people get up and strive instead of sitting inactive. The outcome of mudharabah is the yield of gains and a legitimate means of livelihood and the prevention of riba and other illegitimate incomes.
In mudharabah, if any of the owner’s money is lost in an investment or the like, it is to the loss of the owner only, and the amel loses nothing. Yet, if the two agree on the amel compensating for all or a portion of possible losses, the term is binding and correct.
Mudharabah is a “Ja’iz” contract, meaning that it can be terminated at any time by any of the parties. There are also other conditions that must be met for this contract to be valid:
1- The formula of mudharabah
2- Saneness, bulugh (religious puberty), and choosing to execute the contract out of their own free will
3- Allocation of the percentage of possible profits each party is entitled to
4- What is being invested must be money and its amount should be clear
5- The money must be invested and used legitimately
6- The amel must bear the ability to do the job
Mudharabah is a legitimate means of making a living that Islam has confirmed.