Musharaka and mudaraba: partnerships that share profits and losses

Musharaka: partners with shares

Several parties each contribute capital, and possibly work, to a joint activity.

• Profits are split by a percentage fixed in advance.
• Losses are borne in proportion to each one's stake.
• A diminishing version is used for housing: the bank's share decreases as repayments are made.

Mudaraba: capital and work separate

A capital provider entrusts funds to a manager who contributes their work.

• Profits are shared by an agreed ratio.
• The financial loss is borne by the capital provider, unless the manager was at fault or negligent.
• The manager loses the fruit of their work.

What it changes for the saver

In an investment account based on these contracts, the return is not promised in advance and capital may be exposed. This is the counterpart of the principle that a gain must come with an accepted risk.

Frequently asked

What is the essential difference from an interest-bearing loan?

In an interest-bearing loan, the lender is paid whatever happens to the activity. In these partnerships, the gain depends on the real result, and the risk is shared.

Read next

• What is riba? A simple definition and the reasons for the prohibition
• Riba al-fadl and riba an-nasi'a: the difference explained with examples
• Murabaha explained: buying on credit without interest
• Ijara: financing an asset through leasing, with or without final purchase