Mudarabah is a contract in which two parties agrees to start a business or project in which one party bring the capital needed and the other one brings the expertise or managerial skills required to run the business or fulfill the project. The net profits will be shared among both of them on a mutually agreed ratio whereas the loss will be borne by the financier only. In such type of contract, it is very important that financier should do a thorough research about the expertise of the second party who will be managing the business, because if it results in the loss it has to be borne by the financier and not the manager. Due to this fact there is very less percentage of Mudarabah contracts taking place in the Islamic banking as it’s a high-risk business contract.
The one who invest the fund is known as Rab-ul-Maal, and the one who manages or run the business is known as Mudharib.