Mudaraba is a joint venture between a capital provider (rab al-mal or financier) and an entrepreneur (mudarib or businessman) who agree to share the profits (ribh) at a preset ratio or percentage. The losses, however, will only be borne by the capital provider, unless there proves to have been intentional negligence or misconduct (breach of contractual stipulations) on the part of the mudarib.

Mudaraba is typically based on a number of key principles that govern its practical implementation:

• It is a profit-and-loss sharing contract.
• Profit distribution depends only on a profit being earned.
• The capital provider can stipulate what type of investment the mudarib might undertake.
• It is a binding contract (aqd lazim) once the business venture has been established and commenced.
• The mudarib would only lose the time and effort expensed on the business venture, whilst the capital provider assumes the financial loss.
• Mudaraba doesn’t entitle the capital provider to intervene in the running of the venture.