Mudarabah is one of the oldest arrangements in Islamic finance, and one of the easiest to understand. It is a partnership in which one side provides the capital and the other provides the work.

The two partners

  • The capital provider (rab al-mal) puts in the money.
  • The manager (mudarib) invests and manages it, using their skill and judgement.

In an investment setting, you are the capital provider and the investment manager is the mudarib.

How profit is shared

Before any money is invested, both sides agree a profit-sharing ratio, for example 70% to the investor and 30% to the manager. When the investment makes a profit, it is divided in that ratio. The split applies to actual profit, not to a fixed amount, so there is no guaranteed return.

How losses work

If the investment loses money, the financial loss falls on the capital provider, while the manager loses the time and effort they put in and earns nothing. The exception is negligence or a breach of the agreed terms: if the manager is careless or breaks the agreement, the manager bears the loss.

This is what separates mudarabah from a loan. The investor shares in real business risk instead of receiving interest whatever the outcome, which is why the structure is considered compatible with Sharia principles.

A simple example

You invest ₦1,000,000 in a mudarabah mandate with a 70:30 profit split. Over the year, the portfolio earns ₦200,000 in profit.

  • You receive 70% of the profit: ₦140,000.
  • The manager receives 30%: ₦60,000.
  • Your ₦1,000,000 of capital stays invested or is returned to you.

If the portfolio made no profit, neither side would receive a profit share, and the manager would earn nothing for that period.

Why it suits investors

  • Aligned interests. The manager only earns when you earn.
  • Transparency. The ratio is fixed upfront and profit is calculated from actual results.
  • Ethical screening. The capital can only be invested in permissible activities.

What to check before you invest

  1. The profit-sharing ratio, in writing.
  2. What the money can be invested in, and who checks that it stays Sharia-compliant.
  3. How and when profit is calculated and paid.
  4. How you can withdraw your capital, and how long it takes.

M20's Mudarabah mandates are designed for larger and institutional investors, with every structure reviewed by our Sharia advisory committee.

This article is for general information only and is not investment advice. Investments can go down as well as up. Speak to a qualified adviser about your own circumstances.