In Islamic finance, Mudarabah is a distinct type of partnership, wherein one partner provides the capital to an entrepreneur (another partner) for investing in a commercial initiative, with the objective of sharing profit from the commercial entity. The entrepreneur then undertakes the activities and management of the entity and the profit is shared between the partners in a predetermined quantum, while loss is borne by the investing partners. The investing partner will not interfere in the day-to-day management, but may specify certain conditions related to managing the capital. In other words, he may be referred to as a silent partner.
In Mudarabah, the profit distribution must be pre-determined by both the parties and will be solely dependent on the profit accrued, which is independent of the capital invested in the commercial entity. The Shariah law does not indicate the percentage distribution of profit and will be at the discretion of both parties. Either party, in accordance with the terms and conditions given, can terminate a Mudarabah contract at any time.