Islamic Finance | Tutorials
Difference Between Mudaraba and Musharaka
Mudaraba is a partnership in profit in which one partner provides capital (rab al-mal) and the other provides labor and business expertise (mudarib). In essence, mudaraba is a special case of musharaka (or sharika), with each type of contract having its distinguishing features. Musharaka is an agreement between two or more partners to combine their assets, services, obligations or liabilities for the purpose of making profit. A mudaraba contract can be differentiated from a musharaka contract in the following main respects:
- Entitlement to a share of profit in musharaka is based on the capital contribution of all partners whether in the form of cash, goods, tangible assets, services or creditworthiness (in case sharika is based on reputation). The subject of the musharaka contract is some form of capital contribution. Entitlement to a share of profit in a mudaraba, on the other hand, hinges on two elements: (1) the existence of capital (subject to the conditions of musharaka capital), and (2) the work undertaken by the mudarib (a type of contribution that is different from the mudaraba capital).
- In musharaka, the labor (including management skills and business expertise) is to be provided jointly by the parties (partners), whereas in mudaraba, it falls on the mudarib to provide for all labor requirements (the other partner's contribution is generally confined to providing capital).