Muḍārabah Structuring Framework
A trust-based investment contract in which one party (Rabb al-Māl) supplies capital and another (Muḍārib) supplies labour and expertise, sharing profits per a pre-agreed ratio while losses are borne by capital alone — except where caused by misconduct or negligence of the Muḍārib.
Shariah Basis
"The Prophet ﷺ traded on a Muḍārabah basis with the capital of Khadījah (RA) before prophethood."
"Muḍārabah — Restricted and Unrestricted."
"Revised capital adequacy treatment for Muḍārabah-based investment accounts."
AAOIFI Shariah Standard No. 13 — Muḍārabah
Parties
Capital provider — contributes funds, bears financial loss in absence of muḍārib misconduct.
Working partner — contributes expertise and labour; loses effort only in financial loss.
Essential vs Prohibited
Essential Conditions
- Capital must be clearly defined in amount, currency and form (cash, not debt)
- Profit-sharing ratio is agreed in percentages, not fixed amounts, at contract inception
- Losses are borne exclusively by Rabb al-Māl unless attributable to Muḍārib misconduct or negligence
- Muḍārib has discretion within the agreed (restricted or unrestricted) mandate
- No guarantee of capital or profit by the Muḍārib
- Profit realisation requires actual completion of the underlying venture (no profit on capital alone)
Prohibited Elements
- Guaranteed capital or fixed return on capital (would convert it into ribā)
- Profit denominated in absolute amounts rather than percentages
- Withdrawal of capital before liquidation in a way that disturbs profit attribution
- Commingling without consent in restricted muḍārabah
Transaction Flow
- 1
Mandate & Investment Policy
Define restricted vs unrestricted muḍārabah, sectors, instruments, geography.
- 2
Capital Contribution
Rabb al-Māl transfers capital in agreed currency and form.
- 3
Investment Deployment
Muḍārib invests within mandate; activity log maintained.
- 4
Periodic Valuation
Mark-to-market or constructive valuation; profit/loss provisional.
- 5
Profit Distribution
On realisation/liquidation, profit shared per ratio; loss borne per Shariah rules.
- 6
Termination
Closing reconciliation, audit and final settlement.
Required Documentation
- Muḍārabah Master Agreement
- Investment Mandate (Restricted / Unrestricted)
- Capital Receipt & Acknowledgement
- Profit Equalisation & Investment Risk Reserve policy
- Liquidation & Settlement Statement
- Shariah Adviser Approval Memorandum
Risk Controls
- Capital segregation between restricted and unrestricted pools
- Profit-attribution model independently validated annually
- Muḍārib misconduct/negligence trigger clauses defined
- PER/IRR reserves with disclosure
- Independent valuation and Shariah audit
OSAS-MUD™ — Advisory Dossier
Open the corresponding OSAS™ advisory standard to access the approval memorandum template, transaction layout sheet and Shariah opinion structure for this contract.
Open OSAS-MUD™Part of the Onike Framework Ecosystem
OFIS™ · Onike Framework for Islamic Finance
Reviewed and Approved by Abdul-Azeez Onike Morufu — Registered Shariah Adviser, Securities Commission Malaysia
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