Musharakah and Mudarabah, explained without the jargon

Both are profit-sharing finance structures, and both are alternatives to interest-based lending. They are frequently mentioned together, which makes it easy to assume they are interchangeable. They are not.

Mudarabah: one partner funds, the other runs

Mudarabah is a partnership in which one partner gives capital to the other for the latter's investment in a commercial venture. The first partner is known as Rabb-ul-mal, the owner of the investment. The other is the Mudarib, who is solely responsible for the management and operations of the business. The split of labour is the defining feature: money on one side, management on the other.

Musharakah: both sides share in it

Musharakah is an Arabic term meaning “to share.” In business, it refers to a joint venture where both parties share in the benefit or loss. It comes in two common forms:

1. 1Diminishing partnership — often used to buy real estate. A property is acquired jointly, and the lender gradually transfers his share of the equity to the borrower in return for payments.
2. 2Normal Musharakah — no fixed end date. It continues as long as the parties agree, which suits long-term initiatives.

Where the line blurs

A Mudarabah contract usually assumes the Mudarib has not invested his own money — he runs the business, while the Rabb-ul-mal funds it. But a Mudarib may wish to bring some of his own capital in. At that point the arrangement stops being a Mudarabah and becomes a Musharakah. The names describe the shape of the deal, not the intentions behind it.