Mudarabah (Working capital finance)

Mudarabah is the core of Islamic financing, and many agreements in the Middle East use this practice. The basis of it follows Islamic Law (Shariah), in which interest based financing is not allowed.

However, Mudarabah works in ways similar to angel investment procedures. Such practices involve a partnership where a partner provides investment capital for a business. The person investing it (like an Angel Investor), is referred to as the "Rabb ul Mal" where as the business or entrepreneur looking to build a business is referred to as the "Mudarib." Generally, the investor will not participate in the everyday management of things in this type of agreement.

There are several different types of Mudarabah, just like there are angel investment partnerships. Parties involved have to agree from the start what portion of the profit/loss each side is responsible for. The agreement can also have different returns based on the level of work, for example - set percentages may be different for businesses that operate in multiple regions.

Mudarabah and Musharakah partnerships can sometimes be combined together. Just like business entrepreneurs looking for angel investment, some of the capital may come from the initial investor, while a third party also adds an investment of their own - with permission granted by the original investor. This often works similar to "Silent Business Partnerships" - where the entrepreneur carries out the daily management of the company.

Banks in the area (and various international banks) also often provide Mudarabah services, where the bank plays the Rabb-ul-Mal investor or venture capitalist role, and the business entrepreneur (Mudarib) is responsible for all business operation. Again, like with private investors - profit sharing is predetermined to a set ratio.

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