In Islamic finance, what does the term "mudaraba" specifically refer to?

The term "mudaraba" in Islamic finance specifically refers to a profit-sharing partnership where one party provides the capital while the other party, often an entrepreneur or manager, conducts business using that capital. The profits generated from the business are shared between the parties according to a pre-agreed ratio, while any loss incurred is borne solely by the provider of the capital. This structure aligns with Islamic principles that prohibit predetermined interest rates and promotes risk-sharing and ethical investment.

This profit-sharing arrangement emphasizes the collaborative nature of investment and encourages entrepreneurial initiatives within the framework of Shariah law. Mudaraba contrasts with other structures in Islamic finance, such as leasing agreements or fixed loan arrangements, where the dynamics of capital return differ significantly.