The term ‘Mudarabah’ has been derived from one of the meanings of the Arabic word ‘ﺏﺮﺿ’which means ‘Travel’. Thus the word ‘Mudarabah’ means ‘Travel’ for undertaking business.
Mudarabah is a partnership in profit whereby one party provides capital and the other party provides skill and labor. The provider of capital is called ‘Sahib al-maal’ while the provider of skill and labor is called ‘Mudarib’.
So, Mudarabah may be defined as a contract of partnership where the Sahib al-maal provides capital to the Mudarib for investing it in a commercial enterprise by applying his labor and endeavor. Both the parties share the profit as per agreed upon ratio and the losses, if any, being borne by the provider of funds i.e. Sahib al-maal except if it is due to breach of trust i.e. misconduct, negligence or violation of the conditions agreed upon by the Mudarib. If there is any loss incurred due to the reasons mentioned above, the Mudarib becomes liable for that.