Profit and Loss Sharing
المشاركة في الربح والخسارة
The principle that capital earns a return only by sharing in the risk of the venture, through Mudarabah or Musharakah.
Definition
The organizing principle of Islamic finance: a provider of capital is entitled to a return only if it shares in the risk of loss, in contrast to interest, which guarantees the lender a return regardless of outcome. The two profit-and-loss-sharing contracts are Mudarabah (one party provides capital, the other management, profit shared by ratio, financial loss borne by the capital provider) and Musharakah (all parties provide capital and share profit by ratio and loss by capital share).
Sale- and lease-based contracts like Murabaha and Ijarah are accepted alternatives but are considered second-best to genuine profit and loss sharing by many scholars.
Related Terms
Mudarabahمضاربة
A profit-sharing partnership where one party provides capital and the other provides expertise.
Musharakahمشاركة
A joint partnership where all parties contribute capital and share profits and losses proportionally.
Musharakah Mutanaqisahمشاركة متناقصة
Diminishing partnership - a widely used halal home financing structure.
Ribaربا
Interest or usury - the most strictly prohibited practice in Islamic finance.
Israfإسراف
Extravagance: spending beyond need or reason, prohibited in the Qur'an and central to Islamic personal finance.
GCCمجلس التعاون الخليجي
The six-country Gulf Cooperation Council - the world's most concentrated Islamic finance region.
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Profit and Loss Sharing (المشاركة في الربح والخسارة) - The principle that capital earns a return only by sharing in the risk of the venture, through Mudarabah or Musharakah. The organizing principle of Islamic finance: a provider of capital is entitled to a return only if it shares in the risk of loss, in contrast to interest, which guarantees the lender a return regardless of outcome. The two profit-and-loss-sharing contracts are Mudarabah (one party provides capital, the other management, profit shared by ratio, financial loss borne by the capital provider) and Musharakah (all parties provide capital and share profit by ratio and loss by capital share).
- The principle that capital earns a return only by sharing in the risk of the venture, through Mudarabah or Musharakah.
- Category: General
- Related: Mudarabah, Musharakah, Musharakah Mutanaqisah, Riba, Israf, GCC
- Compare related Shariah-compliant products on HalalWallet
Source: HalalWallet (halalwallet.ca)
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Reviewed by: HalalWallet Editorial Team
Last reviewed: 2026-10-01
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