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To understand Mudharabah we must first recognize that usury or money-lending for profit was a total anathema to the early Muslims, and still remains forbidden. Other forms of profit making therefore had to be defined so as not to be confused with this sinful activity.

Dharba means something like travel seeking reward or bounty', often interpreted as foreign trade. Such activity was common at the time, and even considered honorable. However, traveling in these days was subject to many threats (bandits, adverse weather, and navigational problems) and this trade was quite risky. Rich merchants (referred to as the financier' from here on) often did not want to accept such risks and therefore hired others (the trader'). In such cases, the financier did not want to be considered a mere money-lender.

Mudharabah is therefore a legal term defining the relationship between the two parties in such a trade. The key to recognizing a Mudharabah agreement is to look for a profit splitting ratio. This must be determined in advance and would depend upon many factors such as the type of work and the difficulty. The profit sharing cannot be conditional, nor can it favor one party only. Even if the split is ninety nine to one, that would be valid; one hundred percent would not.

Other conditions can be attached a typical one being a time constraint. Both the start and the end of the relationship can be conditional, so long as the conditions are clear and unambiguous.

The relationship is be nullified immediately should one of the conditions be broken. In such a case, the trader would get paid only for the work done and the financier would get the whole of the profit remaining.

Once a trader had accepted a Mudharabah that trader is bound to look after the interests of the financier as a priority. The trader would need the permission of the financier before accepting another Mudharabah. Without this, any profit made by a second contract would be due to the financier in proportion to the original agreement.

Profit cannot be shared before a defined end as it is recognized that losses can result right up until the last moment.

The system works because the trust required is a matter between two believers in the same faith. Not only are the two party's actions judged by their peers; both are expected to fear that their actions will be judged by a higher power at the end of their time. No need then even for a handshake.

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