What is the legal definition and terminology for a partnership involving both capital and labor?

General Chapter

Al-Mughni

Book of Partnership

Book 18 · Issue 1 · Bab 1

Open in Qurani

Primary text

This arrangement, known as Mudarabah or Qirad, involves one party providing capital to another to engage in trade, with the resulting profit being shared according to a pre-stipulated condition between them. The people of Iraq term it Mudarabah, derived from traveling (striking the earth) for trade, referencing the verse where some are 'striking in the land seeking the bounty of Allah' (Quran 20 of Surah Al-Muzzammil). Alternatively, it might derive from each party taking a share of the profit. The people of Hijaz call it Qirad, possibly derived from 'cutting,' implying the capital provider cuts a portion of his wealth and a portion of the profit for the worker. It is also suggested to stem from equalization or balancing, as the capital and labor balance each other. Scholarly consensus affirms the permissibility of Mudarabah in principle. This is supported by the action of Umar ibn al-Khattab, who entrusted the wealth of an orphan for Mudarabah, and the incident where he judged the profit split between his two sons who conducted trade using borrowed funds, taking half the profit when the arrangement was clarified as Qirad. Furthermore, Uthman conducted Qirad, and both Ibn Mas'ud and Hakim ibn Hizam also engaged in Qirad, resulting in consensus among the Companions. The necessity of Mudarabah arises because capital only grows through trade, which not all capital owners can perform, nor can all skilled traders access capital; thus, it was legislated to meet both needs.