What is Mudaraba Accounting?
Mudaraba accounting refers to the financial reporting of shariah-compliant profit-sharing contracts in which one party (the rabb-al-mal) provides capital and the other (the mudarib) provides management. Profits are shared by ratio, and losses fall on the capital provider unless caused by the mudarib’s negligence.
How It Works
- The rabb-al-mal recognises the mudaraba capital as an investment on its books.
- The mudarib manages the funds and tracks the underlying portfolio separately.
- Profits are distributed according to the agreed ratio; the mudarib’s share is recognised as fee income.
- Losses are absorbed by the rabb-al-mal except where mudarib negligence is proven.
- Disclose the mudaraba arrangement and significant exposure in the notes.
Saudi Context
Mudaraba structures back many Saudi Islamic investment accounts at SAMA-supervised banks and at the Public Investment Fund’s shariah-compliant funds. AAOIFI and SOCPA-adopted IFRS together shape the disclosure framework.
Example
An investor places SAR 500,000 with a fund manager under a 70/30 mudaraba in favour of the investor. Annual profit of SAR 40,000 is split: SAR 28,000 to the investor and SAR 12,000 fee income to the manager.