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Mudaraba

In a mudaraba contract when a profit is realized, it is shared between the financier and the entrepreneur according to a pre- determined ratio. Importantly, profit- sharing rates must be determined only as a percentage of the profit and not as a lump sum payment. In the case of a loss, providing it has incurred in the normal process of business and not due to neglect or misconduct by the entrepreneur, the financier loses all his or her money, while the entrepreneur merely loses his or her time and effort. In cases of proven negligence or mismanagement by entrepreneurs, however, they may be held responsible for the financial losses. For this reason mudaraba contracts are considered to be very risky and require a great deal of confidence in the borrower. The entrepreneur does not invest anything in the business save his or her labor and should not claim any wage for conducting the business. These types of contracts are most common in investment projects in trade and commerce that are capable of achieving full operational status in a relatively short period.