Mudaraba is a relationship between an investor and an entrepreneur, where the investor provides all the capital while the entrepreneur (called mudarib) has the abilities to perform the project. Equity is solely owned by the investor. Profits are shared between them according to the agreement, while losses are borne solely by the investor, the entrepreneur having lost his time and efforts. The only case the entrepreneur bears the losses is when these are the result of misconduct or negligence by him.

Mudaraba is the basis of the Islamic bank model. Saving accounts in the bank are mudaraba contracts between the account holders, who act as investors, and the bank, who acts as a single mudarib for all of them. Sharia allows the mudarib to invest the money directly or indirectly by engaging in any other form of contract with a third party. Thus, the bank enters with people who need capital in an array of different Islamic contracts like mudaraba, ijara, murabaha, etc. The profits that the bank obtains from these operations are shared between the bank and the account holders by virtue of the initial mudaraba agreement, while losses are borne by the account holders.