Introducing Human Capital Mudarabah

A Mudarabah contract is based on a partnership in which one partner is the financier (the investor, or rabb-ul-mal) and the other partner (the fund manager, or “mudarib”) manages the financier’s investment in a business activity. Both parties agree in advance to a profit sharing ratio.

If the investor (rabb-ul-mal) leaves it open for the mudarib to undertake whatever business he/she wishes, the mudarib has the liberty to invest the money as they see fit. This type of mudarabah is called “al-mudarabah al-mutlaqah” (unrestricted mudarabah)

Most people who earn income are engaged in business activity; they are trading in their time and skilled labor in order to receive an income. Whether the person is a doctor, engineer, teacher, mechanic etc. they are all selling their time and skilled labor in order to generate an income.

Typically, Mudarabah implementations have been limited to only certain types of business activity i.e. trading in material goods. However, based on the fact that most income earners are engaged in business activity, I believe the applications of Mudarabah are far more versatile than current implementations suggest. Specifically, I believe Mudarabah contracts can be used to finance the personal needs of virtually anyone who plans on earning income. I call the product “Human Capital Mudarabah” or HCM.

In a nutshell, HCM allows people to raise money for themselves in return for them committing to share a fixed percentage of whatever they earn (profit sharing ratio) for a fixed period of time in which they are working.

Financing this way guarantees affordable payments for the financed (since payments are a percentage of income rather than a fixed dollar amount) and allows investors to invest in a more stable asset class than equity i.e. wages.

When adopted in mass, Human Capital Mudarabah will form the foundation of an economy more equitable than its debt-based counterparts; an economy where human capital is valued more than monetary capital and where opportunity is based on the merit of the individual rather than the social class they belong to.

As I will illustrate in coming posts, Human Capital Mudarabah agreements are better for the financed, the financier and the economy as a whole.


    1. Couldn’t people take advantage of the invests, rabb ul mal. When I think about HCM I think about it in terms of my student loans. If I went to an invester and ask them to invest in my education, so that when I graduate and are employed, I will share a percentage of my income with them for let’s say 5 years. What is going to stop me from getting a low paying job and after the five years get a well paying job. Let’s say I did this because I’m petty and evil. 😂😂😂.


    2. I think HCM is The best financial product I have ever come across but I also think it Can be improved. Let’s use my student loans for example. I think it should depend on how much a person makes not just a persons income. Peoples income change overtime, whether it’s because of the economy, because of their experience, or because of intention. I think that an invester should say I will invest in your education if you are willing to share with me a certain percentage of your income when you are earning above this amount. I think this is also a lot better for the borrower because their are times when paying a share of your income is very hard. Letting the borrower pay when they are in good financial position means that they are less likely to suffer from the payments they are giving to you and You are more likely to benefit. Just my two cents. Thank you for sharing this with us.


    1. Start with the return the investor aims to achieve then project what the mudarib is expected to earn in their coming years of employment.

      Take the following example:

      Kareem is looking to make an investment that yields him a 6% return or higher.

      Adam 🙂 just graduated college and needs $25,000 in financing to buy his first car.

      Kareem estimates Adam will earn $60,000 annually over the next five years.

      Adam and Kareem agree to an HCM agreement wherein Adam agrees to share 10% of his income (profit share) over the next 5 years he is fully employed in return for $25,000 in financing.

      Kareem’s return depends on how much income Adam actually earns.

      If Kareem’s prediction that Adam will earn a $60,000 average annual income is correct, an investment of $25,000 in Adam today will yield Kareem a 6.4% annualized return over 5 years.


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