Islamic Finance

Human Capital Mudarabah – an Islamic answer to Student Loans?

Author: Rakaan Kayali

Rakaan Kayali is the author @ Practical Islamic Finance ( and founder @ BFF Income Share Funding ( He was the only student in his graduating class to receive the honor “With Distinction in Finance” for research he did and published at The Ohio State University entitled “The viability of Islamic finance as a substitute for interest-based banking”. He holds degrees in Computer Science & Engineering as well as Finance from The Ohio State University.  

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 e.g. 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 am recommending Mudarabah contracts be used for financing consumer needs. I call the product “Human Capital Mudarabah” or HCM.

With Human Capital Mudarabah, an individual receives a lump sum of money (the mudarib) and commits to sharing with their financier (rabb-ul-mal) a portion of whatever income they earn (profit sharing ratio) for a fixed period of time in which they are fully employed.

Take the following example:

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

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

Adam and the investor agree to an HCM agreement wherein Adam commits 10% of his income over the next 5 years he is fully employed in return for $25,000 in financing today.

The investor’s return depends on how much income Adam actually earns for the duration of the funding agreement.

Consider the following possible outcomes:

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

If Adam earns more than $60,000 annually, the investor’s average return will be more than 6.4%.

If Adam earns less than $60,000 annually, the investor’s return will be less than 6.4%.

If Adam is unemployed for a year during the life of the contract (so the duration of the contract is 6 calendar years) and Adam earns $60,000 annually when he is working, then the investor’s return will be 4.7%

Regardless of how much the investor’s return is, Adam will not be in default so long as he paid the agreed upon 10% of his income for 5 years in which he was fully employed.

There are a number of terms that need to be included in any HCM agreement in order to guarantee the rights of the investor and investee. For instance:

The term “fully employed” needs to be clearly defined in the contract.

Another stipulation is that there must be a limit on the total percentage of income a mudarib can commit to investors. If the percentage of committed income is too high, the mudarib may decide that it’s not worth it to work anymore. However, if the percentage is reasonably low, the mudarib will always be incentivized to work towards maximizing their income because not doing so would mean they have less income to spend on themselves.

For example, a mudarib should not be allowed to commit 50% of their income. Perhaps a reasonable limit is somewhere around the 15% mark for any one mudarib.

Financing this way guarantees affordable payments for the financed (since payments are a fixed 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’ve illustrated in other posts, Human Capital Mudarabah agreements are better for the financed, the financier and the economy as a whole.

If you’re interested in receiving financing using Human Capital Mudarabah, and live in the United States, or would simply like to learn more about how the product works, visit:


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2 Comments. Leave new

  • There are several issues with this.
    One is it incentives students to chase money, whereas an education is about a lot more than this.
    Another is that it puts pressure on the student to graduate, whereas they might want to do a PhD. Or cease studies and pursue another degree altogether.
    A third is that the investor is taking a risk that nobody is ever willing to take. It’s another incarnation of ‘lets educate our community through charity!’ which has proven itself already to be wishful thinking.
    Fourthly the temptation is too great to put into this contract clauses which turn it into an interest based repayment scheme. Else the poor graduate might have not enough to live on (graduate salaries in the UK are appalling and I invite the author to try realistically thinking about this in GBP!)
    Fifthly nobody will opt for this if it is less convenient than state backed traditional student loans. So even if designed perfectly, uptake will be negligible, and we haven’t solved the problem at hand.
    Sixthly, it is a clear ‘legal ploy’ as they say in Islamic jurisprudence; nobody ever thinks of an eighteen year old going to university as a business person, because this simply isn’t the case. Employees are a terrible way to get a return on investment, even if the student decides to go and work at all, in the same country, etc.
    Seventhly, this is only even useful if the lump sum covers all fees, plus food transport rent bills etc. University in the UK is incredibly inflexible and I don’t know if the author appreciates this coming from the US.

    The state exists for a reason. Almost no countries in the first world put their young people through what the US and England are doing. This is firmly the domain of the state and the only real solution is to vote Labour. We can afford to educate people as a society.

    • Good product mashAllah
      @ Moemen in response to the issues noted:
      1 + 2) If the students don’t want to get a job and earn money after they graduate then this product isn’t suitable for them. The expectation of the financier is to fund the student in a halal manner and generate a return on their investment. The student is aware of this so should respect the terms of the agreement and seek to generate a ROI.
      3) This is exactly the kind of thinking we need in our community. If an established dentist sees that an aspiring dentist is faced with the student financing obstacle then why not fund their education and generate a return at the same time? If they can provide a Qard Hasan then great, but at least with this model it provides an incentive for the investor to help the student maximise their potential and earnings – cooperation and community type thinking are present in this arrangement.
      4) Temptation to deal with interest is always great. Part of the challenge. Of course depending on the course, location and earning potential you’d adjust the investment and profit share/term.
      5) Demand will be dictated by the market. If students had the choice of being burdened with an interest bearing loan (and depriving their education/earning of Baraka) against a cooperative scheme where is no debt or interest element, pretty sure they’d be a lot of demand for the latter.
      6) New product so it’s an education process. Sure they can understand that they’ll be paying back a portion of their earnings in return for the funding. That being said, how many students understand the implications of obtaining student financing? Would you rather burden yourself with debt and mounting interest when employment may be uncertain (and the interest rates on the loan are constantly changing) or an investment which is linked to your level of earnings. re ROI on employees – dictated by the typical investment criteria as described in response 4.
      7) So are you saying that the student has to use funding to pay for everything? They can’t get a part time job, live at home, cover part of the fees from family/friends? The investment encourages responsible living (as opposed to student financing which encourages the opposite) and smart financial management which is an excellent education process that will serve them well in their career. As the investor I wouldn’t want to invest in someone who wasn’t taking due care to ensure that they could generate a return on my investment.

      Completely agree with your last point. It’s an incredible shame what’s going on and student financing, and in my opinion, is the biggest financial challenge (bigger than mortgages – can always rent so no barrier to ‘living’) we currently face as an Ummah in the UK and US. State driven solutions are the best so we should be pushing for policy change all the time. However, alternative solutions like this HCM product, finding alternatives to university (apprenticeships, technical colleges, professional quals which don’t require a degree, community based funding initiatives etc) should all be employed at the same time. It’s a very tough time for us but do remember that ‘every nation will be given a trial and the trial of my nation is wealth’ Rasool (pbuh)


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