If a person enters into a Modharabah contract with another, only sharing the profits of the business, and not sharing the losses, would that be allowed in Islam, when the other party is willing to take him in as a partner in profits only?
Mudharabah is a form of business partnership where two or more parties become partners in a concern in such a way that one or more of them agrees to provide the finances and others agree to provide labor. The profits, if any accrue, are shared by all in a specified and agreed upon proportion. The losses are borne only by those partners that have provided the finances. The loss of the labor providing partners in case the partnership is suffering losses may be borne in the shape of not getting the remuneration for the services they have provided. Different variants of this arrangement may exist on the basis of the differences in the mutual agreement.
The situation that you have referred to seems to be such that a person wants to become a partner in a Mudharabah concern on the condition that he shall provide finances, but shall not share in the losses of the concern. In other words, although he shall have a share in the profits, if any accrue, yet shall not share the losses of the concern.
There is no need to call such an arrangement a Mudharabah arrangement. The person, rather than being considered a partner, should be considered a creditor of the partnership, who wants to avoid earning interest and has therefore agreed to have a specified proportion in the profits of the concern. And because he is a creditor, he is not liable to share in the losses of the concern. The earnings of such a creditor can by no means be termed as interest.
I therefore, think that there is nothing wrong with such an arrangement. However, we should not term it as a Mudharabah arrangement, as Mudharabah is a well-defined term, the scope of which does not accommodate the stated arrangement.
27th November 1998