MODARABA
COMPANIES AND
MODARABAS
AL-QURAN
ى
َ ق
ِ َ ب ا م
َ ْ ا و ر
ُ َ ذوَ ٱَّلل
َ َّ ْ ا وُ قَّ ت ٱ ْ ا وُ ن م
َ ا ء
َ ين
َ ذ
ِ َّ ٱل ا ه
َ ُّ يَ أٰٓ يَـ
َ ِٱلربَ ٰٓواْ ِإن ُكنتُم ُّمؤ ِمن
ين ِ ِم َن
Believers, fear Allah and give up what is
still due to you from usury, if you are
believers;
[SURAH AL-BAQARAH AYAH 278]
THE MODARABA- DEFINITION
Modaraba is a kind of partnership , wherein one party provides finance to
other party for the purpose of carrying on business . The party who provides
the finance is called the “ Rabb-ul-Mal”, whereas the other party who who
puts its management skills for the Modaraba is called the “ Modarib” (working
partner)
Modaraba is one of the prime modes of Islamic Financial System. The concept
of Modaraba was given fourteen hundred years back by our Holy prophet
Hazrat Muhammad (Peace be upon him).
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CONSTITUTION OF MODARABA COMPANIES AND MODARABA
In Pakistan the process of Islamization of the economy was initiated in 1980 when
the Government introduced the concept of Modaraba for Islamization of the
economy in the banking and corporate sector.
The Modaraba Companies & Modaraba (Floatation & Control ) Ordinance, 1980
and Modaraba Companies and Modarabas Rules 1981, were promulgated in the
early 80’s by the Government of Pakistan.
The Ordinance and Rules provides matters relating to the registration of Modaraba
companies and the floatation, management and regulation of Modarabas
Lets see the ordinance structure
STRUCTURE
Regulator Religious Board
The Sector is monitored and regulated by the Authority which certifies that Prospectus of the
Registrar Modaraba is Shari’ah Compliant
(Modaraba Companies and Modarabas)
SECP Justice/Ex-Justice of a Court plus 2 Scholars
Modaraba Management Company (Modarib)
Private/Public Limited Company
with Board of Directors
Modaraba Fund Prospectus
(Pool of Money of Rab-ul-Maal) (business activities)
Separate Legal Entity
THE REGULATORY FRAMEWORK
The Rules & Regulations and the regulatory framework applicable to Modaraba
and the Modaraba Companies are:
-The Modaraba Companies & Modaraba (Floatation & Control) Ordinance, 1980-
registration of Modaraba Companies and floatation, management and regulation
of Modarabas.
- The Modaraba Companies & Modaraba Rules, 1981
- The Companies Ordinance , 1984
- The Religious Board
- Prudential Regulations for Modaraba
ROLE OF MODARIB IN PAKISTAN
A Modaraba floated by an MMC is the manager (Modarib). He uses his
entrepreneurial skills and manages the business of the Modaraba. The profit
earned is distributed among the partners at a specified and defined ratio.
In Pakistan the Modarib who is the MMC, manages the Modaraba Ventures. By
law the Modarib can charge maximum profit of 10% of the net annual profits of
the Modaraba.
BENEFIT TO RABB-UL-MAL
One party has the funds but does not have the expertise and another party
has the expertise but does not have the funds. Modaraba gives opportunities
to both the parties i.e. Modarib and Rabb-ul-Mal to join hands for the
business under the Shariah.
Rabb-ul-Mal can liquidate his or her investment anytime by selling his/her
Modaraba Certificate through Stock markets to other Rabb-ul-Mal.
In Pakistan, the income of a Modaraba is tax free if the Modarib distributes
90% of the profit to Rabb-ul-Mal earned in any single year.
MODARABA AS AN ISLAMIC
FUND
Modaraba can:
▪ Invest in the stock market
▪ Indulge in Ijara, Morabaha and Musharaka Financing
activities
▪ Indulge in trading of Halal Commodities
▪ Undertake project financing activities
PERFORMANCE OF MODARABA AS AN
ENTITY IN PAKISTAN
▪ Modaraba Sector has continuously been
playing an active role in the growth of
Pakistan’s economy. During the last two
decades, the Modaraba Sector has enrolled its
place in the financial intermediaries of
Pakistan and has been able to create a market
niche for themselves in the corporate sector.
Statistics
As on June 30, 2008
(Rs. in million)
2004 2005 2006 2007 2008
No. of Management Companies 30 27 24 24 24
No. of Modarabas 32 28 25 25 24
Paid up Capital 7,827 7,406 6,999 6,644 7,175
10,062 10,062
Total Equity 8,401 9,233 11,456
17,574 21,131 23,736 23,736
Total Assets 29,281
Total Income 4,140 3,939 5,025 5,025 6,583
Leasing Income 3,066 2,966 3,082 3,082 4,631
Musharaka & Morabaha Income 271 323 410 410 624
Miscellaneous & Other Income 803 650 1,533 1,533 1,327
Net Profit after Tax 956 794 811 811 962
Innovation
Islamic Financing Agreements
▪ Diminishing Musharaka Agreement
▪ Ijara Agreement
▪ Istisna Agreement
▪ Modaraba Agreement
▪ Musawamah Agreement
▪ Musharaka Agreement
▪ Murabaha Agreement
▪ Syndicate Modaraba Agreement
▪ Syndicate Musharaka Agreement
▪ Sukkuk Agreement
▪ Salam
UPDATING THE LEGAL
FRAMEWORK
▪ Proposed Amendments in the Ordinance, Rules,
Regulations and Guidelines governing the
Modarabas companies and Modarabas
▪ Relaxation of Prudential Regulations
▪ relaxation in current assets to current liabilities ratios
from 1 : 1 to 0.75:1
TRENDS AND
CHALLENGES
◼ New trends
➢ Concept of Islamic Funds becoming popular
➢ Increasing number of entrants
◼ Regulatory challenges
➢ Stringent eligibility/fit and proper criteria and performance
benchmarks to be introduced, research capabilities to be
improved
➢ Investor base broadened: (public sector) provident and
pension funds
➢ International best practices to be implemented across the
sector
➢ Industry Association’s role to be strengthened, in the areas of
training, examinations and licensing of intermediaries
Incentives
▪ Exemption from capital gains tax
▪ In view of the practical difficulties faced by the industry
Guidelines for issuance of Certificates of Modarba
(COM) was amended and Modarabas were allowed to
issue COM after obtaining credit rating of minimum
investment grade from a credit rating agency registered
with the SECP.
▪ Earlier the precondition was payment of dividend for two
successive years.
▪ Encourage mergers/acquisitions/revivals for
consolidation and capitalization of the sector
Ensuring transparency and
regulatory control
▪ Placement of quarterly accounts on website
▪ Placement of shares either with the SEC (in case of physical) or placed in an account
at the Central Depository Company of Pakistan Limited.
▪ Joint Forum of the SECP/SBP on Islamic Financial Services
▪ Code of Corporate governance
▪ AAOIFI (Accounting and Auditing Organization for Islamic Financial Institutions)
Bharain, 1991
▪ International Best practices - to highlight areas that are non-permissible for
investment
▪ Membership of Islamic Financial Services Board
▪ Industry Associations- product development
▪ Shariah Boards on every institution
▪ Holistic legislation, standardization and harmonization to avoid conflict and overlap.
Monitoring and Enforcement
▪ Monitoring at two levels
▪Offsite
▪Onsite
▪ Enforcement
▪Administrative actions, e.g. revocation of license
▪Imposition of fines
▪References to courts for prosecution and winding up
Exploring the developments
of Islamic Capital Market
Joint Initiative of the IDB (Islamic Development Bank) and IFSB (Islamic
Financial Services Board) - Ten year framework for the Islamic financial
industry development. General regulatory framework for Islamic financial
services industry.
International infrastructure institutions such as the:
▪ Islamic Financial Services Board (IFSB)- Regulator
▪ International Islamic Financial Market (IIFM)-Market
▪ (General) Council for Islamic Banks and Financial Institutions (CIBAFI)-
Promotion of IFIs
▪ Arbitration and Reconciliation Centre for Islamic Financial Institutions
(ARCIFI)- Arbitration
▪ International Islamic Rating Agency (IIRA) – Credit rating
▪ Liquidity Management Centre (LMC)- Investment of surplus funds of IFIs.
▪ Auditing and Accounting Organization for Islamic Financial Institutions
(AAOIFI)- Accounting
Promotion of Islamic Finance
▪ Harmonization / standardization
▪ IDB and IFSB Ten Year Framework
Stands for economic and financial integration of the
Muslim Ummah
▪ -International Islamic Financial Market
▪ -laws, regulations
▪ -transactions / legal documents
▪ -concepts (overcome issues)
▪ Obtain Membership
▪ Become part of the IFSB Workshops
▪ Emulate role models like Malaysia, Bahrain
▪ Memoranda of Understanding
▪ Networking
