MODARABA

COMPANIES AND
MODARABAS

AL-QURAN

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).

http://www.modarabas.com.pk/

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 80s 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
The Sector is monitored and regulated by the
Registrar
(Modaraba Companies and Modarabas)
SECP

Religious Board
Authority which certifies that Prospectus of the
Modaraba is Shariah Compliant
Justice/Ex-Justice of a Court plus 2 Scholars

Modaraba Management Company (Modarib)

Private/Public Limited Company
with Board of Directors

Modaraba Fund
(Pool of Money of Rab-ul-Maal)
Separate Legal Entity

Prospectus
(business activities)

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, 1980registration 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
Pakistans 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.ofManagementCompanies

30

27

24

24

24

No.ofModarabas

32

28

25

25

24

PaidupCapital

7,827

7,406

6,999

6,644

7,175

TotalEquity

8,401

9,233

10,062

10,062

11,456

TotalAssets

17,574

21,131

23,736

23,736

29,281

TotalIncome

4,140

3,939

5,025

5,025

6,583

LeasingIncome

3,066

2,966

3,082

3,082

4,631

271

323

410

410

624

Miscellaneous&OtherIncome

803

650

1,533

1,533

1,327

NetProfitafterTax

956

794

811

811

962

Musharaka&MorabahaIncome

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 Associations 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
Joint Initiative of the IDB (Islamic Development Bank) and IFSB (Islamic
developments
of Islamic
Financial Services Board) - Ten year framework
for the Islamic financial
industry development. General regulatory framework for Islamic financial
services industry. Market
Capital
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