1. MODARABA COMPANIES AND MODARABAS

2. AL-QURAN
يَـٰٓأَيُّهَا ٱلَّذِينَ ءَامَنُواْ ٱتَّقُواْ ٱللَّهَ وَذَرُواْ مَا بَقِىَ مِنَ ٱلرِّبَوٰٓاْ إِن كُنتُم مُّؤۡمِنِينَ
Believers, fear Allah and give up what is still due to you from usury, if you are believers;
[SURAH AL-BAQARAH AYAH 278]

3. 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).

4. 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

5. STRUCTURE Modaraba Management Company (Modarib)
Private/Public Limited Company
with Board of Directors
Modaraba Fund
(Pool of Money of Rab-ul-Maal)
Separate Legal Entity
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 Shari’ah Compliant
Justice/Ex-Justice of a Court plus 2 Scholars
Prospectus
(business activities)

6. 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, 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

7. 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. Besides, the Modarib also gets profit in shape of dividends on its minimum investment in the venture of Modaraba.

8. 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.

9. 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
Act as an SPV/SPE
Act as a venture capital company

10. 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.

11. Statistics As on June 30, 2008 (Rs. in million) 2004 2005 2006 2007
2004
2005
2006
2007
2008
No. of Management Companies
    30
     27
    24
No. of Modarabas
    32
    28
    25
     24
Paid up Capital
7,827
7,406
6,999
6,644
7,175
Total Equity
8,401
9,233
10,062  
11,456
Total Assets
17,574  
21,131 
23,736  
29,281
Total Income
4,140
3,939
5,025
6,583
Leasing Income
3,066
2,966
3,082
4,631
Musharaka & Morabaha Income
   271
   323
   410
624
Miscellaneous & Other Income
   803
   650
1,533
1,327
Net Profit after Tax
   956
   794
   811
   962

12. Innovation Islamic Financing Agreements
Diminishing Musharaka Agreement
Ijara Agreement
Istisna Agreement
Modaraba Agreement
Musawamah Agreement
Musharaka Agreement
Murabaha Agreement
Salam Agreement
Syndicate Modaraba Agreement
Syndicate Musharaka Agreement
Sukkuk Agreement
Commodity Murabaha Agreement
CFS (Continuous Funding System) Agreement

13. UPDATING THE LEGAL FRAMEWORK
Proposed Amendments in the Ordinance, Rules, Regulations and Guidelines governing the Modarabas companies and Modarabas
Relaxation of Prudential Regulations
Statutory reserve requirement increased for capitalization
relaxation in current assets to current liabilities ratios from 1 : 1 to 0.75:1

14. TRENDS AND CHALLENGES New trends
Concept of Islamic Funds becoming popular
Increasing number of entrants
Regulatory challenges
Minimum equity requirement to be raised
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

15. Incentives Exemption from capital gains tax
In view of the practical difficulties faced by the industry Guidelines for issuance of Certificates of Musharaka (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

16. 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.

17. 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

18. 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

19. 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 Fiqh issues)
Obtain Membership
Become part of the IFSB Workshops
Emulate role models like Malaysia, Bahrain
Memoranda of Understanding
Networking