MODARABA COMPANIES AND MODARABAS

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MODARABA COMPANIES AND MODARABAS
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• AL-QURAN
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  ??????? ????????? ??? ?????? ???? ????????????
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• Believers, fear Allah and give up what is still
  due to you from usury, if you are believers
• SURAH AL-BAQARAH AYAH 278

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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 Rues 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
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STRUCTURE
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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
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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.

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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.
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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
• Act as a venture capital company
• amongst other activities.

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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.

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Statistics As on June 30, 2008
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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

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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 0.751

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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 Associations role to be strengthened,
  in the areas of training, examinations and
  licensing of intermediaries

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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 Commission. Earlier the precondition was
  payment of dividend for two successive years.
• Encourage mergers/acquisitions/revivals for
  consolidation and capitalization of the sector

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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
• 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.

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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

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Exploring the developments of Islamic Capital
Market

• JOINT INITIATIVE OF THE IDB AND IFSB- 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

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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