Believers, fear Allah and give up what is still due to you from usury, if you are believers;

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 ³ Rabb-ul-Mal´, whereas the other party who who puts its management skills for the Modaraba is called the ³ 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).

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 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

Regulator The Sector is monitored and regulated by the Registrar (Modaraba Companies and Modarabas), Securities and Exchange Commission of Pakistan Religious Board Authority which certifies that Prospectus of the Modaraba is Shari¶ah 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 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

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.

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-ulMal 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 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.


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.

As on June 30, 2008
No. of Companies

40 27 Rs. 11.378 billion Rs. 29.642 billion Rs. 8.242 billion

No. of Modarabas Total Equity Total Assets

Paid up Capital/Seed Capital

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

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

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 

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

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 noninvestment Membership of Islamic Financial Services Board Industry Associations- product development AssociationsShariah Boards on every institution Holistic legislation, standardization and harmonization to avoid conflict and overlap.

Monitoring and Enforcement 
Monitoring at two levels 
Offsite Onsite 

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 AND IFSB- TEN YEAR FRAMEWORK IFSBFOR THE ISLAMIC FINANCIAL INDUSTRY DEVELOPMENT- general DEVELOPMENTregulatory framework for Islamic financial services industry. International infrastructure institutions such as the: 

Islamic Financial Services Board (IFSB)- regulator (IFSB) International Islamic Financial Market (IIFM)-market (IIFM) (General) Council for Islamic Banks and Financial Institutions (CIBAFI)-promotion of IFIs (CIBAFI) Arbitration and Reconciliation Centre for Islamic Financial Institutions (ARCIFI)- arbitration (ARCIFI) International Islamic Rating Agency (IIRA) ± credit rating  Liquidity Management Centre (LMC)- investment of surplus funds of (LMC)IFIs.  Auditing and Accounting Organization for Islamic Financial Institutions (AAOIFI)- accounting (AAOIFI)-

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

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