Dec 22 - 28, 2008

During a recently held ICMB seminar, it was unanimously agreed that Pakistan, despite having played the pioneer role, has lagged far behind in the field of Islamic Finance as compared to Malaysia, Bahrain, Sudan, UK and other countries simply because of a painstakingly slow process of legislation and sketchy framing of rules and regulations.

The situation appeared due to our failure to timely engage full-time Shariah advisors. We took to the market with some half-baked financial products to attract the predominantly Islam-friendly clientele, resorting to piecemeal referrals to the Shariah experts as and when operational and ideological anomalies raised their heads.

At the outset, we saw a mushroom growth in Modaraba sector followed by its landing into the stagnancy zone. The following figures (Table-1) released by the Modaraba Association of Pakistan, MAP are indicative of the suppressed growth of Modaraba sector.

(Amounts in Million Rs.)
. 2003 2004 2005 2006 2007
No of Management Cos 30 30 27 24 24
No of Modarabas 32 32 28 25 24
Total Equity 7,854 8,401 9,233 10,062 10,821
Total Assets 15,852 17,574 21,131 23,736 26,009
Total Income 4,235 4,140 3,939 5,025 5,200
Leasing Income 3,125 3,066 2,966 3,082 3,997
Murabaha & Musharaka Income 351 271 323 410 504
Misc. & Other Income 759 803 650 1,533 699
Net Profit After Tax 1,072 956 794 811 749
Assets Leased out 6,335 7,101 5,751 6,1513 6,696
Net Investment in Lease Finance 856 1,067 3,315 3,481 3,861

At present 34 Modarabas are listed on Karachi Stock Exchange out which 24 are operative and registered with MAP. To start with, only three model agreements namely Murabaha, Musharaka and Leasing (Ijara) were put in vogue in late eighties. MAP is said to have developed seven more model agreements that await approval by the Religious Board. However, the MAP figures suggest that Modarabas mainly depend on leasing business comprising almost 90 per cent of the total business. Murabaha and Musharaka transactions, which should have been the mainstay of Modarabas, have failed to gain currency in the business and industrial sectors. This puts Modaraba in direct competition with the leasing companies and commercial banks. Asset growth is far from being dynamic. More disappointing are the sliding after tax profits in the backdrop of increasing asset size. Other figures, having all the ingredients of stagnancy, hardly need any elaboration.

The resurgence of demand for Shariah compliant financial system has made Modarabas potential candidates for long term stable growth provided that the problems faced by the sector are resolved and Modarabas are allowed a level playing field.


Modaraba certificates are traded on stock exchange in the same manner as the sale and purchase of shares takes place. Modaraba certificate holders are entitled to any dividends declared, depending on the profitability of the Modaraba but, unlike shareholders, Modaraba certificate holders have no voting rights.

15-Apr-08 15,538 . 7,271 -
6-May-08 14,409 7.27 7,024 3.40
28-May-08 12,255 21.13 6,588 9.39
7-Jul-08 11,878 23.56 6,546 9.97
4-Aug-08 9,853 36.59 5,764 20.73
16-Sep-08 9,224 40.64 5,869 19.28
7-Oct-08 9,181 40.91 5,919 18.59
23-Oct-08 9,183 40.90 5,540 23.81
25-Nov-08 9,187 40.87 5,342 26.53
15-Dec-08 8,817 43.26 4,593 36.83
16-Dec-08 8,444 45.66 4,435 39.00

Out of the 34 Modarabas listed on KSE, 8 are being reported under defaulters' category. These are Crescent Standard Modaraba, Dadabhoy Modaraba, Interfund Modaraba, LTV Modaraba, Schon Modaraba, Tawakkal Modaraba, Unicap Modaraba and Unity Modaraba, with none of them having paid any dividend during the last three years or so. Under the battering the stock market has received during the last 9 months, the Modaraba equity-value erosion too has been quite sizeable. The sector has registered 39 percent erosion as against a total stock market erosion of 45.66 per cent. Out of 26 active Modarabas, only two are trading above par. These are Allied Rental Modaraba and Imrooz Modaraba. with their Rs.10/= shares being quoted at Rs.34/= and Rs.32/20 respectively.

The reason for the disappointing performance of Modarabas can be traced to the mushroom growth during the early years when control and vigilance were traded off for the survival of a nascent concept which was introduced in the market without proper ground work. Most of the business and industrial houses were granted licenses to float Modarabas with a nominal capital and minimum regulations. Later on, these Modarabas were misused to cater to the financing needs of the group business. Some of them unscrupulously engaged in stock market trading and passed on the trading losses to the certificate holders. Some failed to develop a quality loan portfolio and their equity was wiped off by default losses. Regulations were introduced with the passage of time but the damage had already been caused.

Those Modarabas who really meant business were not provided with a level playing field as commercial banks were there to outperform them in the field of competition. Modarabas could not expand their business due to the paucity of funds. Unlike commercial banks, Modarabas were not allowed to accept public deposits. To expand, they had to borrow funds from the market at the going rate. This afforded them a minimal spread not enough to carry out and profitably expand business. Modarabas floated by commercial banks managed to survive as they developed a sort of synergy and somehow got cheaper funds to expand business. Afterwards, Modarabas were allowed to raise business funds by issuing certificates of investment (COIs), but here again only those succeeded who had on their backs a commercial bank or a financial institution as the prospective purchasers of COIs looked to the backing institutions for their comfort level. Non availability of cheap business funds for Modarabas, in general, has been the root cause of individual failures and sector stagnancy. Now, when the Islamic Finance is making its presence felt in the global financial markets, the dismal performance of Modarabas is regrettable.