Excerpts from an exclusive interview with Waqar Ajmal Chaudhry, Chairman, Modaraba Association of Pakistan


May 19 - 25, 2003



Modarabas have consistently improved upon their working over the years. For the year ending June 30, 2002 twenty of the forty-five listed Modarabas declared dividend ranging from 2.5% to 50%. The aggregate amount paid by them was around Rs 570 million. They were also able to compete well with other segments of non-banking financial sector because leasing companies distributed Rs 231 million and investment banks paid Rs 67 million dividend for this period. Modarabas are making efforts to further improve upon their performance through following good governance and diversifying their activities. Meanwhile, the process of consolidation is on track and so far nine mergers and five acquisitions have taken place.

The single largest contribution of Modarabas is that they are playing a dynamic role in the process of Islamization of financial system in the country. They have the capacity to bring the change as an appropriate infrastructure is in place with more than twenty years of experience. Modrarabas can undertake any kind of business that is not against the injunctions of Islam. While most of them are in the financial sector, others have been formed for industrial, trading and other purposes. Modarabas operating in Pakistan are like close end mutual funds. They are also exempted from paying income tax provided they distribute 90% of their profit among their certificate holders.

A large number of modarabas are engaged in the leasing business. Others are engaged in trading and portfolio management. One modaraba is in the manufacturing business. Modarabas have come up with innovative products and are contributing substantially to economic activity in the country. The Certificates of Musharika provide an ideal investment vehicle for individuals and corporate entities seeking Riba free solutions. Another product in the pipeline is Islamic Term Finance Certificates.

There is a proposal under consideration for jointly setting up a SME Modaraba with an objective for providing funds to small and medium enterprises in the manufacturing sector. This venture will offer wider geographical coverage. Modarabas are also looking at introducing Islamic mortgages. This will allow individuals to avail housing finance in line with the Sharia injunctions.

Modaraba Association of Pakistan (MAP) has been trying to enhance the profile of the modaraba sector both domestically as well as internationally. Locally, it has been trying to improve upon public awareness regarding its role in providing Islamic modes of financing. On the international front, a number of MAP members recently attended the ninth Private Sector Investment Conference organized by the Islamic Chamber of Commerce in Sharjah. This was a good forum for projecting the achievements of the modaraba sector. Pakistan is in a unique position enjoying the established infrastructure and legal framework and can help other Muslim countries in achieving the Riba free financial system. I recently attended a seminar organized by Euromoney on Islamic Banking and Finance and shared Pakistan's experience with delegates from Europe, America and Africa.



Over the last couple of years efforts have been made by Modarabas, Securities and Exchange Commission of Pakistan (SECP) and other regulatory bodies to further improve the level of corporate governance, financial discipline, monitoring and control systems to protect the interest of the stake holders in the sector. The Modaraba Ordinance and Rules are also being reviewed jointly with the SECP. The MAP is also working closely with the SECP to bring necessary amendments in the Prudential Regulations governing the modaraba sector so that they reflect ground realities and allow some of the flexibilities permitted to commercial banks by the State Bank of Pakistan.

Judging the potential of the Modaraba sector, the International Finance Corporation had offered assistance to various Modarabas in nineties. This assistance was provided under an Islamic Income Notes Agreement under which the IFC had agreed to lend on profit and loss sharing basis for a period of up to ten years. After the completion of this arrangement, some modarabas have once again approached the IFC. It is expected that they would get the funds in due course.

With the revival of economy and confidence of investors in the economy of Pakistan, the demand for funds has increased considerably. Modarabas are ready to play their role of providing opportunities for earning Riba free income to both the lenders and the borrowers.