There is no doubt that Modarabas would definitely find their way to the glorious future

Mar 07 - 13, 2005

Pakistan came into being in 1947. Soon after the existence of the country the central bank, State Bank of Pakistan was established in the year 1948. At the historic occasion, Quaid-e-Azam Mohammad Ali Jinnah in his speech laid down the directions for the system of economy of the newborn country created on Islamic ideology. It quote "The adoption of Western economic theory and practice will not help in achieving our goal of creating a happy and contended people. We must work our destiny in our own way and present to the world an economic system based on true Islamic concept of equality of manhood and social justice. We will thereby fulfilling our mission as Muslim and giving to humanity the message of peace which alone can save it and secure the welfare, happiness and prosperity of mankind."

The concept of Islamic banking is not an idea now. The earliest Islamic banks faced serious challenges on many fronts, however, the problems did not last long and having passed through this difficult time have proven steady growth over the time and are now operating around 70 countries in the world. They have developed, introduced and delivered viable solutions to different stakeholders. Islamic financial institutions are diverse and becoming increasingly innovative. Value of their collective assets has reportedly exceeded $ 200 billion with steady growth of 10-15% p.a. Some conventional financial institutions of international standing have also established Islamic banking subsidiaries and windows. In USA, UK and other European countries number of Islamic funds exists since last many years.

Islamic banking and finance movement is in advance stage in countries like Malaysia, Saudi Arabia, Sudan, Indonesia, Brunei, Bahrain, Pakistan and Iran. In this article, I would confined my discussions to the process of Islamization of economy of our beloved country, and more precisely to the role of Modarabas in this context.

In Pakistan, when we go back to the history to find the routes when the transformation process to Islamize the economy was started, we found that efforts were made in this respect in 1977-78. We are proud at that Pakistan is among very few countries that have initiated the efforts to implement interest-free banking at national level. We have a very long history to operate our financial system under the conventional interest-based system, therefore, interest being deeply embedded in the present day economics and finance. Connotation of Riba was finally decided through verdict given by Council of Islamic ideology in its landmark report in 1979.

We witness that due to variety of nature of problem this transformation process of economy was a colossal task, therefore, it is implemented in different phases and we can divide it into two major groups. First individual financial i.e. Modarabas start their operations in early eighties under immense competition with conventional financial institutions/banks and run parallel with them. Secondly, country wide Islamic banking on comprehensive basis. In the second phase, initially, separate interest-free counters starts operation in nationalized commercial banks and subsequently other private banks have followed them. Later on, licenses were also granted by State Bank of Pakistan to establish full fledge Islamic commercial banks in the country.

Modarabas in Pakistan has played a key role to give ignition and momentum to the movement of Islamization of financial system of the country. The history can never be completed without taking the notice of their contribution in transformation process of the economy. They have created the atmosphere to develop the understanding about the Islamic mode of finance and prove that these are practicable to resolve the financial requirements of all sectors of the economy. Modarabas are capable to undertake all sorts of business that is in conformity with the Sharia. Most of the Modarabas are providing working capital as well as term finances to their clients. Despite of serious constraints to mobilize the funds for their expansion, their performance is remarkable in term of the current assets size and return they are making and profit distributing among their certificate holders. Modarabas are contributing towards the economic development of the country, and providing appropriate infrastructure based on their experience.

Besides all these achievements, it is worthwhile to note that due to decades of their operation they have trained plenty of executives and prepared a sizeable workforce of personnel who are carrying substantial experience on their credit and are most proficient to prudently undertake the financing through Islamic mode of finance. They are the assets for successful operation of any Islamic financial institution. Modarabas have practically perform the role like an institute and providing on the job training facilities to prepare such workforce and nourishes the system at their cost and expense. With the growth of Islamic-based financial institutions in the country, these executives are also rendering valuable services in the newly established Islamic financial institutions to strengthen the system of Islamic mode of financing.

Historically, there was no opportunity for the peoples seeking Riba Free investment avenues for their surplus funds to earn modest return with the confidence that their funds are in safe hands. With the advent of Modarabas such investors have found an opportunity to invest their surplus in Modaraba certificates. Over the period of time this has been proved that it was a good venue to get reward on their investments in term of dividend offered by the Modaraba in succeeding years derived from their operation of providing finances through Islamic mode of financing.

In the present scenario of commencing second phase of process of Islamization of the financial system, commercial banks were entered into the market of Islamic finance, moreover other banks and financial institutions were allowed to undertake the leasing and micro finance business as well, therefore, likewise leasing companies, Modarabas are also subject to un-precedent competition with the commercial banks having surplus liquidity. Therefore, this is the time to diversify their operation and provide innovative solution to their clients to maintain their clientele. At this point I would like to emphasize that Modarabas should focus their attention to tap different opportunities in the changing scenario, and target other market segment other than the conventional.

To conclude this brief article, I would like to extend my personal view on the potentials yet to be explored by the Modarabas. The Islamic financial institutions particularly Modarabas should make an effort to integrate and consolidate their resources and pool their expertise enable them to capture more business venues to enhance their operation. As a matter of food for thought, I may suggest exploring of the possibilities to take the advantage of unattended sectors of the economy e.g. livestock farming, alternative energy sources, organic farming & fruit exports, trade of biodegradable environmentally friendly fertilizer business and others. Modarabas may also go to Gwadar to derive businesses from the new port land area e.g. warehousing facilities, packaging of exportable goods, lifting of cargo, transportation etc etc.

I am confident that with the dynamic approach to address the issues in the competitive environment there is no doubt that Modarabas would definitely find their way to the glorious future, and to set new milestones for the new entrants.

Writer is a member of key management team of First Equity Modaraba