Feb 04 - 10, 2008

A closer look at the Modaraba sector reveals an interesting story. Among the Muslim countries Pakistan enjoys the distinction of incorporating the first organized and regulated move towards Islamization of financial system in the country in the form of Modarabas dated back to 80's. Since then, the sector has gone through many phases of development, experimentation and consolidation. With the introduction of new business models reemergence of a stronger and more vibrant sector seems certain.

According to Basheer A. Chowdry, immediate past Chairman of the Modaraba Association of Pakistan the main activity being undertaken by the Modarabas is the ijarah/leasing business. This segment is being handled by sixteen (16) Modarabas whereas other multiple activities like manufacturing, distribution etc. are being carried out by the remaining Modarabas. The financial year ending on June 30, 2007 witnessed a growth of 10% in the assets of the Modarabas.

According to Mohammad Shoaib, newly elected Chairman of the MAP, "It is encouraging that during last financial year IPOs of two new Modarabas have been successfully made through stock exchanges. First Allied Rental Modaraba was established with a paid up capital of Rs 300 million and First Treet Manufacturing Modaraba with a capital of Rs 143 million".


The business models signify the diversity and capacity of the Modarabas to undertake multiple activities. In addition to these two Modarabas, permissions have also been granted to establish four other Modarabas namely Modaraba Al-Makatib, Modaraba Al-Tameer, Modaraba Al-Souk and the Total Modaraba. It is very encouraging that after a long and quiet period, six new Modarabas have entered the sector which marks a clear recognition of the potential and revival of the sector.

While Islamic banks have registered rapid growth in a brief time but Modaraba sector, despite paying handsome dividend among the certificate holders has not been able to attract the attention of investors. According to the Year Book published by the Association a striking feature of the sector is that most of its members have been paying out cash dividends regularly. In fact, within the financial sector, the number and the amounts of the Modarabas paying cash dividends have been more than other companies of the financial sector.

During the last year, seventeen (17) Modarabas declared dividends up to 65%. The total cash and stock distributions come to Rs.575 million which constitutes an average of 9% of the paid up capital of the Modarabas. In recognition of the outstanding performance Modaraba Association has been distributing awards to encourage its members to declare healthy dividends. In December 2007 the top three highest dividends paying Modarabas were conferred awards. These were First Imroz Modaraba, First Habib Modaraba and Standard Chartered Modaraba.

It is often debated whether commencement of Islamic banking will complement the Modaraba sector or pose fierce competition. Chowdry Sahib is of the view the emergence of Islamic banking in Pakistan is a very important event for the financial sector. Establishment of six new Islamic banks and growth of designated Islamic banking branches of the conventional banks has created significant visibility and demand for the Islamic financial services.


Similarly, Shoaib strongly believes that the regulatory framework will accelerate the process of Islamization in the country. Now Pakistan has Islamic banks, Islamic mutual funds and Takaful operator. All these entities are contributing towards further expansion of Islamic financial market. The favourable regulatory environment is also helping the Modarabas Sector to explore new business ventures and also facilitating closer cooperation with the Islamic banks, funds and Takaful operators.

Mohammad Shoaib is of the view that there is a dire need for creating awareness among the masses about the Shariah compliant financial products. He is confident that Modaraba sector has the expertise to create synergy. The Association has been working actively to establish functional synergies between the Modarabas and Islamic banks. The Securities and Exchange Commission of Pakistan and the State Bank of Pakistan are also encouraging possible collaboration between the two sectors. It is believed that significant achievements will be made very soon.

The level of close contact between the Association and the regulators could be gauged from the fact that the review and re-drafting of the model agreements of the Modaraba sector for simplification and standardization has been completed.

These model agreements were approved by the Religious Board in late 80's. In the recent years, State Bank of Pakistan also developed and introduced model agreements for a number of products offered by Islamic banks. It was observed that since both sectors i.e. Islamic banks and Modarabas are using different modules of agreements some operational difficulties are faced, particularly when the Modarabas have to enter into financial transactions with the Islamic banks.


The need was felt to bring the model agreements in line with the contemporary research and practices. For this purpose, approved agreements which are in practice by Islamic banks in Pakistan, have suitably amended to meet the specific requirements of the Modarabas without making any fundamental changes in the concept. The drafts of the revised agreements have been examined by the Registrar Modarabas and have been referred to the Religious Board for approval. This will create an effective uniformity and ease for the Islamic financial sector of the country.

With a growing awareness of the Islamic financial services Modarabas have to innovate, expand and improve their business modes, products, skills and operational capabilities. They also have to expand the equity base to cater to the needs of customers. Modaraba sector should also explore the potential of exporting its skills and experiences to other Islamic countries and also develop global alliance and linkages.