MODARABAS HOLD POTENTIAL TO ISLAMIZE THE FINANCIAL SYSTEM

KANWAL SALEEM
June 29 - July 5, 2009

The concept of Modarabas in the country's Islamic finance sector emerged in 1979 following government's initiatives of Islamization of the economy. The Council of Islamic Ideology was formed in a bid to devise a blueprint for the Islamization of the economic and financial sectors. Modaraba Companies and Modaraba (floatation and control) Ordinance was promulgated in 1980 in order to provide the statutory framework for organizing business enterprises according to the injunctions of Islam.

Modaraba, an Arabic term implies a contract between two parties, whereby one party, the Rab-ul-mal entrusts money to the other party called the Mudarib, to put in his management expertise and utilize it in agreed manner.

Modaraba may be either for a fixed period or for an indefinite period (perpetual modaraba). Modaraba management company winds up a modaraba floated for a fixed period or for a specific purpose on the expiry of the period or upon accomplishment of the purpose of the modaraba, as the case may be.

Sharing his views about the Modarba business in Pakistan, Syed Muhammad Ishaq Abbasi, Chief Operating Officer, Abbasi & Company (pvt.) Limited told PAGE that majority of the modarabas in Pakistan are in the financial sector, although there is no restriction on the nature of business except that it should be according to the injunctions of Islam. The business/financing activities currently undertaken by modarabas in Pakistan are ijarah/leasing, morabaha, musharika, trading, equity/portfolio financing and manufacturing /distribution.

He said there were two types of modaraba practiced in Pakistan i.e. multipurpose modaraba with more than one objectives and specific purposes and modaraba with a particular purpose.

He is of the view that modarabas have a dynamic and progressive role to play in the Islamization of the financial system of the country. He said the modaraba sector had not performed as expected and their contribution in the financial sector had been insignificant. The total market capitalization of modarabas is still a tiny fraction of financial sector capital, he added.

Syed Muhammad Ishaq Abbasi further said modarabas had not been very successful in mobilization of savings or deposits or diversification of their products to differentiate from other market players such as leasing companies. Modarabas need to innovate, improve their products and operational capabilities, and at the same time become more competitive in their cost of funding. Reliance on banks would always place them at a cost disadvantage and there is a need to tap other sources, which remain unrealized and do not flow to the banking sector, he added.

He said a 'modaraba' is akin to the concept of mutual funds minus its unIslamic features. The concept of mutual funds has gained widespread acceptance in the country as is evident by the success of NIT units and ICP mutual funds, he said. The institutions of modaraba can play a vital role in mobilizing savings in the society and diverting them into productive channels of investments in the economy, he added.

He also said 'Al Meezan Investment Management,' a subsidiary of Meezan Bank in collaboration with Karachi Stock Exchange had introduced in Pakistan the first co-branded Islamic index of listed companies - KSE Meezan Index. The Index comprising 30 companies that qualify the Shariah screening criteria and are weighted by float adjusted market capitalization. An individual security weightage is capped at 12% at the time of re-composition, he said, adding Al Meezan Investments has the mandate for Shariah screening of stocks to be included in the Index using principles prescribed by Shariah Supervisory Board of Meezan Bank, which is chaired by eminent Shariah scholar.

According to him, the Shariah screening criteria set by the Shariah Supervisory Board is as follows: 1) Nature of business of the invested company should be Halal. 2) The total interest bearing debt of the Investee Company should not exceed 40% of the total assets. 3) The total illiquid assets of the Investee Company as a percentage of the total assets should be at least 20 per cent. 4) The total investment of the Investee Company in Shariah non-compliant business should not exceed 33% of its total assets. 5) The income from Shariah non-compliant investment should not exceed 5% of the gross revenue of the Investee Company. (Gross revenue means gross sales plus other income). 6) The net liquid assets per share should be less than the market price of the share.

Answering a question, he said there was immense growth potential in the Islamic mutual fund industry. NAFA Islamic Funds has already launched three open-end mutual funds i.e. NAFA Cash Fund, NAFA Stock Fund, and NAFA Multi-Asset Fund in its first year of operation. It has become one of the leading asset management companies in the mutual fund industry of Pakistan.