This document provides an overview of Mudarabah companies and Mudarabahs in Pakistan. It defines Mudarabah as an Islamic financing arrangement where one party provides capital to another party who manages the capital. The government of Pakistan established regulations for Mudarabah companies and Mudarabahs in the 1980s to help Islamize the economy. Mudarabah companies facilitate investment by acting as intermediaries between capital providers and entrepreneurs seeking financing. They examine project proposals and invest capital in viable ventures, generating returns for investors.

1. A Brief review of Mudarabah Companies and
Modarabahs In Pakistan
Dr. Muhammad Junaid Sharif
Sheikh Zayed Islamic Center
University of the Punjab Lahore.

2. A Brief review of Mudarabah Companies and Modarabahs
DEFINITION
Modarabah is a kind of partnership , wherein one party provides
finance to other party for the purpose of carrying on business . The
party who provides the finance is called the Rabb-ul-Mal´, whereas the
other party who who puts its management skills for the Modaraba is
called the Modarib´ (working partner)Modaraba is one of the prime
modes of Islamic Financial System.

3. The concept of Modaraba was given fourteen hundred years back by our
Holy prophet Hazrat Muhammad (Peace be upon him).Modaraba is a kind
of partnership , wherein one party provides finance to other party for the
purpose of carrying on business .The party who provides the finance is
called the Rabb-ul-Mal´, whereas the other party who who puts its
management skills for the Modarabah is called the Modarib´ (working
partner). Modaraba is one of the prime modes of Islamic Financial
System. The concept of Modarabah was given fourteen hundred years
back by our Holy prophet Hazrat Muhammad (Peace be upon him).

4. CONSTITUTION OF MODARABA COMPANIES AND MODARABAH
In Pakistan the process of Islamization of the economy was
initiated in 1980 when the Government introduced the concept
of Modarabah for Islamizationof the economy in the banking
and corporate sector.
The Modaraba Companies & Modaraba (Floatation &Control )
Ordinance,1980 and Modaraba Companies and Modarabas
Rues 1981, were promulgated in the early 80s by the
Government of Pakistan.
The Ordinance and Rules provides matters relating to the
registration of Modaraba companies and the floatation,
management and regulation of Modarabas.

5. The Rules & Regulations and the regulatory framework applicable
to Modarabah and the Modarabah Companies are:
- The Modarabah Companies & Modaraba (Floatation &
Control) Ordinance, 1980
- The Modaraba Companies & Modaraba Rules, 1981
- The Companies Ordinance , 1984
-The Religious Board
- Prudential Regulations for Modarabah

6. ROLE OF MODARIB IN PAKISTAN
A Modarabah floated by an MMC is the manager (Modarib). He uses
his entrepreneurial skills and manages the business of the Modarabah.
The profit earned is distributed among the partners at a specified and
defined ratio.
In Pakistan the Modarib who is the MMC manages the Modaraba
Ventures. By law the Modarib can charge maximum profit of 10% of the
net annual profits of the Modaraba. Besides, the Modarib also gets
profit in shape of dividends on its minimum investment in the venture of
Modaraba.

7. BENEFIT TO RABB-UL-MAL
One party has the funds but does not have the expertise and another
party has the expertise but does not have the funds. Modaraba gives
opportunities to both the parties i.e. Modarib and Rabb-ul-Mal to join
hands for the business under the Shariah.
Rabb-ul-Mal can liquidate his or her investment anytime by sellinghis/her
Modarabah Certificate through Stock markets to other Rabb-ul-Mal
In Pakistan, the income of a Modarabah is tax free if the Modarib
distributes 90% of the profit to Rabb-ul-Mal earned in any single year.

8. MODARABAH AS AN ISLAMIC FUND
Modarabah can:
• Invest in the stock market
• Indulge in Ijara, Morabah and Musharaka Financing activities
• Indulge in trading of Halal Commodities.
• Undertake project financing activities.
• Act as an SPV.
• Act as a venture capital company amongst other activities

9. PERFORMANCE OF MODARABA AS AN ENTITY IN PAKISTAN
Modaraba Sector has continuously been playing an active role in the
growth of Pakistan’s economy. During the last two decades, the
Modaraba Sector has enrolled its place in the financial intermediaries of
Pakistan and has been able to create a market niche for themselves in
the corporate sector.

10. Statistics

11. Islamic Financing Agreements
•Diminishing Musharaka Agreement
•Ijara Agreement
•Istisna Agreement
•Modaraba Agreement
•Musawamah Agreement
•Musharaka Agreement
•Murabaha Agreement
•Salam agreement
•Syndicate Modaraba Agreement
•Syndicate Musharaka Agreement
•Sukuk Agreement
•CFS (continuous funding system) agreement

12. Updating the Legal Frame Work
•Proposed Amendments in the Ordinance, Rules, Regulations
and Guidelines governing the Modarabas companies and
Modarabas.
•Relaxation of Prudential Regulations
–Statutory
reserve requirement increased for capitalization.
–Relaxation
to 0.75:1
in current assets to current liabilities rations from 1:1

13. TRENDS AND CHALLENGES
•New trends
–Concept
of Islamic Funds becoming popular
–Increasing number of entrants
•Regulatory challenges
–Minimum
Equity requirement to be raised
–Stringent eligibility/fit and proper criteria and performance
benchmarks to be introduced, research capabilities to be improved.
–Investor base broadened: (public sector) provident and pension
funds
–International best practices to be implemented across the sector
–Industry Associations role to be strengthened, in the areas of
training, examinations and licensing of intermediaries.

14. MODARABAH COMPANIES AS A CONJUNCTION POINT
For the occurrence of investment usually there are two options:
1: Active Investment
2: Passive Investment
•Active investment occurs in a state where one or more persons or
entities engaged their capital into a project. The project is wholly
managed by them, they put their labor and capital to run the project and
thus bears all the risks, consequently they enjoy the fruit of their
managerial skills and the capital they have invested in it.
•Passive investment occurs in a state where one party provides capital
only and takes no part in the management of the capital invested and
wants to receive return/fruit on the basis of the investment they have
provided to run a project or venture. Usually it happens when a party or
person have no skills to manage or invest his capital. Three options are
available to such a passive investor

15. Investment options for capital-holders (Principal investors)

16. Modarbah companies in this regard can serve as a conjunction
point by facilitating both stake holders very effectively and
efficiently. Capital holders invest their funds with the Modarabah
in form of Modarabah certificate and thus get return of their
investment in form of profit and loss. On the other hand, joint
ventures, entrepreneurs submit their project proposals to the
Modarabah companies, the Modarabah examines the business
plan and if it is satisfied that the project could bring in sufficient
income, it invests in that project. In this way Mudarabah
companies use various financing devices like Ijarah, Murabaha,
Diminishing Musharakah, Salam , Istisna etc.

17. Thanks