Dissimilar sources identified that Modaraba Companies are part of the non-banking Islamic financial institutions. Presently in Pakistan, the institutional framework, evolution, development and profile of the Modaraba companies have been spelled out along with an overview of the market environment for the Modarabah certificates. Moreover, international studies identified that non-banking financial institutions are playing increasingly significant role in the efficient functioning of modern capital markets.
As depository institutions, the evolution and development of Islamic banks has also encouraged the development of non-banking Islamic financial institutions counting investment funds and insurance companies managed by various Islamic banks. In addition, since 1984, there has been an evolution and important increase in the activities of Modaraba Companies (MCos) in our country treated as non-banking Islamic financial institutions through the State Bank of Pakistan (SBP). These companies constitute a significant segment of the Islamic financial system.
Since the companies are participants of an emerging dynamic stock market such as, the Pakistan Stock Exchange (PSE), for attracting investments, these companies face tough competition from other market participants. The competitors range from Leasing Companies (LCos) which are new entrants to the market too, to the relatively experienced and mature market participants, like, chemical as well as pharmaceutical companies which are listed in the PSE for many years.
Although, the LCos do not claim to offer an agenda of Islamic financing, these companies however, have emerged in the scene to compete with the MCos in the renting and trading business, in addition to competing for mobilization of resources as all other firms do.
Statistics showed that till March 31, 2022 in Pakistan, the registered Modaraba companies are 31, while 28 Modaraba companies are presently operating and are listed at PSX. As of December 31, 2021, the aggregate paid-up capital, equity and total assets of Modaraba sector reached at Rs 20.7 billion, Rs 24.1 billion and Rs 57.3 billion respectively. Out of total 25 profit making Modarabas, 19 Modarabas declared cash dividend and/or bonus for the year 2021. It is also important to note that during July-March FY2022, the Securities and Exchange Commission of Pakistan (SECP) has issued 1.0 certificate of Shariah compliant company and 20 certificates of Shariah compliant securities in terms of the Shariah Governance Regulations, 2018, for the development of the Islamic capital market.
During the period under review, SECP has issued certificates of Shariah compliance for the Shariah compliant securities/Sukuk worth Rs 92.5 billion. Presently, SECP has permitted Modaraba companies to deal or trade in real estate projects recognized through development authorities like Karachi Development Authority. According to SRO 1546 (I)/2022 issued by the SECP, a Modaraba company can hold, deal or trade in real estate projects, subject to the laid down conditions.
Modaraba companies & Islamic banks
Researchers also recorded in their studies that as direct participants of financial markets, the MCos are thus, confronted with more serious issues compared to the Islamic banks. First, the Islamic banks offer a contrasting alternative to interest-based banks — the lines between conventional and Islamic banking are thinly defined. They also analyzed that the MCos do not have this comparative advantage. Since investments in stocks, in general, are permitted from the religious perspective, the MCos do not offer to their investors, much dissimilar investment opportunities compared to common stocks.
Second, unlike deposit mobilization by the Islamic banks, the resource mobilization requirements of the MCos compel them to participate in the capital markets. Third, while contributing to economic development by resource mobilization and allocation, these institutions, compared to Islamic banks are directly and more actively involved in the development of Islamic financial instruments and capital markets.
Fourth, the MCos are offering finance to industry more directly and have been able to organize longer-run relationship between finance and industry, in comparison to Islamic banks. Nevertheless, the activities and functions of the MCos and Islamic banks are inter-related and supplement each other in spreading the application of Islamic rules of financing.
Business model of modaraba
In the rest of the world, Modaraba in Pakistan is a unique model of its kind as no such example exists. The Modarabas are permitted to offer any financial product or conduct any business based on Islamic concept offered it is Shariah compliant and accepted through the religious board. It is also said that Modarabas can invest in stock markets, trading of halal commodities, project financing activities etc. The Modaraba can increase funds in the form of Certificates of Modaraba and Certificate of Musharaka. Modarabas can also issue Sukuk and Musharaka based TFCs. Prospectus of the Modaraba should be accepted through the Registrar Modaraba, SECP, after obtaining a certificate from the religious board to the business of the Modaraba. Modaraba certificates shall be listed on the stock exchange for trading purpose.