PRESENTED BY :Zohaib SikandarMudassir Munir

Sumear ShiekhSakib Zahid

What is Modaraba Modaraba is not a new concept. The word Modaraba is

derived from Al-darb i.e. journeying in the land for the purpose of earning sustenance (rizq).

It is an agreement between two or more persons whereby one or more of them provide finance, while the other provides management to carry on any business venture whether trade, industry or service with the objective of earning profits.

The profit is shared in an agreed proportion. The loss is borne by the financiers only in proportion to their share in the total capital.

TYPES OF MODARABA

Al Modaraba Al Moqayyadah: Rabb-ul-maal may specify a particular business or a particular place for the Modarib, in which case he shall invest the money in that particular business or place. This is called Al Modaraba Al Moqayyadah (restricted Modaraba).

Al Modaraba Al Mutlaqah: If Rabb-ul-maal gives full freedom to Modarib to undertake whatever business he deems fit, this is called Al Modaraba Al Mutlaqah (unrestricted Modaraba)

Modarib is also not authorized to do the following:

Keep another Modarib or a partner  

Mix his own investment in that particular Modaraba without the consent of Rabb-ul-maal.

Role of Modaraba in Pakistan

Pakistan’s commitment to promote “Riba free” economic system was carried forward with the promulgation in 1980 of the Modaraba Companies and Modaraba (Floatation and Control) Ordinance, 1980

Its primary aim was to accelerate capital formation and economic development in accordance with the tenets of Islam.

It was thought that the experience gained from this mode of financing will replicate it throughout the system in Pakistan but unfortunately Modaraba hasn't taken off so far.

Role Of Modaraba In Pakistan Financial Sector.Assets held by Modarabas account for 0.2 % of

the total assets held by the financial institutions in the country.

Modarabas operating in Pakistan are like closed-end mutual funds

They are exempted from income tax provided they distribute 90% of their profit among the certificate holders.

MODARABA ASSOCIATION OF PAKISTAN

Locally, the MAP has been trying to improve upon public awareness regarding the role of Modaraba sector in providing Islamic mode of financing

The MAP constantly review’s Modaraba Ordinance, Rules and make necessary amendments that will further improve the regulatory and operational environment.

One of the recent achievements has been floatation of Musharika-based Term Finance Certificates by Al-Zamin Leasing Modaraba

Business activities currently undertaken by Modarabas

Ijarah

Morabaha

Musharika

Trading

Ijarah

Ijarah means lease, rent or wage.

Generally, Ijarah concept means selling benefit or use or

service for a fixed price or wage.

Under this concept, the Bank makes available to the customer the use of service of assets / equipments such as plant, office automation, motor vehicle for a fixed period and price.

Morabaha Morabaha is one of the most commonly used modes of

financing by financial institutions.

It refers to a sale transaction where the seller reaches an agreement with the buyer to provide him with a specific

commodity at a marked up price

The seller discloses the actual cost of procuring the asset and the buyer then pays the sum back to the seller in fixed installments.

Musharika Musharika concept is being used to develop innovative

products both on asset as well as liability side

In Musharika capital is provided by two or more parties for

project development.

The profits are shared among the parties on the basis of their participation or on a pre-agreed ratio and the losses are shared on the basis of equity participation.

PROBLEMS FACED BY MODARABA IN PAKISTAN

INADEQUATE CORPORATE GOVERNANCE

INNOVATIVENESS NEEDED

INADEQUATE CORPORATE GOVERNANCE

Corporate governance is one of the key issues in managing the Modarabas' which proved to be inadequate and the interests of the investors and certificate holders have not been adequately protected

The concentration of powers is in the hands of managers particularly when the standards of transparency and disclosures are not that rigorous does leave a lot to be desired

INNOVATIVENESS NEEDED

The Modarabas have not been able to diversify their products or differentiate from other market players such as previously leasing companies and now commercial banks through consumer finance

Today more that 80% of their business is concentrated on commercial banks and leasing companies which do not provide any market niche or comparative advantage to them.

PRUDENTIAL REGULATIONS FOR MODARABAS

Short title and commencement Creation and Building up of Reserve Limits on Exposure Limit on Modaraba Exposure Conditions for Granting Facilities Maintenance of minimum margins Restriction on certain types of transactions No investment in stock market shall be made by a

modaraba except in its own name.Provisioning for non-performing Asset

How Could Modaraba Sector Can Be Improved.

The risk management practices in Modarabas' should be reviewed to find out if the managers are optimizing the returns for the given level of risk.

The only credible way to expand this mode of financing is by demonstrating that the reward-risk relationship under

Modaraba is not inferior compared to other instruments.

It is vital for Modarabas' to develop some other products and services which are in the domain of the Modarabas' and also tailored to the demand of the particular customer base which has so far not been able to access financial sector institutions.

Case Study

The Habib Group with vast experience in the industrial, financial and commercial sectors floated FHM in 1985.

Basic aim of the FHM was dealings in line with principles elaborated in Sharia.

The Management of FHM has always given emphasis on

building-up quality lease portfolio

The efficacy of FHM's business strategy and prudent risk management policies has supported the management to maintain outstanding assets quality while ensuring sustanability of performance, .

PROFILE FHM commenced its business operation in March,

1985, with initial capital of Rs.25.0 million only.

The FHM has a total equity base of around Rs.2.500 billion and an assets size of approximately of Rs.5.0 billion.

Efficient customer services and high client value has always been FHM’s objective.

FHM draw its success by complying with highest ethical and moral standards and always try to make efforts to enhance superior professional competencies .

Achievements Of First Habib Modaraba

Continuous payment of dividend since business operations.

FHM is maintaining "A" category rating for last 10 years.

Recipient of best performing Modaraba award from Modaraba Association

. Recipient of "Corporate Excellence Certificate" Award from

Management Association of Pakistan.

Highest Equity and Assets size in entire Modaraba sector.

Infection free lease portfolio,till the year 2007, not a single advances portfolio was provided as a non performing loan

.

Key strength of First Habib Modaraba

Excellent credit rating Consistent dividend pay out Infection free lease assets portfolio Highest equity in the entire modaraba sector Negligible employee turnover Zero provision on account of lease rental Highest profit for the past three years in the

entire modaraba sector Receiving modaraba association award since

1999

CONTINOUS PAYMENT OF DIVIDENDS

Credit Rating With continuing sound

financial position, the FHM is also maintaining “A” category credit rating since almost last 10 years

PACRA) has awarded rating scale of “A1+” for short term and “AA” for long term. “A1+” is the highest level in PACRA's rating scale for short term rating.

HIGHEST EQUITY BASE AND ASSETS SIZE

Net Leased Assets Equity Growth

Profit After Tax

BEST PERFORMING MODARABA AWARD

Balance Sheet Growth

CONCLUSION For a considerably long time investors have been ignoring

Modarabas.

There is a general perception that investing in modaraba certificates is not attractive.

While the perception may be close to reality, there are certain good performing modarabas which offer earnings yield which is much higher than the return from savings deposits and even Defence Saving Certificates.

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