By Imran Hussain Minhas
Imran Hussain Minhas is certified Islamic Microfinance Manager and Joint Director, Modaraba Companies and Modarabas, at Securities and Exchange Commission of Pakistan. He is professionally a banker and also serves in the visiting faculty of International Islamic University, Islamabad as Associate Professor (Banking and Finance).
He can be reached at: email@example.com.
Islamic Banking and Finance (IBF) is the value system based on Shari’ah Principles and Islamic values which prohibit riba and ensure profit sharing mechanism in financial world. It operates with the objectives to implement and materialize the economic and financial ideology of Islamic Shariah, in addition to the conventional good governance and risk management rules.
The local Council of Islamic Ideology (CII), consisting panelists of bankers and economists, was set up on September 29, 1977 who prepared the blueprint of interest free economic system and submitted their report, highlighting details for eliminating the interest from the economy, in February 1980. Resultantly the Government of Pakistan (GoP) first time in its history started journey towards Islamic Finance by promulgating the Modaraba Companies & Modaraba (Floatation & Control) Ordinance, 1980 through presidential orders.
After the Ordinance the Modarabas as pioneering Islamic Financial Institutions took the role of torch bearer of Islamic Finance in Pakistan. The concept of Modaraba financing transformed into an Islamic Financial Institution and the Modarabas are allowed to operate as corporate entities under the regulatory framework of SECP.
Modaraba is a unique model of its kind as no such example exists in rest of the
world. The Modaraba companies are the management companies (MMC) of the
Modarabas, who contributes only 10% towards total paid up funds of the Modaraba, and operate as “Modarib” whereas the Certificate holders of the Modaraba, who are the “Rab-ul-Maal”, provide 90% funds to the Modaraba.
The Modarabas are allowed to offer any financial product based on Islamic concept provided it is approved by the Religious Board, constituted by the GoP for the purpose of Modarabas. Modarabas are providing Islamic financial services (IFS) with no mixture of conventional banking and finance.
Modarabas can invest in stock markets, trading of halal commodities, project financing activities and act as special purpose vehicle (SPV). The Modaraba can raise deposits in the form of Certificates of Modaraba/ Musharakah and can also float Musharakah based TFCs. To encourage Islamic Finance (IF) the GoP exempted the Modarabas from Income Tax provided they distribute 90% of their profits to the Certificate (Share) holders.
The Main Challenges faced by the Modarabas in Pakistan are:
1- Absence of Islamic Money Market/Liquidity Instruments – Pakistani market lacks Islamic money market and instruments which could be utilized either to cover liquidity shortages or to manage excess liquidity by the IFIs.
2- Lack of Awareness – Despite the growth of IB over the last 30 years, many
people in the Muslim and non-Muslim world do not understand what Islamic
finance actually is. Proper media campaigns, awareness programs, road shows
and seminars are required to educate business communities and general public
about Islamic Finance and Modarabas.
3- Lack of Research and Development – There are no proper research and development institutes for the Islamic finance. Islamic financial institutions need research and training forums in order to prompt entrepreneurship amongst their clients.
4- Financial Reporting Standards – The regulatory financial reporting
framework for the IFIs consists of International Financial Reporting Standards
(IFRS), and various reporting standards. Presently Murabahah and Ijara
standards have been notified and implemented by the SECP. But still standards
for distribution of profit to PLS depositors, Diminishing Musharakah and
Musharakah and other interest free modes of financing and investments are
required to be introduced according to Islam.
5- Network Issues – The Modarabas have only 50 branches which are based in the three big cities of Pakistan. Bigger branch net work down to the rural areas can increase the business and size of the Modarabas due to it ethical and
religious roots of Islamic finance among the people.
Developments in the Modaraba sector
SECP has realized the problems of Modaraba sector and focused on the various
issues of the Modaraba sector, which remained neglected since last 30 years. To implement the true Islamic finance has issued Shari’ah compliance and audit mechanism for Modarabas to ensure that business of the Modarabas is free from non-shari’ah compliant income.
The mechanism underlines processes of shares screening, dividend purification and management of charity etc. It also prescribes qualification and procedure for appointment of Shari’ah Advisors and Internal Shari’ah auditors.
For the better monitoring of the Modaraba sector the Government in the last week of March 2012 has approved some amendments in the Modaraba Ordinance. For the improved skill set training programs for the staff working in the Modarabas have been arranged in coordination with the NBFI and Modaraba Association of Pakistan.
Even after the recent global financial meltdown the growth in the Islamic finance remained in double digits and higher than the conventional banking. Islamic finance has proved a vital potential to be substituted against conventional banking system in many countries of the world.
Modaraba sector has a great potential that we need to tap by media campaign,
publication, education of the clients and motivating the Modarabas to penetrate in the small cities and target the small segment of the society.
SECP is also focusing on the development of new fund raising products. For the
business and risk management friendly regulations a Reform Committee has also been constituted to review the existing regulatory regime and best world’s best practices.
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