Modaraba: From an Instrument to an Institution

Islamic financeModaraba or Mudarabah is a special kind of partnership where one partner gives money to another for investing it in a commercial enterprise. The investment comes from the first partner who is called “rabb-ul-maal”, while the management and work is an exclusive responsibility of the other, who is called “mudarib.

Types of Modaraba

Modaraba Al Muqayyadah

Mudarabah Al Muqayyadah means a restricted Modaraba where the rabb-ul-maal may specify a particular business or a particular place for the mudarib, in which case he shall invest the money in that particular business or place.

Modaraba Al Mutlaqah

Modaraba Al Mutalqah means unrestricted Modaraba where the rabb-ul-maal gives full freedom to the mudarib to undertake whatever business he deems fit.

Benefits of Modaraba

Halal Business

  • Modaraba is the business model in the financial sector which is based on true Islamic practices duly scrutinized and approved by the members of the Religious Board appointed by the Federal Government. It provides profitable investment opportunities to the stakeholders who are looking for Halal profits on their investments according to Islamic Shariah.
  • The diversity of the Modaraba concept provides a unique universe of business opportunities to the sector, including financing, trading, manufacturing, equipment-rental, participation in property development, project management, portfolio management, imports and exports and distribution business. Such a diverse canvas of activities is not available to any other entity in the Islamic financial regime.
  • Tax Benefit: The income earned by the Modarabas, other than the trading modarabas, is fully exempted from income tax provided they distribute 90% of their profits amongst the certificate holders. For trading Modarabas, the maximum tax rate is 25 percent.
  • Maximum Distribution of Profits: As an Investor of a Modaraba one may expect getting maximum dividends as 90% of the income/profits of the Modaraba are distributed to the certificate holders in order to avail the benefit of tax exemption.
  • Funding and financial facilities under the Sharaih compliant modes are provided by Modarabas, on the pattern similar to Islamic banks to the clients.

Modarabas in Pakistan

Modaraba is one of the prime modes of Islamic Financial System. In Pakistan the process of Islamization of the economy was initiated in 1977 and in light of the recommendations made by the Islamic Ideology Council, Government of Pakistan introduced certain changes in the Banking Companies Ordinance and promulgated the Modaraba Companies & Modaraba (Floatation & Control) Ordinance, 1980 to provide a legal framework for Islamic financial system. This was a major step through which the concept of “Modaraba financing” was transformed into an Islamic financial institution in order to allow Modarabas to operate as legal corporate entities. Amongst the other activities, the Modarabas were allowed to undertake Ijarah, Morabahah, Musharakah, Diminishing Musharakah, Salam and Istisna financing activities; trading of Halal Commodities, project financing activities, investment in the stock market and can act as a special purpose vehicle.Now the Modaraba Companies and Modarabas are operating in Pakistan for the last over 30 years as a unique model and there is no example of any similar legal entities in rest of the world.

Modaraba Structure

The Companies incorporated under the Companies Ordinance, 1984 and registered with the Registrar (Modarabas), SECP are eligible to undertake floatation and management of Modarabas. The Modaraba or Modaraba Fund (pool of funds) is created through public subscription (IPO) and listed on stock exchange(s). Generally, a Modaraba can undertake virtually any business activity that is not repugnant to Islam.

Products Offered


Leasing or sale of usufruct of an asset, under the arrangement the lessor retains the ownership of the asset with all the rights and the responsibilities that go with the ownership.


Salam is a sale whereby the seller undertakes to supply some specific goods to the buyer at a future date in exchange of an advanced price fully paid at spot. The contract of Salam creates a moral obligation to the Salam seller to deliver the goods. The Salam contract cannot be cancelled once signed.


It is a contract whereby a manufacturer (Contractor) agrees to produce (build) and deliver a well described good (or premises) at a given date in future. As against Salam, in Istisna the price needs not to be paid in advance. It may be paid in installment in step with the preferences of the parties or partly at the front end and the balance later on as agreed.


It is a contract between two parties, capital owners or financiers (called rabb-ul-maal) and Investment Manager (called Mudarib) Profit is distributed between the two parties in accordance with the ratio upon which they agree at the time of the contract. Financial losses are borne only by the financier. The entrepreneur’s loss is not getting any reward for his services.


It is sale at a specified profit margin. The term, however, is now used to refer to a sale agreement whereby the seller purchases the goods desired by the buyer and sells them at an agreed marked-up price, the payment being settled within an agreed time frame, either in installments or in lump sum. The seller bears the risk for the goods until they have been delivered to the buyer. Murabaha is also referred to as Bai-Muajjal.


A Musharaka contract is similar to a Modaraba contract, the difference being that in the former both the partners participate in the management and the provisions of capital and share in the profit and loss. Profits are distributed between the partners in accordance with the ratios initially set, whereas loss is distributed in proportion to each one’s share in the capital.

Diminishing Musharaka

Another form of Musharaka, developed in the near past, is ‘Diminshing Musharaka’. According to this concept, a financier and his client participate either in the joint ownership of a property or an equipment, or in a joint commercial enterprise. The share of the financier is further divided into a number of units and it is understood that the client will purchase the units of the share of the financier one by one periodically, thus increasing his own share till all the units of the financier are purchased by him so as to make him the sole owner of the property, or the commercial enterprise, as the case may be.

Besides these Islamic modes of financing the Modarabas also involved in the activities like:

  • Trading of Halal Commodities
  • Manufacturing
  • Investment in Equities
  • Portfolio Management
  • Private Equity/Venture Capital
  • Investment Finance Services
  • Housing Finance

Investing in Modarabas

Investment in Certificates of Modaraba

Initial Public Offering: The general public, after carrying out due diligence of management and prospectus may subscribe to certificates of Modaraba when these are first time offered by the Modaraba Company in primary market.

Direct Buying from the Stock Market

One may also invest in the Modaraba Certificates through buying them from registered stock broker (secondary market). The Modaraba Certificates are quoted and traded on the stock exchange(s) like shares of other listed companies.

Investment in non-interest bearing finance instruments/schemes issued by Modarabas

Modarabas offer various non-interest bearing certificates i.e. Certificates of Musharakah, certificates of Modaraba, Term Finance Certificates on Musharakah basis, Sukuk etc. approved by the Religious Board and the Registrar Modarabas. These investment schemes are launched by Modarabas on profit and loss sharing basis and rate of return varies based on the periodic profitability of the project/business of the Modaraba. With the approval of the Registrar (Modarabas), advertisements for such investment schemes are published in which all the information about the scheme, the mechanism of distribution of profit & loss and credit rating of the issuing Modaraba etc. are disclosed. No Modaraba can offer such schemes unless it has obtained a minimum investment grade rating, i.e. ‘BBB’ from a registered credit rating agency.

All Modarabas regulated by Registrar Modaraba, SECP, have their places of business in major cities of Pakistan, offering a variety of financing, leasing, rental and trading facilities to the Clients. A complete list of the Modarabas is displayed at the website of NBFI & Modaraba Association of Pakistan ([email protected]).

Regulatory Framework

The Modaraba Companies and Modarabas are working under the regulatory framework provided in following laws, rules and regulations:

  • Modaraba Companies and Modaraba (Floatation and Control) Ordinance, 1980
  • Modaraba Companies and Modaraba Rules, 1981
  • Prudential Regulations for Modarabas
  • Shariah Compliance and Shariah Audit Mechanism
  • Code of Conduct of NBFI & Modaraba Association of Pakistan

The Modaraba Companies & Modaraba (Floatation & Control) Ordinance, 1980

The Modaraba Companies & Modaraba (Floatation & Control) Ordinance, 1980 provides for matters to registration of Modaraba companies and floatation and management and regulations of Modarabas.

The Modaraba Companies & Modaraba Rules 1981

In 1981 Modaraba Companies and Modaraba Rules were framed to provide Rules to do the business.

Prudential Regulations for Modarabas 2004

In 2004 Prudential Regulations for Modarabas were issued. The regulations provide a wide range of risk management tools for conducting the day to day affairs and business of the Modarabas.

Companies Ordinance, 1984

The affairs of Modarabas are managed through the Modaraba Management Company, which is required to be registered under the Companies Ordinance, 1984. As such, the management company must comply with all the provisions of the Companies Ordinance without any exception. However, where there is consistency in the Modaraba Ordinance and the Companies Ordinance, the provisions of Modaraba Ordinance shall prevail for the Modarabas.

Shariah Compliance

In order to ensure compliance with the Shariah principles, Shariah Compliance and Shariah Audit Mechanism was issued by the Registrar Modaraba vide Circular No. 8 of 2012 dated 3rd February, 2012 after extensive consultation with the Association and market operators which provide a detailed framework for compliance of Shariah principles, investment of competent Shariah scholars for verification of business operations and publication of a certificate of Shariah compliance in the financial accounts of Modarabas.

These guidelines will improve the quality of existing compliance and eliminate the risk of any inadvertent violation of Shariah principles by the Modarabas. It is an important step towards the enhancement of the image of Modarabas as a responsible component of Islamic Financial Industry and will help build their business links with Islamic Banks, mutual Funds and Takaful companies.

Religious Board

The Federal Government of Pakistan constitutes Religious Board for Modarabas under section 9 of the Modaraba Companies and Modarabas (Floatation and Control) Ordinance, 1980, which comprises of a Chairman and two Shariah Scholars. No Modaraba can operate in Pakistan unless its business and prospectus is cleared from the Religious Board for the Modarabas. All the products and business activities of the Modaraba are approved by the Religious Board for Modarabas with the facilitation of the Modaraba Wing. The following is the composition of the Religious Board constituted by the Federal Government vides notification dated August 30, 2012:

Former Justice Syed Zahid Husain Bokhari (Chairman)

Mufti Muhammad Saeed Khan (Shariah Scholar); and

Dr. Muhammad Tahir Mansoori (Shariah Scholar).

Brief History of Islamic Finance in Pakistan

Islamic finance during the last four decade has witnessed considerable progress at the global front. Besides the traditional Islamic finance markets of Middle East financial centers across various western countries are also accepting and recognizing the viability and utility of this alternate financial system. In particular the relative resilience of Islamic financial institutions during the recent financial crisis due to its asset backed nature and being devoid of speculation and uncertainty, has significantly improved its credibility as a more prudent and stable system. The scope and range of Islamic finance products has also widened considerably over the years and Islamic financial institutions are presently catering to most of the financial services needs of various sectors of the economy. These are dedicated regulatory, legal and academic institutions at the international level working and providing support for maintaining the high pace growth of the Islamic finance industry.

In Pakistan, the Islamic financial industry is represented by Islamic Banks, Islamic banking Windows of Conventional Banks, Modarabas, Islamic Mutual Funds and Takaful Companies.

Initially the business of the Modaraba sector was restricted to only three basic products i.e. Ijarah, Musharaka and Murabaha. In the year 2008 12 new products were got approved by the Religious Board. In addition model financing agreements of all these products were approved. Now all the Modarabas are strictly using these agreements while undertaking any of the above business.

Performance of Modaraba Sector

Modarabas have been declaring and distributing handsome cash and bonus dividends to their certificate holders consistently over many years. For the year ended June 2013, the highest distributions were cash 100%, bonus 10% and right 30%.

Following is the complete list of distributions:


Sr. No. Name of Modaraba (Rupees in millions)
Total Assets Paid up Equity Cash Dividend for2012-13
1 Allied Rental Modaraba 4,440 975 2,353 30%, 5% (Bonus)
2 B.F. Modaraba 129 75 123 Nil
3 B.R.R. Guardian Modaraba 3,012 780 802 3.10%
4 Crescent Standard Modaraba 161 200 125 1.50%
5 First Al-Noor Modaraba 359 210 324 5.00%
6 Elite Capital Modaraba 193 113 134 5.50%
7 First Equity Modaraba 666 524 628 Nil
8 First Fidelity Leasing Modaraba 374 264 344 Nil
9 First Habib Bank Modaraba 883 397 716 14.75%
10 First Habib Modaraba 4,719 1,008 3,053 20.00%
11 First IBL Modaraba 220 202 174 3.35%
12 First Imrooz Modaraba 309 30 133 100.00%
13 First National Bank Modaraba 2,004 250 298 Nil
14 First Pak Modaraba 79 125 73 1.20%
15 First Paramount Modaraba 267 76 176 11%, 10%(Bonus)
16 First Prudential Modaraba 585 872 516 2.30%
17 First Punjab Modaraba 1,569 340 33 Nil
18 First Treet Manufacturing Modaraba 1,644 1,304 1,519 9.50%
19 First UDL Modaraba 794 264 551 20.00%
20 KASB Modaraba 1,516 283 266 Nil
21 Modaraba Al-Mali 239 184 179 1.25%
22 Standard Chartered Modaraba 6,840 454 1,003 20.00%
23 Trust Modaraba 429 298 305 6.00%
Total 31,431 9,228 13,828 Nil


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