Islamic Mode of Financing

By Ali, Muhammad Imtiaz | Economic Review, April 1995 | Go to article overview

Islamic Mode of Financing


Ali, Muhammad Imtiaz, Economic Review


Modaraba, an approved mode of islamic financing, is assuming importance in our financial system and has shown a considerable growth over the last few years. Modaraba is partnership between capital on one side and personal effort on the other. In this system of business proportionate share in the profit is determined by mutual agreement. But the losses are to be borne by the investor of the capital. In Pakistan, the sponsor of a Modaraba has to be a company which must be registered under the Modaraba Companies and Modaraba (Floatation and Control Ordinance 1980).

To ensure that only sound Modarabas are floated and their management is proper, the government has restricted the registration of general purposes Modarabas with banks., financial institutions and investment companies only. The capital of Modarabas is only subscribed through public floatation. The certificates issued by the companies are listed in the stock exchanges of the country. The new rules disallow second Modaraba unless the performance of the first one has been satisfactory for three years. The operation of Modarabas in Pakistan is strictly scrutinised and monitored by the Corporate Law Authority (CLA) as well as the State Bank of Pakistan (SBP).

These companies are periodically audited by statutory auditors who are approved by CLA. In addition, CLA picks five Modarabas each year at random to conduct special audit by a different group of auditors than the statutory one. State Bank of Pakistan is also arranging a special audit primarily to check the health of the assets and internal controls exercised within the organisation.

Scope of Business Activity

The Modaraba due to its legal structure and operative framework can theoretically undertake any business activity prescribed by Shariah and highlighted by dynamic competitiveness and acumen of its fund managers. Modaraba being a mode of transaction and business is not without influence of the general business practices in Pakistan. However, Modaraba can not carry on any business which is repugnant to the Islamic injunctions. The business as generally understood, is an activity for profit and therefore, it has to be governed and managed accordingly. Great deal of inconsistency prevails because fabric of laws, social practices and the values are not entirely in conformity with Islamic Shariah.

Modaraba Industry in Pakistan, serving as an impetus for its rapid acceptance and development as an effective and prospective alternative to riba, free financing. …

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