Activities of Modarabas, Leasing Companies and Investment Banks in Pakistan

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

Activities of Modarabas, Leasing Companies and Investment Banks in Pakistan


Ali, Muhammad Imtiaz, Economic Review


The number of listed Modarabas and leasing companies at Karachi Stock Exchange rose to 51 and 25 respectively as on 29th December, 1994, with aggregate market capitalisation in excess of Rs. 16 billion. These institutions have given a completely new dimension to the range and depth of financial activities in the financial market of the country.

As a part of the financial sector reforms in the non-banking sector, a number of financial institutions such as leasing companies, modarabas, investment banks and housing finance companies were set up in Pakistan. As of end June, 1994 there were 43 modarabas, 18 leasing companies, 9 investment banks and 1 housing finance company operating in the capital market of the country. The number of listed Modarabas and leasing companies at Karachi Stock Exchange rose to 51 and 25 respectively as on 29th December, 1994, with aggregate market capitalisation in excess of Rs. 16 billion. These institutions have given a completely new dimension to the range and depth of financial activities in the financial market of the country.

The Government of Pakistan has been constantly pursuing one of its major economic objectives i.e. the Islamization of all financial transactions in the country. As a major step, the concept of Modaraba was institutionalised in 1980 through the formulation of Modaraba Companies and Modarabas (floatation and control) Ordinance, 1980. Thereafter, the entire ambit of domestic banking and financial activities was brought in line with the tenets of Sharia with effect from January 1, 1985 and the State Bank of Pakistan issued detailed rules and guidelines relating to Islamic mode of finance. One thing which emerged as part of this restructuring was the concept of Ijara (Lease) and thus leasing was granted official recognition as an acceptable Islamic mode of financing.

The overwhelming importance of Modarabas and their significant contribution to the national economy in the areas of leasing, stock market investments, short and long-term financing, trading and manufacturing cannot be ignored. Modarabas account for over 36% of the paid up capital of all listed financial institutions in the country including banks. Nearly 37% of the listed financial institutions in Pakistan are Modarabas. Now let us examine in detail the activities of Modarabas, Leasing Companies and investment Banks in Pakistan.

Modarabas

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 a 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 ControlOrdinance 1980).

To ensure that only sound Modaraba 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 scope of business activity. …

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