INP-WealthPk

Govt Working on Legislation to Protect Modaraba Investors

February 03, 2022

By Abdul Wajid Khan ISLAMABAD, Feb. 03 (INP-WealthPK): The government of Pakistan is working on legislation to enhance its regulation on the business of Modaraba – an Islamic mode of financial system – to provide protection to investors. According to a proposed bill prepared by the Ministry of Finance, titled “Modaraba Companies and Modaraba (Floatation and Control) (Amendment) Bill”, a copy of which is available with INP-WealthPK, there is an urgent need to promulgate the proposed bill to provide incentives to entrepreneurs and prospective investors to invest and carry out their businesses under the umbrella of regulated structure of Modaraba to earn profits on their investments. The proposed bill intends to regulate the business of Modaraba and related companies to provide protection to the investors, Modaraba certificate holders and the public. The existing law was promulgated in 1980. Since its inception, no substantial changes have so far been introduced except the inclusion of some administrative powers for the commission and the registrar Modaraba, reads the statement of objects and reasons of the bill. The proposed bill aims to amend more than 40 years old ordinance, in order to accomplish the beneficial regulation of Islamic financial services within the remit of the Securities and Exchange Commission of Pakistan (SECP), encourage and promote Islamic financial institutions, and reduce regulatory burden. The bill will facilitate the growth of the economy in general and the Islamic financial sector in particular by providing simplified procedures for ease of starting and doing business, ensuring enhanced protection of investors and augmenting corporatisation in the country. The proposed bill has been introduced in the National Assembly and the NA Standing Committee on Finance will give its verdict on it after detailed deliberations with different stakeholders in the upcoming session. Modaraba in Pakistan Modaraba is considered one of the key modes of the Islamic financial system and it is a kind of partnership, in which two parties share finance and skills with each other to do any business. The party providing finance is called “Rabb-ul-Mal”, whereas the other party providing management skills for the business is called the “Modarib”. The profits are shared in a predetermined ratio. Amongst the other activities, Modarabas are also allowed to undertake Ijarah, Murabahah, Musharaka, diminishing Musharaka, trading of different commodities, project financing and investment in the stock market. In Pakistan, the process to initiate Islamic financial system started in 1977. Later, the government introduced certain changes in the Banking Companies Ordinance and promulgated the Modaraba Companies & Modaraba (Floatation and Control) Ordinance, 1980 to provide a legal framework for the Islamic financial system. Potential for Modaraba Experts in Pakistan see great potential for Modaraba to invest in the small and mid-size enterprises (SMEs) sector to generate more jobs and economic benefits. A recent report on the Modaraba sector launched by the Institute of Business Administration (IBA) said that there is immense potential for Modaraba in SME financing which is so far considered an underserved sector by the banking sector. In Pakistan, the Islamic financial industry, including banking and non-banking sectors, is growing fast. According to the State Bank of Pakistan (SBP), the year-on-year increase in the assets and deposits of the Islamic banking industry in 2020-21 remained 32 percent and 29.7 percent, respectively. The market share of Islamic banking assets and deposits in the overall banking industry was 17 percent and 18.7 percent, respectively. Former Governor State Bank of Pakistan Dr. Ishrat Hussain in a recent statement urged the Islamic financial institutions, including Islamic banking and finance industry, to play their role in bringing down poverty and inequality in the country. He said that about 69 percent of Islamic banking assets go to the corporate sector and there is no difference between Islamic banking and conventional bankers. It is hoped that companies of Modaraba will change their focus in future to contribute more positively to the socioeconomic development of the country.