Abdul Wajid Khan

The government is introducing several reforms to further promote Modaraba business in Pakistan.

According to an official brief of the Securities and Exchange Commission of Pakistan (SECP) on the bill titled ‘The Modaraba Companies and Modaraba Floatation and Control (Amendment) Bill’, a copy of which is available with WealthPK, the proposed bill aims to amend 40-year-old Modaraba Companies and Modaraba (Floatation and Control) Ordinance, 1980 to encourage the Modaraba sector in the country.

The bill is currently under review by the Standing Committee of the National Assembly on Finance, which will thoroughly deliberate the bill in its upcoming meetings and then clear it for further process.

The brief says that the bill focuses on the growth of the Modaraba sector through various amendments to several broad categories including ease of starting and conducting the business of Modaraba, enhanced requirements to increase transparency, and increased protection to the certificate holders. It says that several measures are being introduced to ensure ease of doing the business.

Under the bill, application fee for registration of a new Modaraba management company and establishment of a new Modaraba has been reduced from Rs250,000 to Rs100,000, and from 10% to 0.25% of the nominal amount, respectively. The brief says that the share of profit of a Modaraba company is being enhanced and linked with the performance of the company i.e., return on average equity. Currently, it is up to 10% of the net annual profit of the Modaraba. The brief further highlights that the concept of unlisted Modaraba is being introduced to enable investors to establish new Modarabas without the requirement of listing with the SECP.

The minimum capital requirement has been reduced from Rs7.5 million to Rs1 million for registration of a new Modaraba company. Enabling provisions are being incorporated for allowing a Modaraba to mobilise resources through issuance of certificates of Musharakah and other Islamic financial instruments, and also provisions are being introduced for a Modaraba to file its financial statements electronically. Under the bill, the concept of annual general meeting (AGM) and voting rights for the modaraba certificate holders are being introduced in the line with the Companies Act to enhance powers of certificate holders.

Provisions have been incorporated in the bill for the approval of financial statements of a Modaraba and appointment of auditors of a Modaraba by the certificate holders in AGM. The brief further says that new enabling powers for certificate holders are being given to apply for the change of management of a Modaraba through the special resolution. Under the bill, restriction is being placed on a Modaraba company not to divest its Modaraba certificates, in case it has opted voluntarily to transfer the management of the company.

According to the proposed bill, in order to give immediate impetus to the Islamic financial industry and to stimulate economic growth, there is an urgent need to promulgate the proposed bill to provide incentives to entrepreneurs and prospective investors to invest and carry out their business under the umbrella of regulated structure of Modaraba to earn profits on their investments. The proposed bill intends to regulate the business of Modarabas to provide protection to the investors, Modaraba certificate holders and public.

It will facilitate the growth of economy in general and the Islamic financial sector in particular by providing simplified procedures for ease of starting and doing business, enhancing protection of investors, and augmenting corporatisation in the country.

The proposed bill further seeks to mitigate the reputational and operational risks and enhance the image and operational framework of Modarbas as an Islamic financial institution of the country. The bill aims to enhance SECP oversight and bring operational flexibilities for the modaraba sector.

Modaraba is considered one of the key modes of an 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 which provides the finance is called the ‘Rabb-ul-Mal’ or the investor, whereas the other party which shares its management skills and efforts for the business is called the ‘Modarib’ or the manager. The profits generated through the business are shared according to a predetermined ratio.

Credit : Independent News Pakistan-WealthPk