PRESENTED BY : Zohaib Sikandar Mudassir Munir Sumear Shiekh Sakib Zahid

What is Modaraba
Modaraba is not a new concept. The word Modaraba is derived from

Al-darb i.e. journeying in the land for the purpose of earning sustenance (rizq).
It is an agreement between two or more persons whereby one or more

of them provide finance, while the other provides management to carry on any business venture whether trade, industry or service with the objective of earning profits.
The profit is shared in an agreed proportion. The loss is borne by the

financiers only in proportion to their share in the total capital.

TYPES OF MODARABA
Al Modaraba Al Moqayyadah: Rabb-ul-maal may specify a particular

business or a particular place for the Modarib, in which case he shall invest the money in that particular business or place. This is called Al Modaraba Al Moqayyadah (restricted Modaraba).

Al Modaraba Al Mutlaqah: If Rabb-ul-maal gives full freedom to

Modarib to undertake whatever business he deems fit, this is called Al Modaraba Al Mutlaqah (unrestricted Modaraba)

Modarib is also not authorized to do the following:

Keep another Modarib or a partner

Mix his own investment in that particular Modaraba

without the consent of Rabb-ul-maal.

Role of Modaraba in Pakistan

Pakistans commitment to promote Riba free economic system was

carried forward with the promulgation in 1980 of the Modaraba Companies and Modaraba (Floatation and Control) Ordinance, 1980
Its primary aim was to accelerate capital formation and economic

development in accordance with the tenets of Islam.

It was thought that the experience gained from this mode of financing

will replicate it throughout the system in Pakistan but unfortunately Modaraba hasn't taken off so far.

Role Of Modaraba In Pakistan Financial Sector.

Assets held by Modarabas account for 0.2 % of the total

assets held by the financial institutions in the country.

Modarabas operating in Pakistan are like closed-end

mutual funds
They are exempted from income tax provided they

distribute 90% of their profit among the certificate holders.

MODARABA ASSOCIATION OF PAKISTAN

Locally, the MAP has been trying to improve upon public awareness

regarding the role of Modaraba sector in providing Islamic mode of financing

The MAP constantly reviews Modaraba Ordinance, Rules and make

necessary amendments that will further improve the regulatory and operational environment.
One of the recent achievements has been floatation of Musharika-

based Term Finance Certificates by Al-Zamin Leasing Modaraba

Business activities currently undertaken by Modarabas

Ijarah
Morabaha Musharika

Trading

Ijarah
Ijarah means lease, rent or wage.
Generally, Ijarah concept means selling benefit or use or service for a

fixed price or wage.

Under this concept, the Bank makes available to the customer the use

of service of assets / equipments such as plant, office automation, motor vehicle for a fixed period and price.

Morabaha
Morabaha is one of the most commonly used modes of financing by

financial institutions.

It refers to a sale transaction where the seller reaches an agreement

with the buyer to provide him with a specific commodity at a marked up price
The seller discloses the actual cost of procuring the asset and the buyer

then pays the sum back to the seller in fixed installments.

Musharika
Musharika concept is being used to develop innovative products both

on asset as well as liability side

In Musharika capital is provided by two or more parties for project

development.

The profits are shared among the parties on the basis of their

participation or on a pre-agreed ratio and the losses are shared on the basis of equity participation.

PROBLEMS FACED BY MODARABA IN PAKISTAN

INADEQUATE CORPORATE GOVERNANCE

INNOVATIVENESS NEEDED

INADEQUATE CORPORATE GOVERNANCE

Corporate governance is one of the key issues in managing the

Modarabas' which proved to be inadequate and the interests of the investors and certificate holders have not been adequately protected

The concentration of powers is in the hands of managers particularly

when the standards of transparency and disclosures are not that rigorous does leave a lot to be desired

INNOVATIVENESS NEEDED
The Modarabas have not been able to diversify their products or

differentiate from other market players such as previously leasing companies and now commercial banks through consumer finance

Today more that 80% of their business is concentrated on commercial

banks and leasing companies which do not provide any market niche or comparative advantage to them.

PRUDENTIAL REGULATIONS FOR MODARABAS

Short title and commencement Creation and Building up of Reserve Limits on Exposure Limit on Modaraba Exposure Conditions for Granting Facilities Maintenance of minimum margins Restriction on certain types of transactions No investment in stock market shall be made by a modaraba

except in its own name. Provisioning for non-performing Asset

How Could Modaraba Sector Can Be Improved.

The risk management practices in Modarabas' should be reviewed to

find out if the managers are optimizing the returns for the given level of risk.
The only credible way to expand this mode of financing is by

demonstrating that the reward-risk relationship under Modaraba is not inferior compared to other instruments.
It is vital for Modarabas' to develop some other products and services

which are in the domain of the Modarabas' and also tailored to the demand of the particular customer base which has so far not been able to access financial sector institutions.

Case Study

The Habib Group with vast experience in the industrial, financial and

commercial sectors floated FHM in 1985.

Basic aim of the FHM was dealings in line with principles elaborated in

Sharia.
The Management of FHM has always given emphasis on building-up

quality lease portfolio

The efficacy of FHM's business strategy and prudent risk management

policies has supported the management to maintain outstanding assets quality while ensuring sustanability of performance, .

PROFILE
FHM commenced its business operation in March, 1985, with

initial capital of Rs.25.0 million only.

The FHM has a total equity base of around Rs.2.500 billion and an

assets size of approximately of Rs.5.0 billion.

Efficient customer services and high client value has always been

FHMs objective.
FHM draw its success by complying with highest ethical and moral

standards and always try to make efforts to enhance superior professional competencies .

Achievements Of First Habib Modaraba

Continuous payment of dividend since business operations. FHM is maintaining "A" category rating for last 10 years. Recipient of best performing Modaraba award from Modaraba

Association

Recipient of "Corporate Excellence Certificate" Award from

Management Association of Pakistan.

Highest Equity and Assets size in entire Modaraba sector. Infection free lease portfolio,till the year 2007, not a single advances

portfolio was provided as a non performing loan

Key strength of First Habib Modaraba

Excellent credit rating Consistent dividend pay out Infection free lease assets portfolio Highest equity in the entire modaraba sector Negligible employee turnover Zero provision on account of lease rental Highest profit for the past three years in the entire modaraba sector Receiving modaraba association award since 1999

CONTINOUS PAYMENT OF DIVIDENDS

Credit Rating
With continuing sound financial position, the FHM is also maintaining A category credit rating since almost last 10 years PACRA) has awarded rating scale of A1+ for short term and AA for long term. A1+ is the highest level in PACRA's rating scale for short term rating.

HIGHEST EQUITY BASE AND ASSETS SIZE

Net Leased Assets Equity Growth

Profit After Tax

BEST PERFORMING MODARABA AWARD

Balance Sheet Growth

CONCLUSION
For a considerably long time investors have been ignoring

Modarabas.

There is a general perception that investing in modaraba certificates

is not attractive.

While the perception may be close to reality, there are certain good

performing modarabas which offer earnings yield which is much higher than the return from savings deposits and even Defence Saving Certificates.

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