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on a 60:40 ratio.

In case a loss is suffered in one part of the business and a profit in another, the profit isutilized to offset the loss before it is distributed between the parties.

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, financialinstitutions 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.

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 cannot

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 managedaccordingly. Great deal of inconsistency prevails because fabric of laws, social practices and

the values are not entirely in conformity with Islamic sharia.

Modaraba Industry in Pakistan, serving as an impetus for its rapid acceptance and development

as an effective and prospective alternative to riba, free financing. This is the reason that within a

decade notwithstanding the challenges of already deeply entrenched interest-based financing

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system, fiscal restraints and geopolitical constraints the number modaraba companies have

mushroomed over 50 in the country.

Floatation

For floating a Modaraba, first of all, there must be a Modaraba Management Company, known

as Manager of the Modaraba or "Modaraba Company". The company may be registered under

Companies Ordinance 1984. After incorporation as Joint Stock Company, it is to be registered

as Modaraba company with the Registrar of Modarabas, Islamabad. Once registered as a

Modaraba Company by the Registrar of Modarabas, it can float any number of Modarabas

subject to the recent requirement of three years satisfactory performance. For creating and

managing Modaraba, inter alia, the Modaraba Company has to prepare a business plan and

prospectus containing various information as required in 4th schedule of the Modaraba

ordinance, which is to be cleared by the Religious Board appointed for the purpose.

In case of Modaraba companies applying for listing on stock exchange 50% of the total paid up

capital shall be subscribed by the sponsors or their associate or friends, relatives andassociated undertakings and balance of 50% shall be offered to the general public

including NIT. Modaraba cannot be floated with a paid-up capital of less than 2.5 million. Laws

in Pakistan permit banks to register themselves as a modaraba company for the floatation of

their own modarabas. With some initiative, this offers a unique opportunity to banks in

Pakistan to diversify into new areas of business play an active and innovative role in the

economic development of the country.

Future of Modaraba

The government policy of privatisation and deregulation of economy and easing of fiscal and

banking regulations have opened new avenues of investment and diversification for the financial

sector.

In this context the modarabas along with the investment finance bank will play a pivotal role in

strengthening and developing the capital market activities and to establish the confidence of

investors.

The Modaraba, undoubtedly is an important and useful element of our financial structure and

the investors are keen to put their money in modaraba primarily because of the fact that their

business is in conformity with the injunctions of Islam.

Name of Modaraba Companies

1 Allied Rental Modaraba Limited.2 Al-Noor Modaraba Management (Pvt) Limited.3 B.F. Modaraba.4 B.R.R. Guardian Modaraba.

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5 Crescent Standard Modaraba.6 First Elite Capital Modaraba.7 First Equity Modaraba.8 First Fidelity Leasing Modaraba.9

First Habib Bank Modaraba.

10 First Habib Modaraba.11 First IBL Modaraba.12 First National Bank Modaraba.13 First Pak Modaraba.14 First Paramount Modarba.15 First Prudential Modaraba.16 First Punjab Modaraba.17 First Udl Modaraba.18 KASB Modaraba.19 Modaraba Al-Mali.20 Standard Chartered Modaraba.21 Trust Modaraba.