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Islamic sharia has enunciated a set of principles, which provides basis and limits for all kinds of business in general and economic and commercial transactions in particular. Principles pronouncing justice, mutual help, free consent and honesty on the part of the parties to a contract avoiding fraud, misrepresentation and misstatement of facts and negation of injustice or Zulm provide grounds for valid contracts. Principles providing for prohibition of Riba, Gharrar Jahl, Darar, Maysir and Qimar (gambling) define invalid and voidable contracts and demarcate the limits which should not be crossed.

Modern Islamic finance emerged from a belief that conventional forms of financing may contain certain elements prohibited by Sharia, since the Holy Quran forbids taking interest. As an alternative, a myriad of Islamic financial transactions have been innovated based on a combination of classical trade based contracts and other accompanying agreements.

The Modaraba Sector being the pioneer in introducing Islamic Finance as an alternative to the conventional system of finances in Pakistan, is an important segment of the financial sector. Modaraba Companies and Modaraba (Floatation & Control) Ordinance, 1980 was promulgated in 1980 and Modaraba Rules were framed in 1981 and subsequently Prudential Regulations for Modarabas were issued in 2004.

Modaraba Financing: Modaraba Financing is regarded as the most preferred mode of finance in Islamic financial industry.

The word "Modaraba" is derived from the Arabic word "Al-darb fil ard" which means to travel through the land and seeking bounty of Allah. This is related to trade because trade usually involves travelling. Mudaraba Qiraad and Muqaradah terms are used to express a specific business in which the capital is provided by one party (Rabul-Mal) whereas the labor or work is provided by the other party (Mudarib). It therefore, signifies a contract of partnership in which the owner of the fund is entitled to profit on the physical involvement in the shape of capital and the other is entitled to profit on account of its efforts in the shape of skill and labour provided that the loss if any, is borne by the owner of the capital. It is this aspect of contractual relationship which must be based on absolute trust and unblemished honesty with which business under modaraba has to be run otherwise the very purpose of its operation shall become void and unislamic.

The legitimacy of Mudaraba which is a contract of fidelity has been established on the basis of Holy Quran, Ahadiths, Ijma and Qiyas. The mostly quoted incident of commercial contract between Holy Prophet (PBUH) and Hazrat Khadija (RA) has been narrated in many renowned books of Sirah and history but on the critical analysis shows that it was a contract of Mudarabah but of fixed remuneration (Ujrah) i.e. labor charges. The said narration gained much popularity that it was quoted by many Sirah writers. The prominent scholars on Islamic banking and finance have also stated it to be a Mudaraba contract.

In the pre-Islamic period, the modaraba contract was prevalent on the condition that profit was to be shared on the basis of agreed ratio between Rab-ul-mal and the Modarib. However, in case of loss it was to be borne by the Rab-ul-mal only. This basic and fundamental principle of Modaraba was maintained by the Holy Prophet (Peace be Upon Him). There were, however, added or imposed certain conditions to the contract of the modaraba in the light of teachings of islam, which have been discussed in detail by the Scholars and are to be found in the Books of Fiqh.

MODARABA - AN ENTITY Modaraba is a prime mode of Islamic finance and in all over the world this is being used as a product only and is undertaken in accordance with the Sharia guidelines. In Pakistan, Modaraba is not only being used as a product but it is also an entity which has a proper legislature and being regulated by the Securities and Exchange Commission of Pakistan.

Government of Pakistan recognized the concept of Modaraba for Islamisation of the economy in the financial sector and passed the Modaraba Companies & Modaraba Companies (Floatation & Control) Ordinance, 1980 to provide a legal framework for organizing business enterprises according to the injunctions of Holy Quran and Sunnah. The Ordinance was promulgated on 26th June, 1980. In the subsequent year, Modaraba Rules, 1981 were framed to carry out the purpose of Modaraba.

Initially the concept of the Modaraba institution could not attract the entrepreneurs mainly due to lack of awareness of the business model as well as lesser demand from the investors. However, the first Modaraba namely "Twin Tower Modaraba" was floated in 1980 which was a specific purpose modaraba and was established for the construction of a multi-storied building at Karachi. After completion of the project the modaraba was wound up.

During the period from 1981 to 1990, only 19 modarabas were licenced and 15 were floated . However from the period 1991 to 1995, the number of modarabas licenced increased from 19 to 63 while floatation of modarabas increased from 15 to 39. The rapid growth of Modaraba concept was an expression of confidence by the entrepreneurs and investors in the Islamic modes of business.

BUSINESS OF MODARABAS: Prior to 2008, Modaraba Sector was using only three products of Islamic modes of financing i.e. Murabaha, Musharaka and Ijarah. The respective agreements had been approved by the Religious Board more than three and a half decades back. In view of the significant research and developments undertaken and evolution of the Islamic financial system globally and also in Pakistan, it was felt necessary to redraft the previous agreements and also to introduce new products to broaden the business capabilities of Modarabas.

In the year 2008, the Religious Board chaired by Justice (R) Mian Mahboob Ahmed approved model financing agreements viz-a-viz (i) Diminishing Mushraka (ii) Ijaraha (iii) Murabaha (iv) Musharaka (v) Salam (vi) Istisna (vii) Mudarabah (viii) Musawamah (ix) Syndicate Mudarabah (x) Syndicate Musharaka and (xi) Islamic CFS Murabaha.

In addition to the above, the Religious Board has also approved issuance of "Modaraba Sukuk" to corporate as well as individual investors by Modarabas which will cater to short term resource mobilization for Modarabas.

SHARIAH COMPLIANCE Modaraba being an Islamic Financial Institutions requires co mpliance of the Modaraba Ordinance, 1980, Modaraba Rules, 1981, Prudential Regulations and Guidelines prescribed by Shariah for Modarabas for its execution. To achieve this objective, the Securities & Exchange Commission of Pakistan (SECP) has a Religious Board which approves the business of Modaraba and provides direction to achieve the Maqasid al Sharia under the control of the Registrar Modaraba, SECP.

Towards quality improvement of Shariah compliance of Modarabas, SECP launched the Shariah Compliance & Shairah Audit Mechanism (SCSAM) for Modarabas whereby Modarabas are required toappoint a Shariah Adviser who will look after their shariah issues and provide them guidelines on a on going basis. The Mechanism also requires setting up of Shariah Compliance structure which can ensure compliance at every stage on a continuous basis.

Copyright Business Recorder, 2019

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