8/6/2019 Assignment Pakistan

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11Monday, December 20 / Sunday December 26, 2010

Feature BUSINESS ASIA

The Indian sub-continent providedan initial intellectual leadership tothe global movement of Islamic

  banking and finance. The writerslike Abul A'ala Maududi, Professor Khur-shid Ahmed, Muhammed Umar Chapra,NejatullahSiddiqiand many more wrote ex-tensively on the concept and theory of Is-lamic banking. An Islamic economist fromthe sub-continent, Muhammad Uzair, pre-

sented the most widely cited model of Is-lamic banking and finance – known asTwo-Tier Mudaraba model.

Itwas inPakistan wherethe firstIslamicCooperativeBankwas attemptedto be setupin the early 1960s – an experimentthat failed

 within six months of its inception. A strongmovement had always existed in Pakistan,demanding for implementation of Shari'a inthe financial sector of the country.

However, it was only in 1981 that a Mu-daraba-based model for developing Islamic

 banking and finance was introduced. Sincethen, the development of Islamic banking

and finance in the country has seen many ups and downs.

Mudaraba is a mode of financing, whichallows a financier to invest in a business run

 byan appointedmanager whoshares inprofitinsteadof receiving a fixed wage. Thus, a Mu-daraba is an arrangement between two par-tieswhereby oneprovides money while otheruses that money to start/run a business inorder to share profit between them in accor-dance with a mutually pre-agreed profit dis-tribution ratio. If the business is in loss, themoney provider bears all the financial loss,

 while manager loses his time and efforts.

Mudaraba-based businesses have existedin the Muslim world for centuries but Pakistanis perhaps the first country that legislated infavour of developing this form of business,

 when the Office of the President promulgatedMudarabaCompanies and Mudaraba(Floata-tionand Control) Ordinance in 1981.

Following this, a number of Mudarabas were floated on Karachi, Lahore and Islam-abadStock Exchanges. Thiswas an excellentmodel, which could have been used as amechanism for liquidity management for Is-lamic banks - a problem still in need of a vi-able solution.

However,Pakistan has failed to highlightthe potential of this model in the interna-tional development of Islamic banking andfinance. Sukuk (or what is termed as an Is-lamic bond) has stolen the limelight, al-though the Pakistani model of Mudaraba

 business is a very powerful Shari’a authentictoolfor developingan Islamiccapital market.

Different industrial groups set up Mu-darabasfor doing a varietyof businesses, andused leasing as a mode of financing. A num-

 ber of banks have also set up their own Mu-darabas. For example, Mudaraba Al Mali(one of the oldest Mudarabas in the country,

  which was set up in 1987) was bought by Bank Islami to take control of the manage-ment of the Mudaraba in 2007.

In1981, when thelegislation forsettingupMudarababusiness wasfirst introduced, there

 was noIslamicbank operating in thecountry.So, it appears that the government of 

Pakistan thoughtof developinga vibrant Mu-daraba sector as a pre-requisite for develop-ment of Islamicbanks.Thisis evidenced byanumber of conventional banks even at pres-ent managing their own Mudarabas throughtheir Shari’a compliant subsidiaries or Mu-daraba management companies.

Mudarabas were very successful in theirfirst ten years between 1981 and 1992, untilthe Finance Bill of 1992 that took away the

tax incentives from this nascent industry.Since then, the growth of Mudaraba businessin Pakistanhas decreased, although in termsof financial returns it remains a very attrac-tive investment.

Mudaraba Business & Islamic Invest-ment Banking

The Mudaraba business model, as devel-oped in Pakistan, has a potential to replaceconventional investment banking.

In the following, salient features of Mu-darabas business in Pakistan are described:

 Asmentioned above, the businessof Mu-darabas and Mudaraba Companies is gov-

erned by Mudaraba Companies andMudarabas (Floatation and Control) Ordi-nance 1981. Securities and Exchange Com-mission of Pakistan (SECP) serves as theregulator,whichhas a dedicated department,headed by Registrar of Mudarabas, oversee-ing Mudaraba companies and Mudarabas.

There is a clear distinction betweena Mu-daraba and a Mudaraba management com-pany, which must be a separate legalperson/entity. A Mudaraba may be floatedfor a specific purpose (e.g., the first Mu-daraba, Twin Towers Mudaraba, set up inPakistan was floated in 1982 for the con-

struction of a residential-cum-commercialcomplex known as the Twin Towers, locatedin Karachi) or for general trading and busi-ness activities. Most of the Mudarabas actu-ally fall in the second category. Similarly,Mudarabas could be setup fora fixed periodor as perpetual Mudarabas.

The Mudaraba business activities vary.Some Mudarabas specialise in trading instocks of listed companies in Pakistan –something very close to the model of a mu-tual fund. Other Mudarabas specialise inleasing business – a diminishing focus fol-lowing fierce competition from leasing com-panies in the country.

 A number of industrial groups have theirownMudarabasto raise money forexpansionof theiroperations – a feature akin to Sukuk.

Profit accruingfrom the Mudarabaactiv-itiesis distributed amongst the shareholders

 by offering them dividends according to thesharesheld. Dividends maybe in theformof 

cash or additional shares. With a history of about 30 years of oper-

ations, Mudarababusiness in Pakistanoffersan interesting model that could be used fordeveloping a number of solutions that Is-lamicbanking andfinancial market has beenactively seeking. Thefollowing areas must beof special interest to the local and global Is-lamic financial services industry.

1. TheMudaraba businessin Pakistanoffers a solutionfor liquiditymanagement toIslamic banks and financialinstitutions. Thegovernment or another body representing

 banks may play a leading role to create fromthe existing operations of Mudarabas andMudaraba companies a liquidity manage-ment platform, which could be used by localIslamic banks and financial institutions.

2. Shares of Mudarabas are in effectIslamic investment certificates – a featurethat isvery much inline with thespiritof theoriginal model of Sukuk.Giventhat theprofitis distributed in the form of dividends and

there is no guaranteeing of the capital or re-turn, Mudarabas are a genuinely authenticmodel for Sukuk.

Needless tosay that itis possible tocreatestructured products on the Mudaraba assets

to offer principal protection and a guaran-teed return for those players who may seek these features.

3. Given the versatility of operationsof Mudarabas, it is now time that the StateBank of Pakistan must start looking into de-

 veloping Mudaraba business into a genuinely new Islamic investment banking model. Al-ternatively, SECP may allow some new fea-tures in the Mudaraba business to make itmore akin to investment banking than anin-

 vestment company model.4. The current model of Mudaraba

 business in Pakistan must be studied by thenewly createdInternational Islamic Liquidity Management Corporation (IILM) in KualaLumpurand the Bahrain-basedInternationalIslamic Financial Market (IIFM) to create aglobal platform for liquidity management forIslamic banks and financial institutions.

 Professor Allama Humayon Dar is aworld-known Shari’a scholar, specialising

in Islamic financial advisory. He sits on anumber of Shari’a boards, advising banksandfinancial institutions in the West as well in the Islamic world. He can be reached onhumayon@businessasiaweekly.com.

Mudaraba companies in Pakistan

 

 

 Pakistan has failed to highlight the potential of this model in theinternational development of Islamic banking and finance