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Modaraba Registration in Pakistan

Modaraba, or Mudarabah, is a special partnership in which one partner gives another money to invest in a commercial enterprise. The investment comes from the first partner, who is called the "rabb-ul-mal". The management and work is the responsibility of the other partner, who is called the "mudarib", and the profits are shared in a predetermined ratio.

STRUCTURE OF MODARABA

The Modarabas are allowed to offer any financial product or conduct any business based on Islamic concept provided it is Shariah compliant and approved by the Religious Board. This includes investing in stock markets, trading of halal commodities, project financing activities etc.

The Modaraba can raise funds through Certificates of Modaraba and Certificate of Musharaka. Modarabas can also issue Sukuk and Musharaka based TFCs. The Modaraba's prospectus must be approved by the Registrar of Modarabas, Securities and Exchange Commission of Pakistan, after receiving a certificate from the Religious Board certifying that the Modaraba's business is permissible under Islam. Modaraba certificates shall be listed on the stock exchange for trading purposes.

Features

A Modaraba is an agreement between two parties, in which one party provides managerial skills and the other party provides capital funds to carry on the business. Profit is shared according to the agreed ratio.

This business must be governed by the “Modarba Companies Ordinance 1980” and “Modarba Rules 1981”. According to the modarba rules, at least 10% of shares are compulsory for the party who provides managerial skills.

A company which is registered as a modaraba can float a modaraba. In order to float a modarba company, the registrar and controller must give their permission. The business must also obtain a clearance certificate from the Religious Board to ensure that it is not against Islamic Laws. Each modarba company must appoint a chartered accountant as its auditor in order to certify the accounts and objectives of the partnership. If the loss occurs due to the modarab or manager's negligence, they will also share in the loss. A modarab is a legal person and can sue and be sued. The Government of Pakistan issued the Modarba Companies Ordinance in 1980 to encourage business on the basis of profit sharing.

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Specific modarbaModaraba Al Muqayyadah (Restricted Mudarabah)

Mudarabah Al Muqayyadah is a type of modaraba where the Rabb-ul-maal (investor) may specify a particular business or place for the mudarib (manager) to invest the money in.

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Modaraba Al Mutlaqah (Unrestricted Mudarabah)

The Modaraba Al Mutalqah is an unrestricted modaraba, where the Rabb-ul-maal gives the mudarib full freedom to undertake whatever business he deems fit. However, the mudarib is not authorized to invite another Mudarib or a partner, or to mix his own investment in that particular Modarabah without the consent of Rab-ul Maal. The mudarib or mudaribs are authorized to do anything that is part of the normal course of business. However, if they want to do anything outside of the normal routine, they need express permission from the rabb-ul-mal.

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CONDITIONS OF BUSINESS

A modaraba company cannot do any business which is against the principles of Islam. The Govt. of Pakistan has set up a religious board to give clearance to each Modaraba company about its business activity. Each modaraba company will appoint an auditor approved by the registrar. He will certify objectives and accounts of the company. The officers, directors or their relatives cannot take loans from the funds of the Modarba company in any shape or form. The modarba company is not allowed to engage in any business that competes with the modarba floated by it.

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RELIGIOUS BOARD FOR MODARABA

In order to achieve the objectives of Islamic business, the Federal Government has established a Religious Board (RB) for Modarabas. The members of the Religious Board are well-known Shari'ah Scholars from the country, and the chairman is qualified to be a Judge of the High Court. The role of the Religious Board is to certify that the business of the Modaraba is not opposed to the injunctions of Islam.

DIFFERENT CAPACITIES OF MUDARIB

Ameen (Trustee):

The capital of Mudarabah is an Amanah (trust) in the hands of the Mudarib (manager), therefore if any loss occurs to the business without negligence on the part of the Mudarib, the Mudarib will not be liable for that loss. The money given by the Rabb-ul-maal (investor) and the assets required therewith are held by the Mudarib as a trust. Wakeel (Agent):

When Mudarib starts the business, he becomes an Agent of Rabbul-Mal. Therefore, all the business activities will be carried out on behalf of the principal. And if principal (Rab-ul-Mal) gives any instructions, Mudarib is bound to comply with these instructions.

Shareek (Partner): The mudarib is a partner in the business and receives a percentage of profits in accordance with the agreed upon ratio.

Dhamin (Liable): If the mudarib disobeys the instructions of the rab-ul-mal, or if the enterprise suffers a loss due to his negligence or misconduct, he is liable to compensate for the loss.

Ajeer (Employee): If the Mudarabah agreement is terminated for any reason, then the Mudarib is Ajeer. He is entitled to a fee for his services (Ujrat-e-Misl).

REGULATORY FRAMEWORK FOR MODARABA

Modaraba companies and Modarabas are subject to the regulatory framework set out in the following laws, rules and regulations:

- Modaraba Companies and Modaraba (Floatation and Control) Ordinance, 1980

- Modaraba Companies and Modaraba Rules, 1981

- Prudential Regulations for Modarabas

- Sharia Compliance and Shariah Audit Mechanism

- Code of Conduct of NBFI & Modaraba Association of Pakistan

- Fit & Proper Criteria for the sponsors, CEO, Directors and Key Executives (2008)

- Shariah Compliance and Shariah Audit Mechanism 2012

FAQs

A Modaraba is a form of Islamic financing where one party provides capital (the investor) and another party provides expertise and management (the operator). The profits generated from the business are shared according to a pre-agreed ratio, while the capital loss is borne solely by the investor.

2. What are the benefits of registering a Modaraba in Pakistan?

The key benefits of registering a Modaraba include:
Compliance with Islamic financing principles.
Limited liability for investors.
Potential for profit-sharing arrangements that attract investors.
Access to a wider pool of Shariah-compliant financing options.
Government incentives for Islamic finance initiatives.

To register a Modaraba in Pakistan, you need:
A unique name that complies with SECP regulations.
A registered office address.
A detailed business plan outlining the Modaraba's activities.
A Shariah-compliant agreement outlining the profit-sharing ratio and operational details.
Capital contributions from investors.

The registration process for a Modaraba involves:
1. Name Reservation: Submit a name reservation application to the Securities and Exchange Commission of Pakistan (SECP).
2. Prepare Documentation: Draft the Modaraba agreement and prepare necessary documents, including the business plan and financial statements.
3. File with SECP: Submit the application along with the required documents and fees to the SECP.
4. Obtain Certificate: Upon approval, the SECP issues a Certificate of Registration, officially registering the Modaraba.

The registration process for a Modaraba typically takes about 4 to 6 weeks, depending on the completeness of the application and documents submitted.

The essential documents required for Modaraba registration include:
Name reservation application.
Modaraba agreement.
Business plan detailing the operational and financial model.
Identity proof (CNIC) of partners.
Proof of registered office address.

Yes, there are fees associated with the registration process, including:
Name reservation fee.
Modaraba registration fee based on capital contributions.
Additional costs for legal or consulting services, if applicable.

Yes, foreign entities can invest in a Modaraba in Pakistan. However, compliance with regulatory requirements and foreign investment policies set by the government must be ensured.

A Modaraba in Pakistan is governed by the Modaraba Companies and Modaraba (Floatation and Control) Ordinance, 1980, along with the guidelines set by SECP. This ensures adherence to Islamic finance principles and protects the rights of investors.

The Modaraba operator is responsible for managing the operations of the Modaraba. They handle daily activities, make investment decisions, and ensure compliance with the terms of the Modaraba agreement and regulatory requirements.

Profit distribution in a Modaraba is based on the profit-sharing ratio outlined in the Modaraba agreement. The operator manages the investments, and profits are distributed among the investors according to this agreed-upon ratio after deducting operational costs.

In a Modaraba, losses are typically borne solely by the investors, while the operator does not incur liability for capital losses unless otherwise agreed. The Modaraba agreement should outline the treatment of losses.

Yes, a Modaraba can be converted to another business structure, such as a partnership or private limited company. This process involves regulatory compliance and obtaining approval from the SECP.

There is no specified minimum capital requirement for a Modaraba in Pakistan; however, the capital must be sufficient to carry out the intended business activities and should be disclosed in the business plan.

A Modaraba must maintain proper accounting records, including:
Financial statements.
Investment records.
Profit and loss distribution records.
Minutes of meetings and decisions taken by the operator. Maintaining these records ensures compliance with legal requirements and facilitates audits.

A Modaraba can ensure compliance with Shariah law by appointing a Shariah advisor or board to oversee its operations, ensuring that all activities and contracts align with Islamic principles.

Common reasons for rejection include:
Non-compliance with name availability regulations.
Incomplete or inaccurate documentation.
Failure to meet the eligibility criteria for operators or investors.
Issues with the Modaraba agreement.
Ensuring all documents are accurate and compliant can help avoid rejection.

Yes, a Modaraba can apply for loans or financing, but it must adhere to Islamic financing principles, which may restrict certain types of interest-bearing loans. The Modaraba should seek Shariah-compliant financing options.

To dissolve a Modaraba, follow these steps:
1. Pass a resolution among investors to dissolve the Modaraba.
2. Notify the SECP and submit a dissolution application along with required documents.
3. Publish a notice of dissolution in a local newspaper.
4. Settle any outstanding liabilities and distribute remaining assets among investors.

Yes, other business structures like partnerships or limited companies can operate as a Modaraba, provided they meet the regulatory requirements and comply with the Modaraba framework established by the SECP.



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