Promising Progress of Modaraba Sector of Pakistan

Abstract

Over the last three decades in Pakistan, the Islamic Financial Services have evolved as a primecomponent of the financial sector by growning in size and diversity. Within the universe of Islamic financial industry, the Modarabas have remained pioneer Islamic Financial Institutions in Pakistan. The development of Modaraba as a Shariah compliant mode of business and its transformation into an institutional framework with proper legislation, regulatory and monitoring structure, and operating guidelines is a sole feature of Pakistani Islamic Financial market. In fact, Modarabas as Islamic financial institutions are the forerunnersin flourishingthe Islamic financial sector of Pakistan.The the Securities and Exchange Commission of Pakistan (SECP) recently introduced reforms and strengthened the regulatory framework of Modaraba sector that enlarged the Modaraba sector asset base to PKR 41 billion (US$ 380.0 million) by the end of December 2016. At present,the sector has low level of leverage, growing quality assets and healthy dividend payouts.The progress in the sector is largely due to strengthening of governing laws particularly the guidelines for Sharia compliance issued by the Registrar Modaraba. Effective monitoring and strong surveillance by the office of Registrar Modaraba has also supported a lot for better performance of the sector and enhancement of confidence of investors. At present 25 Modarabas are operating in Pakistan's financial market as listed entities and are engaged in various Shariah compliant business activities.In the last three decades, Modarabas emerged as a main segment within the sector of non-banking Islamic financial institutions. It is a viable and reliable source of medium term financing with an opportunity to earn Riba-free income. Recently, many good corporate entities have made their debuts into Modaraba business and the market experts foresee a significant number of new entrants in the sector which will further strengthen this segment and find their way to set new milestones in coming years. The following article covers current status and progress of the sector, its challenges and future business opportunities.