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Certificates of musharaka.

A major breakthrough in resource mobilization was achieved by the Modaraba Sector when in October 1994 the Registrar of Modarabas finalized the guidelines for issuance of Certificates of Musharaka. Since the inception of Modarabas in early 80's one of the most pressing problems faced by the sector was that due to the inability to raise deposits (certificates of deposit) modarabas could not leverage and consequently their growth had been stunted. In the past, to raise funds the modarabas have generally been reverting to issuance of Right and Bonus Shares, which obviously resulted in dilution of their earnings per share.

As early as 1989, modarabas had approached the government to allow them resource mobilization through certificates of deposit. It took 3 years of convincing and in early 1992 the Government agreed to allow modarabas the certificates of deposit subject to approval by the Religious Board. This was not an easy task. It took nearly 2-1/2 years to develop a financial instrument totally "Riba-Free" and than to convince the Religious Board that this instrument was indeed Islamic in nature. Finally in September 1994, the Religious Board approved the guidelines for Musharaka Certificates, and in October'94 the Registrar of Modarabas released the final set of guidelines. The salient features of the Certificates of Musharaka guidelines is enumerated below:


(1) In these Guidelines, unless anything is repugnant to the subject or context:-

(i) "Certificate" means a certificate of definite denomination issued by the Modaraba to the contributory acknowledging the receipt of money contributed by him under these guidelines on the basis of arrangement described herein;

(ii) "Contributory" means the holder of a valid Certificate'

(iii) "Contributories Fund" means the amount contributed by the Contributories through the Certificates issued under these Guidelines;

(iv) "Modaraba Fund" means the daily product of the following, based on the books of account of a Modaraba:-

(a) paid-up fund of the Modaraba;

(b) revenue and capital reserves;

(c) un-appropriated profit; and

(d) accumulated losses, if any, which shall be deducted from the aggregate of (i), (ii) and (iii) above.

(e) "Total Fund" means the aggregate of Contributories Fund and Modaraba Fund as defined in (iii) and (iv) above.

Supremacy of Sharia

(i) In all matters relating to application of these Guidelines, Sharia shall be absolutely supreme and over-riding in all respects.

(ii) The management of a modaraba authorized through these Guidelines to raise capital through Certificates of Musharaka shall ensure that all the business transactions and dealings undertaken by the Modaraba and its conduct in all respect shall conform with Sharia.

Musharaka Arrangement

(i) The amount received by a Modaraba from the Contributories shall be invested in the overall business activity of the Modaraba on the basis of full participation in the profit and loss of the Modaraba;

(ii) The profit and loss of the Modaraba shall be shared on the following basis:

(a) Losses shall be shared by the Contributories and the Modaraba in proportion of their fund in the total fund;

(b) Upto 90 per cent of the total profit shall be shared by the Contributories and the Modaraba Certificate holders in accordance with ratio declared by the Modaraba and accepted by the contributory, and in the absence of any such declaration in proportion of their respective contribution to the total fund.

(iii) Unless otherwise provided the profit and loss of the Modarabas shall be determined at quarterly intervals. The quarterly profit and loss account of the Modaraba shall be published in at least two national newspapers for the information of the Musharaka Certificate holders.

(iv) In case of loss resulting into winding up of the Modaraba, the payments out of the realisable assets shall be made after discharging liability of creditors, to the Musharaka Certificate holders and 'Modaraba Certificate holders'.

(v) The Musharaka arrangements specified by the Modaraba shall clearly indicate the frequency of distribution of profit or adjustment of losses to the Musharaka Certificate holders i.e. quarterly, half yearly, annually or at maturity. In all cases the concept of final determination and adjustment of profit and loss at maturity against the total sum repayable to the Musharaka Certificate holder must be clearly stated in all schemes of Musharaka Certificates under these Guidelines.

Features of Certificates of Musharaka

(i) A Certificate of Musharaka issued under these Guidelines shall be registered in the name of Contributory/Contributories to whom it is issued.

(ii) The maturity period of Certificate of Musharaka shall not be less than three months. However, the terms of certificate must be specified at the time of issue and shall be indicated in the Certificate of Musharaka.

(iii) The Certificates of Musharaka may be listed on the Stock Exchange or traded over the counter.

Purchase of Certificates of Musharaka before Maturity by the Modaraba

(i) The Modaraba shall not redeem or encash certificates of Musharaka before its maturity; however in the case of Certificates of Musharaka traded over the counter the Modaraba may provide a facility of purchase of such Certificates of Musharaka on the basis of the guidelines specified hereunder.

(ii) Every Modaraba permitted by the Registrar to issue Musharaka Certificate over the counter under these guidelines shall:

(a) Appoint a Trustee to oversee the Musharaka Certificates redemption reserve fund and use of fund for the purchase of Musharaka Certificates by the Modaraba before maturity, and

(b) Establish a "Redemption Reserve Fund" to provide for the scheme for purchase of Certificates of Musharaka from such reserve fund, before maturity.

The Trustee

(i) The Trustee forthe purposes of these guidelines shall be appointed from the practicing members of firms of Chartered Accountants or the practicing members of Cost & Management Accountants, Investment Banks, Commercial Banks and DFI's.

(ii) The Trustee shall report any discrepancy lack of compliance of these guidelines in respect of the Musharaka Certificates redemption reserve fund or its usage for purchase of Musharaka Certificates before maturity.

(iii) Any dispute between the Trustee and the Modaraba shall be referred to the Registrar and his decision in such matter shall be final.

Musharaka Certificate Redemption Reserve Fund

(i) The purchase of Musharaka Certificates out of Redemption Reserve Fund shall be made at purchase price approved by the Trustee and posted by the Modaraba.

(ii) The minimum contribution to the Musharaka Certificates redemption reserve fund shall be 5 per cent of the amount of Musharaka Certificates outstanding.

(iii) The certificates purchased from the Redemption Fund may be sold over the counter of retained till maturity.

(iv) The Modaraba shall not exceed the purchase of certificates of Musharaka commitment beyond the amount of the reserve fund.


(i) State Bank of Pakistan's Rules of Business for NBFI's including the exposure limits will also apply the Musharaka Certificates issued by the Modaraba.

(ii) Subject to Rule 3 of these Guidelines, in all cases International Accounting Standards as adopted by the Government of Pakistan shall be followed.

(iii) A quarterly report on the Certificates of Musharaka issued by a Modaraba shall be furnished to the Registrar within 10 days from the close of each quarter, as prescribed by the Registrar.

Conditions of Eligibility

(i) The following conditions of eligibility shall be fulfilled by the Modaraba for the grant of consent by the Registrar to issue of Certificates of Musharaka.

(a) The prospectus of Modaraba as approved by the Religious Board contains provisions for resource mobilization on Musharaka basis.

(b) The paid-up fund of the Modaraba is not less than fifty million rupees;

(c) The Modaraba is actively engaged in business for a period of two years and has been declaring not less than fifteen per cent dividend per annum during the said period;

(d) The corporate and fiduciary conduct of the Modaraba and the directors of the Modaraba Company has been found to be satisfactory.
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Title Annotation:Islamic financial instruments
Author:Kadri, Rauf B.
Publication:Economic Review
Date:Mar 1, 1995
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