Pakistan is perhaps the only country in the world with a vibrant Mudaraba business. With the promulgation of Mudaraba Companies and Mudarabas (Floatation and Control) Ordinance in 1980 followed by Mudaraba Companies and Mudaraba Rules 1981, Pakistan established an alternative investment and finance model that could be used for developing a viable governance framework for Islamic investment banking.

From as many as 50 Mudarabas listed on the three stock exchanges in the country in the 1990s, now the number has gone down to almost its half (27), as a result of consolidation, mergers and acquisitions, and declining interest in the Mudaraba sector.

Still, in terms of total assets under management (AUM), Mudaraba sector holds more than US$263 million (RM875.53 million) in AUM, significantly lower than the corresponding figure in 1990s — US$425 million — when the number of Mudarabas reached its peak.
In Malaysia, while Islamic banking has progressed and prospered in the last two decades, the profit and loss sharing nature of Islamic banking is being fast replaced with fixed return deposits.

A number of banks have gradually moved away from Mudaraba-based investment accounts to Wakala-based investment accounts, following the issuance of Mudaraba guidelines by Bank Negara Malaysia (BNM) requiring Islamic banks to offer restricted investment accounts, which in turn requires a purer form of profit and loss sharing than what is at present being practiced.

Bankers by default do not like profit and loss sharing, and hence it will always be difficult to build an Islamic banking model on the basis of profit and loss sharing. Even if banker’s arms are twisted to adopt profit and loss sharing, the regulators in most countries are also averse to the concept.
According to Mudaraba Companies and Mudarabas (Floatation and Control) Ordinance 1981, a Mudaraba can be defined as:

“Mudaraba means a business in which a person participates with his money and another with his efforts or skill or both his efforts and skill and shall include Unit Trusts and Mutual Funds by whatever name called.”

The governance structure of Mudaraba business in Pakistan is very tight. All Mudarabas are regulated by the Securities and Exchange Commission of Pakistan, and not by State Bank of Pakistan, the central bank.
Mudaraba regulations require separation of the Mudaraba management company (MMC) and the Mudaraba itself, with the latter being a company independent of the former and must be listed on one of three stock exchanges in the country.

Most of Mudarabas in practice are listed on all the three stock exchanges, ie, Karachi, Lahore and Islamabad stock exchanges.

The requirement of listing the Mudaraba on the stock exchange is to ensure that the investors are able to exit freely and easily. Most of investors in Mudaraba sector, however, intend to benefit from dividends rather than capital gains.

Mudarabas and MMCs are not deposit-taking institutions. This makes them pure investment companies, allowing their investors to benefit from the upside of the business and also taking the hit in case there is a loss in the Mudaraba business. A number of banks have set up Mudarabas but these are run by MMCs independent of the bank management.

Malaysia has already emerged as a leader in Islamic banking and finance, and it stands a better chance of developing a Mudaraba sector in the country.

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