What is Modaraba and How it is registered in Pakistan?

What is Modaraba and How To Register It ?

Modaraba or Mudarabah is a special kind of partnership where one partner gives money to another for investing it in a commercial enterprise. The investment comes from the first partner who is called “rabb-ul-mal”, while the management and work is an exclusive responsibility of the other, who is called “mudarib” and the profits generated 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.
  • Modarabas can invest in stock markets, trading of halal commodities, project financing activities etc.
  • The Modaraba can raise funds in the form of Certificates of Modaraba and Certificate of Musharaka. Modarabas can also issue Sukuk and Musharaka based TFCs.
  • Prospectus of the Modaraba should be approved by the Registrar Modaraba, Securities and Exchange Commission of Pakistan, after obtaining a certificate from the Religious Board to the business of the Modaraba.
  • Modaraba certificates shall be listed on the stock exchange for trading purpose.


  1. It is an agreement, in which one party provides managerial skill and other party provides capital funds to carry on the business.
  2. Profit is shared according to the agreed ratio.
  3. It may be for “Multiple Purpose” or for special purpose.
  4. This business must be governed by the “Modarba Companies Ordinance 1980” and “Modarba Rules 1981”.
  5. According to the modarba rules at least 10% shares are compulsory for the party who provides managerial skill.
  6. A company which is registered as a modaraba can float a modarba.
  7. For the floating of modarba company must obtain the permission from the registrar and controller.
  8. A clearance certificate is also obtained from the Religious Board that business is not against the Islamic Laws.
  9. Each modarba company has to appoint the charted accountant, as auditor who will certify the accounts and objectives of PARTNERSHIP.

Note :- If the loss occurs due to modarab or manager negligence then he will also share the loss. A modarba is legal person and can sue and be sued. Govt. of Pakistan issued the Modarba Companies Ordinance in 1980 to encourage the business on the basis of profit sharing.

Kinds of Modaraba :-

  1. Multipurpose modarba
  2. Specific modarbaModaraba Al Muqayyadah (Restricted Mudarabah)

Mudarabah Al Muqayyadah means a restricted modaraba where the Rabb-ul-maal may specify a particular business or a particular place for the mudarib, in which case he shall invest the money in that particular business or place.

Modaraba Al Mutlaqah (Unrestricted Mudarabah)

Modaraba Al Mutalqah means unrestricted modaraba where the Rabb-ul-maal gives full freedom to the mudarib to undertake whatever business he deems fit.

However, he is not authorized to:

  • invite another Mudarib or a partner
  • mix his own investment in that particular Modarabah without the consent of Rab-ul Maal

The mudarib or mudaribs, as the case may be, are authorized to do anything which is normally done in the course of business. However, if they want to do an extraordinary work, which is beyond the normal routine of the traders, they cannot do so without express permission from the rabb-ul-mal.


  1. A modaraba company cannot do any business which is against the principles of Islam. The Govt. of Pakistan has set up a religious board which will give clearance to each Modarba company about its business activity.
  2. Each modaraba company will appoint the auditor approved by the registrar. He will certify objectives and accounts of the company.
  3. The officers, directors or their relatives cannot take the loan from the funds of the Modarba company in any shape.
  4. The modarba company cannot engage itself in any business in competition which has the same nature with the modarba floated by it.
  5. The registrar can cancel the registration of Modarba if it fails to comply the rules of the Modarba Ordinance.

Religious Board for Modaraba

To achieve the objectives of Islamic business, the Federal Government has established a Religious Board (RB) for Modarabas.

  1. The members of Religious Board are well known Shari’ah Scholars of the country and the chairman is qualified to be a Judge of the High Court.
  2. Religious Board certifies that the business of the Modaraba is not opposed to the injunctions of Islam.

The Federal Government of Pakistan constitutes Religious Board for Modarabas under section 9 of the Modaraba Companies and Modarabas (Floatation and Control) Ordinance, 1980, which comprises of a Chairman and two Shariah Scholars. No Modaraba can operate in Pakistan unless its business and prospectus is cleared from the Religious Board for the Modarabas. All the products and business activities of the Modaraba are approved by the Religious Board for Modarabas with the facilitation of the Modaraba Wing. The following is the composition of the Religious Board constituted by the Federal Government vide notification dated August 30, 2012:

  • Former Justice Syed Zahid Husain Bokhari (Chairman) ;
  • Mufti Muhammad Saeed Khan (Shariah Scholar); and
  • Dr. Muhammad Tahir Mansoori (Shariah Scholar).

Different Capacities of Mudarib

Ameen (Trustee): The capital of Mudarabah is an Amanah in the hand of Mudarib, therefore if any loss incurs to business without negligence of Mudarib, Mudarib will not be liable for that loss. The money given by Rabb-ul-maal (investor) and the assets required therewith are held by 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): In case of profit, Mudarib is partner in that business to the extent of his profit share in agreed ratio.

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

Ajeer (Employee): If Mudarabah becomes void due to any reason, then Mudarib is Ajeer. He is entitled to get a fee for his services (Ujrat-e-Misl).

Regulatory Framework for Modaraba

The Modaraba Companies and Modarabas are working under the regulatory framework provided in following laws, rules and regulations.

  1. Modaraba Companies and Modaraba (Floatation and Control) Ordinance, 1980
  2. Modaraba Companies and Modaraba Rules, 1981
  3. Prudential Regulations for Modarabas
  4. ShariahCompliance and Shariah Audit Mechanism
  5. Code of Conduct of NBFI & Modaraba Association of Pakistan
  6. Fit & Proper Criteria  for the sponsors, CEO, Directors and Key Executives (2008)
  7. Shariah Compliance and Shariah Audit Mechanism 2012

The Modaraba Companies & Modaraba (Floatation & Control) Ordinance, 1980:

The Modaraba Companies & Modaraba (Floatation & Control) Ordinance, 1980 provides for matters to registration of modarba companies and floatation and management and regulations of Modarba.

The Modaraba Companies & Modaraba Rules, 1981:

In 1981 Modaraba Companies and Modaraba Rules were framed to provide Rules to do the business.

Prudential Regulations For Modaraba 2004:

In 2004 Prudential Regulations for Modaraba were issued. The regulations provide a wide range of risk management tools for conducting the day to day affairs and business of the Modaraba.

Companies Ordinance, 1984:

The affairs of Modaraba are managed through the Modaraba Management Company, which is required to be registered under the Companies Ordinance, 1984. As such, the modaraba company must comply with all the provisions of the Companies Ordinance without any exception. However, where there is inconsistency in the Modaraba Ordinance and the Companies Ordinance, the provisions of Modaraba Ordinance shall prevail for the Modaraba.

Modaraba Ordinance and Rules defines the main functions of the Registrar Modaraba and the Modaraba, which are:

  • Registration and authorization of Modaraba Companies and Modarabas in Pakistan
  • Monitoring of Modarabas’ Operations
  • Appointment of Auditors
  • Accounts and other documents filing requirements
  • Issuance of Business Rules and Regulations
  • Compliance and Enforcement of Corporate Laws
  • Protection of Investors
How to Invest in Modaraba – Floatation of a Modaraba

Key Eligibility Requirements for Registration as Modaraba Company (MC):

  1. A Company incorporated under the Companies Ordinance, 1984; or a body corporate owned or controlled by the Federal Government or a Provincial Government can apply for the floatation of a Modaraba.
  2. The Sponsors, Directors and Officers of the MMC and the Modaraba must fulfill the requirement of fit and proper criteria as circulated by the Registrar Modaraba vide circular No. 10/2008 which prescribes that the Promoters/Directors:
    1. Should be persons of means and integrity
    2. Should have knowledge and experience of relevant business
  • Should not be convicted of fraud or breach of trust or of an offence involving moral turpitude.
  1. Should have not been adjudged as insolvent or have suspended payment or compounded with their creditors etc.

Permission to Float Modaraba:

  1. A duly registered Modaraba Management Company can apply to the Registrar for grant of permission to float a Modaraba, along with prospectus, feasibility report and other requisite documents as prescribed in the Rules. The Registrar scrutinizes the application and after he is satisfied, submits it to the Religious Board for issue of a certificate on the prescribed Form.
  2. The Religious Board after having considered that the proposed business of the Modaraba is in accordance with the conjunctions of Islam, approves the application for floatation of a Modaraba.
  3. After approval of the Board, the Registrar can grant authorization certificate to float a Modaraba.

Investment in Shares/Certificates of Modaraba:

  • Initial Public Offering: The general public after carrying out due diligence of future prospects may subscribe to certificates of Modarabas when these are first time offered for public subscription.
  • Direct Buying from the Market: After the Initial Public Offering, an investor can buy Modaraba Certificates through a broker as these are quoted on the stock exchange(s) just like shares of other listed companies.

Investment in Non-interest Bearing Finance Instruments/ Purchase of Certificates of Musharaka (COM):

  • Modarabas may offer various deposit/investment schemes, i.e. Certificates of Musharakah, Certificates of Modaraba, Term Finance Certificates on Musharakah basis, Sukuk etc.,once approved by the Registrar Modaraba.
  • The Certificate of Musharaka is on profit-sharing basis. Through this arrangement of Musharaka, a Modaraba raises funds from various investors to fund a project and in lieu of money received issue certificates of Musharaka.
  • Such investment scheme is based on profit and loss sharing basis and rate of return varies periodically based on the profitability of the project/business of the Modaraba.
  • With the approval of the Registrar (Modarabas), advertisements for such investment schemes are published in which all the information about the scheme, the mechanism of distribution of profit & loss and credit rating of the issuing Modaraba etc. are disclosed.
  • No Modaraba can offer such schemes unless it has obtained a minimum investment grade rating, i.e. ‘BBB’ from a registered credit rating agency.