Pakistan is the only country in the World, where the unique model of Modaraba has been introduced and no similar example exists anywhere else in the World.
In simpler terms, Modarabas are Islamic Investment Funds or Collective Investment Schemes, whose 70% capital is supposed to be subscribed by the general investors, while the rest of the 30% capital can be contributed by the Modaraba Management Company (MMC) or its associates. In this way, a Modaraba Fund (pool of funds) is created through public subscription (IPO), with mandatory listing on the stock exchange.
Modarabas operate as corporate entities and function as Islamic Financial Institutions (IFIs). However, in practice, Modarabas function as partnerships wherein one party provides finance to the other having skill to carry out any business. The party which provides the finance is called the “Rabb-ul-Mal” (the Investor), whereas the other party, which puts its management skills and efforts for the Modaraba is called the “Modarib” (the Manager).
The Modarabas' legislation was introduced in Pakistan in 1980 after the countrys' supreme religious body Islamic Ideological Council (IIC) recommended the broader Islamization of the countrys' economy. In response to these recommendations, the Government of Pakistan (GOP) introduced certain changes in the countrys' Banking Companies Ordinance (BCO) 1962 and promulgated a special law titled "Modaraba Companies & Modaraba (Floatation & Control) Ordinance 1980 (Modaraba Ordinance)" to provide a legal framework for the governance of the Islamic financial system in Pakistan.
