Modaraba company is a unique and prime mode of non-interest Islamic financial system. It is a form of financial contract in which one party, the investor (Rab-ul-mal) entrusts money to another party, the financial manager (Mudarib) for the purpose of carrying out a business (Modaraba). Modaraba is defined in The Modaraba Companies & Modaraba (Floatation & Control) Ordinance 1980 (hereinafter Ordinance) as a business in which a person participates with his money and another with his efforts or skills or both and shall include Unit Trust and mutual Funds by whatever name called.

The most common example of a modaraba can be found in the Islamic history when Hazrat Khadijah gave capital for the business of Holy Prophet Muhammad (Sal-Allahu Alaihe Waalahi Wassalam). The profits and losses in a Modaraba are shared between the investor and financial manager in an agreed proportion.

In Pakistan, the concept of Modaraba was introduced in 1980 when the government realized that there was a need for the Islamization of economy of Pakistan.


S.7 of the Ordinance, 1980 explains the types of Modaraba Companies:


Mudarabah Al Muqayyadah means a restricted modaraba where the investor specifies a particular business or a particular place for the financial manager, in which case he shall invest the money according to the instructions.


Modaraba Al Mutalqah means unrestricted modaraba where the investor gives liberty and independence to the manager to undertake whatever business he deems fit. However, he is not authorized to: keep another manager or a partner mix his own investment in that particular Modarabah without the consent of investor.

In the case of Unrestricted Mudarabah, the manager is 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 the express approval of the investor.

Time period: A modaraba may be either for a fixed period or for an indefinite period.


  • Modaraba Companies and Modaraba (Floatation and Control) Ordinance, 1980
  • The Modaraba Companies and Modaraba Rules, 1981
  • The Companies Act, 2017
  • The Religious Board
  • Prudential Regulations for Modaraba


According to Sec. 4 of the Ordinance, the party shall apply to Securities & Exchange Commission of Pakistan (SECP). When a Modaraba Company is registered with SECP, another application is made for initiating the operation-the floatation of the Modaraba. This application is accompanied by a prospectus related to the nature and conduct of business, Modaraba Certificates, debentures etc.

An application for the Floatation of Modaraba shall be accompanied by a prospectus which shall contain, inter alia, the following information, namely:

  • The name and type of Modaraba;
  • The conditions and amounts of the Modaraba to be floated and the division thereof into Modaraba Certificates of fixed amount;
  • The business scheme, prospects and mode of distribution of profit;
  • The amount to be subscribed by the modaraba company to the modaraba in its own name supported by evidence about its ability to meet the commitment;
  • The form of Modaraba Certificate; and
  • Such other matters as may be prescribed.

The application, the prospectus and the documents filed therewith shall be authenticated by all the directors of the Company.

To ensure the compliance of the application with the Shariah, the documents are evaluated by the Religious Supervisory Board (RSB). After clearance from the board, the Company applies to the controller of Capital Issues and Stock Exchange for floatation of the Modarabas.

The registrar, if he is satisfied after such inquire and after obtaining such further information as he may consider necessary that the applicant is eligible for registration and that it is in the public interest so to do, may grant registration and that is it in the public interest so to do, may grant registration to such company on such conditions as he may deem fit.


  • All Modarabas are registered with the registrar of Modarabas by fulfilling certain Shariah and operational requirements.
  • The Modaraba Funds are mobilized by issuing Modaraba Certificates. The Modaraba Certificates are non- voting shares of common stock in the Modaraba.
  • The Minimum capital requirement a for multipurpose Modaraba is Rs. 7.5 million and for Single purpose Modaraba it is 2.5 / 5 million.
  • A manager, the Mudharib will not charge more then 10% of total annual profits as its remuneration, besides the return on its capital contribution to the Modaraba.
  • The Modaraba Companies can issue rights, stock dividends and distribute cash dividends.
  • The Modaraba Company cannot be involved in any activity that is prohibited by the shariah.
  • 75% of the Modaraba‚Äôs operations must be kept in the main line of business.
  • At least 15% of the Liabilities of a Modaraba must be invested in the National Investment Trust Certificates (NIT Units) or in securities of Public contribution.


The State bank has no specific regulations related to Modaraba Companies. These Companies are treated as non- banking financial institutions. The instructions of the State Bank of Pakistan for the floatation of the Modaraba by such institutions are given in the Prudential Regulations for non-banking financial institutions. Following are the salient features of these regulations which also the Modaraba Companies.

Each Modaraba will establish with the SBP a reserve fund equivalent to its own paid up capital. The reserve fund will be established by annual contribution of at least 20% of the after-tax profits of each Modaraba floated. Once the reserve fund equals the paid-up capital, the annual contribution will be decreased up to 5% of after-tax profits. Stock dividend is considered as an appropriation for this purpose.

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.


  • Halal Business
  • Diversified Business
  • Tax Benefit
  • Maximum Distribution of Profits
  • Funding and Financial Facilities under Shariah Compliant


  • Market Risk
  • Operational Risk
  • Credit Risk
  • Regulatory or Shariah Non-Compliance

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