The Securities and Exchange Commission of Pakistan (SECP) has decided to revise the regulatory framework for modarabas to make it comprehensive, so that market participants could have more operational flexibility. According to the SECP Annual Report for 2011, the SECP is reviewing and revising the regulatory framework for modarabas to make it more comprehensive so that more operational flexibility is available to market participants.
This mainly includes amendments in the Modaraba Ordinance and Rules. The Prudential Regulations for Modarabas are also being reviewed to bring harmony between the regulatory framework for financial institutions under the NBFCs regime and modarabas. It said that the recent global financial crisis has brought an opportunity for the modaraba sector to position itself as a stable form of financial institution.
It is worth mentioning that despite the financial and economic crises, most of the modarabas continued to perform well and posted profits. As per the unaudited financial statements of modarabas as on June 30, 2011, the aggregate paid-up fund of modarabas was Rs 8.746 billion.
The total assets of the modaraba sector stood at Rs 26.393 billion during 2010-2011 against Rs 24.562 billion in the previous year. Similarly total equity of the modaraba sector was Rs 11.561 billion which shows an increase of Rs 661 million as compared to Rs 10.900 billion during the previous year. In spite of recession in the market, as on June 30, 2010, out of 26 modarabas in existence, 18 modarabas declared cash dividend to their certificate holders ranging from 1.2 percent to 76 percent.
The SECP is committed to promoting growth in the modaraba sector. It has always encouraged the sector to introduce more innovative Shariah-compliant products and is focused on the development of Islamic financial services being provided by modarabas, it said.
The report further said that the State Bank of Pakistan and the SECP have established a joint forum for the development of Islamic financial services in Pakistan. During the period, guidelines to promote musharika and modaraba financing by Islamic banking institutions (IBIs) prepared by the SBP were discussed and necessary input was provided to them.
Modarabas deduct Zakat on their dividends paid to their certificate holders. However, in the Zakat and Ushr Ordinance, 1980, modarabas are not specifically and legally authorised to deduct Zakat on their dividend payment. Similarly, modarabas have not been included in the list of
''Sahib-e-Nisab'' entities, for which ''Zakat'' is deducted on the dividend from modaraba investment. In order to legally authorise modarabas to deduct Zakat on their dividend by including modarabas in the list of deducting agency and exclusion of modarabas from the definition of ''Sahib-e-Nisab'' entities, a case was submitted to the Ministry of Religious Affairs for the required amendments to the Zakat and Ushr Ordinance.
In terms of Workers Welfare Ordinance, 1971, modarabas are required to contribute 2 percent of their taxable income to the Workers Welfare Fund (WWF). As provided in the Income Tax Ordinance, 2001, the income of modarabas is exempted from tax provided 90 percent of their income is distributed in cash to their certificate holders.
Since Workers Welfare Ordinance, 1971, does not envisage any provision of the applicability of WWF on those entities whose incomes are exempted from income tax; a request was submitted to the Ministry of Labour & Manpower for exempting modarabas from the payment of WWF in light of a similar exemption granted to mutual fund industry, SECP report added.