AL-QURAN يَـٰٓأَيُّهَا ٱلَّذِينَ ءَامَنُواْ ٱتَّقُواْ ٱللَّهَ وَذَرُواْ مَا بَقِىَ مِنَ ٱلرِّبَوٰٓاْ إِن كُنتُم مُّؤۡمِن

1. ROLE OF THE SECURITIES AND EXCHANGE COMMISSION OF PAKISTAN FOR THE DEVELOPMENT OF THE ISLAMIC FINANCIAL MARKETBilal RasulRegistrar (Modarabas and Modaraba Companies) SECP

2. AL-QURAN يَـٰٓأَيُّهَا ٱلَّذِينَ ءَامَنُواْ ٱتَّقُواْ ٱللَّهَ وَذَرُواْ مَا بَقِىَ مِنَ ٱلرِّبَوٰٓاْ إِن كُنتُم مُّؤۡمِنِينَ Believers, fear Allah and give up what is still due to you from usury, if you are believers; [SURAH AL-BAQARAH AYAH 278]

3. Why Islamic finance? • The Quran- Riba; Mentioned 3 times in 2:275, and once in 2:276, 2:278, 3:130, 4:161 and 30:39 • Stiputlation of the 1973 Constitution of Pakistan. Article 38, “Promotion of social and economic well-being of the people, denounces Riba and calls for its elimination as early as possible”. • Judgement of the Supreme Court – Interest free system from 2001 • Moral obligation as Muslims to propagate (Tabligh) • Various statutory and legal frameworks for Islamic finance

4. What is Shariah Compliance and what is SECP doing? • AAOIFI- Accounting Standards • IFAS-1 (Murabaha) • IFAS-2 (Ijara) • IFSB • Associate Membership obtained • Workshops/conferences attended • SBP-SECP coordinantion • Joint Forum of the SECP/SBP on Islamic Financial Services • coordinate/reciprocate/implement • Transactional issues decided at one forum

5. CONSTITUTION OF MODARABA COMPANIES AND MODARABA In Pakistan the process of Islamization of the economy was initiated in 1980 when the Government introduced the concept of Modaraba for Islamization of the economy in the banking and corporate sector. The Modaraba Companies & Modaraba (Floatation & Control ) Ordinance, 1980 and Modaraba Companies and Modarabas Rues 1981, were promulgated in early 80’s by the Government of Pakistan. The Ordinance and Rules provides matters relating to the registration of Modaraba companies and the floatation, management and regulation of Modarabas

6. Religious Board Authority which certifies that Prospectus of the Modaraba is Shari’ah Compliant Justice/Ex-Justice of a Court plus 2 Scholars Regulator The Sector is monitored and regulated by the Registrar (Modaraba Companies and Modarabas), Securities and Exchange Commission of Pakistan Modaraba Management Company(Modarib) Private/Public Limited Company with Board of Directors Prospectus (business activities) Modaraba Fund (Pool of Money of Rab-ul-Maal) Separate Legal Entity STRUCTURE

7. THE REGULATORY FRAMEWORK The Rules & Regulations and the regulatory framework applicable to Modaraba and the Modaraba Companies are: - The Modaraba Companies & Modaraba (Floatation & Control) Ordinance, 1980- registration of Modaraba Companies and floatation, management and regulation of Modarabas. - The Modaraba Companies & Modaraba Rules, 1981 - The Companies Ordinance , 1984 - The Religious Board - Prudential Regulations for Modaraba

8. ROLE OF MODARIB IN PAKISTAN • A Modaraba floated by an MMC is the manager (Modarib). He uses his entrepreneurial skills and manages the business of the Modaraba. The profit earned is distributed among the partners at a specified and defined ratio. • In Pakistan the Modarib who is the MMC, manages the Modaraba Ventures. By law the Modarib can charge maximum profit of 10% of the net annual profits of the Modaraba. Besides, the Modarib also gets profit in shape of dividend on his minimum investment in the venture of Modaraba.

9. MODARABA AS AN ISLAMIC FUND Modaraba can: • Invest in the stock market • Indulge in Ijara, Morabaha and Musharaka Financing activities • Indulge in trading of Halal Commodities • Undertake project financing activities • Act as an SPV • Act as a venture capital company amongst other activities.

10. PERFORMANCE OF MODARABA AS AN ENTITY IN PAKISTAN • Modaraba Sector has continuously been playing an active role in the growth of Pakistan’s economy. During the last two decades, the Modaraba Sector has enrolled its place in the financial intermediaries of Pakistan and has been able to create a market niche for themselves in the corporate sector.

11. Statistics (as on June 30, 2009)

12. Innovation Financing Agreements • Diminishing Musharaka Agreement • Ijara Agreement • Istisna Agreement • Modaraba Agreement • Musawamah Agreement • Musharaka Agreement • Murabaha Agreement • Salam Agreement • Syndicate Modaraba Agreement • Syndicate Musharaka Agreement • Sukkuk Agreement • Commodity Murabaha Agreement • CFS (Continuous Funding System) Agreement Debt securities • Certificates of Musharika • Certificates of Modaraba

13. UPDATING THE LEGAL FRAMEWORK • Proposed Amendments in the Ordinance, Rules, Regulations and Guidelines governing the Modarabas companies and Modarabas • Regulatory framework for Shariah Compliant companies for standardizing and harmonizing the various legal frameworks

14. TRENDS AND CHALLENGES • New trends • Increasing number of entrants • Concept of Islamic Funds becoming popular • Regulatory challenges • Harmonization • Awareness • Minimum equity requirement to be raised • Stringent eligibility/fit and proper criteria and performance benchmarks to be introduced, research capabilities to be improved • Investor base broadened: (public sector) provident and pension funds • International best practices to be implemented across the sector • Industry Association’s role to be strengthened, in the areas of training, examinations and licensing of intermediaries

15. Incentives • Exemption from capital gains tax • In view of the practical difficulties faced by the industry Guidelines for issuance of Certificates of Musharaka (COM) was amended and Modarabas were allowed to issue COM after obtaining credit rating of minimum investment grade from a credit rating agency registered with the Commission. Earlier the precondition was payment of dividend for two successive years. • Encourage mergers/acquisitions/revivals for consolidation and capitalization of the sector

16. Ensuring transparency and regulatory control • Placement of quarterly accounts on website • Placement of shares either with the SEC (in case of physical) or placed in an account at the Central Depository Company of Pakistan Limited. • Code of Corporate governance • AAOIFI • International Best practices - to highlight areas that are non-permissible for investment • Membership of Islamic Financial Services Board • Industry Associations- product development • Shariah Boards on every institution • Holistic legislation, standardization and harmonization to avoid conflict and overlap.

17. Monitoring and Enforcement • Monitoring at two levels • Offsite • Onsite • Enforcement • Administrative actions, e.g. revocation of license • Imposition of fines • References to courts for prosecution and winding up

18. Exploring the developments of Islamic Capital Market JOINT INITIATIVE OF THE IDB AND IFSB- TEN YEAR FRAMEWORK FOR THE ISLAMIC FINANCIAL INDUSTRY DEVELOPMENT- general regulatory framework for Islamic financial services industry. International infrastructure institutions such as the: • Islamic Financial Services Board (IFSB)- regulator • International Islamic Financial Market (IIFM)-market • (General) Council for Islamic Banks and Financial Institutions (CIBAFI)-promotion of IFIs • Arbitration and Reconciliation Centre for Islamic Financial Institutions (ARCIFI)- arbitration • International Islamic Rating Agency (IIRA) – credit rating • Liquidity Management Centre (LMC)- investment of surplus funds of IFIs. • Auditing and Accounting Organization for Islamic Financial Institutions (AAOIFI)- accounting

19. Promotion of Islamic Finance by All Stakeholders Harmonization/standardization- Adherence to the Resolutions and Recommendations of the Council of the Islamic Fiqh Academy IDB and IFSB Ten Year Framework Stands for economic and financial integration of the Muslim Ummah -International Islamic Financial Market -laws, regulations -transactions/legal documents -concepts (overcome Fiqh issues) Obtain Membership Become part of the IFSB Workshops Emulate role models like Malaysia, Bahrain Memoranda of Understanding Networking