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4.1.1.6. Scarcity of human capital and lack of expertise to run mudarabah business. Most of the managers of MCos did not have background in venture capital business. Their experience was of pure financial intermediaries. Therefore
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4.1.1.6. Scarcity of human capital and lack of expertise to run mudarabah business Most of the managers of MCos did not have background in venture capital business. Their experience was of pure financial intermediaries. Therefore mudarabahs were not used to start a new business or to finance a venture enterprise. They were mostly used as a subsidiary of an established business to raise funds for its needs or the MCo applied the funds in fixed income contracts like leasing and murabaha. Thus lack of diversified human capital narrowed the scope of business activities undertaken by MCos. 4.1.2. Use of mudarabah as SPV for off-balance sheet transactions MCo structure also has a strategic regulatory advantage that has been exploited very successfully in one context. Since a MCo can be registered for a specific purpose activity/business, the MCs issued by it does not give voting and control rights to its holders which remain with the MCo. Therefore, it is an ideal entity to serve as SPV for raising funds through flotation of MCs on mudarabah basis; use the funds to finance construction (or expansion) of plant; and then lease (or leas-to-own) it. The MC holders receive a regular stream of income in the form of rents. The strategic advantage is that the originator can raise funds without issuing new shares which otherwise would have diluted the value of the shares for existing shareholders. Because the MC are not on the balance sheet of the originator. This is the structure very successfully employed by Fayzan Manufacturing Mudarabah. A case study of it with some details are given in Box-3. Box-3 Case Study: Fayzan Manufacturing Mudaraba A relevant case study is Fayzan Manufacturing Mudaraba in Pakistan, which was exclusively formed to finance ICI Pakistan‘s US$ 200 million Polyester Fibre (PSF) expansion plans. The transaction was uniquely structured to fulfill the off-balance financing requirements of the company, which was highly leveraged, in view of their ensuing Balancing Modernization and Replacement (BMR) activities. A consortium of banks and financial institutions formed an independent Mudaraba Management Company (Mudarib) that floated the Fayzan Manufacturing Mudaraba (FMM). 70
