Pakistan regulator launches modaraba overhaul

March 29 (Reuters) - Pakistan’s capital market regulator is intervening to improve the performance of modarabas, equity-like financing vehicles that are a small but significant part of Islamic finance in the world’s second-largest Muslim nation.

Modarabas, which date back to the 1980s, were the first Islamic business model established in Pakistan with a statutory framework and dedicated regulations. They are almost unique to Pakistan.

In a statement last week, the Securities and Exchange Commission of Pakistan (SECP) said it had reviewed the country’s 28 modarabas and found problems such as limited diversification, unsatisfactory liquidity, small capital bases and a lack of fresh investment.

The SECP said it had initiated enforcement actions against modarabas with unsatisfactory track records. It did not name the institutions or specify the measures taken, but said there was concern about the profitability of 13 modarabas.

“The chief executives and the board of directors of the management companies are being persuaded to chalk out business plans to improve the performance of modarabas in the best interest of the stakeholders,” the SECP added.

It pledged to take legal action if needed to “weed out” bad performers in the sector, and proposed a range of amendments to its modaraba rules including the appointment of independent directors and the creation of a reserve fund for each institution to increase financial stability.

Modarabas are a form of Islamic investment partnership where assets are managed on behalf of clients, with income and expenses shared under a pre-agreed ratio. They are therefore regarded as one of the purest forms of Islamic finance.

As of February, Pakistani modarabas held total assets of 35.6 billion rupees ($339 million), up from 30.1 billion rupees a year earlier, SECP data showed. (Reporting by Bernardo Vizcaino; Editing by Andrew Torchia and Tom Heneghan)