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Non banking and financial institutions have started playing an increasing important role in the functioning of this new modern capital markets. The major encouragement to these institutions is the Islamic banking, which lead the development of mudaraba companies. These companies form an important Islamic financial system, which is not regular Islamic banking. The companies are participating in the stock market (KSE) in order to attract more investor. The prime competitor for MCO is the leasing companies (LOC) which are considered to be the new entrance in the market. Although LOC may not claim to offer any Islamic finance but they have major contribution in renting and trading business. Considering these facts LOC are bound to receive more competition when compare to the Islamic banking. Mudarabah is considered to be an important Islamic financial contract. In the past few years interests has been renewed on the deposit side. In mudaraba the financiers are not allowed to play the role of management (Imrooz, 2010)
Background of the company:
In this study we shall talk about one of the company of Pakistan named First Imrooz Modaarba. It was brought into existence in the year 1993 under the modaraba companies and modaraba regulation act. Mudaraba can be said as a contract which is made in terms of both money and mangers with regards to the skills and profits made. Mudaraba is type of investment, money as well as the equally participation of managerial activities. All the profit made out of mudaraba companies are equally distributed among the subscribers. This is one of the prime concepts of Islamic finance which speaks about the equal participation of one partner contributing with the funds and another with the skills. People who are participating with the intention of efforts consider themselves as managers while on the other hand the funds provider becomes the beneficial owner. In modern terminology mudaraba is a concept of mutual funds less un-Islamic features. (Imrooz, 2010)
Currently there are around 30 companies listed as the modaraba running companies on the Karachi stock exchange, which sums up to a total capital approximate amount of Rs 2,892 Million. It has been noticed that due to modaraba companies in Pakistan there have been loads of unprofessional modaraba manager entering the market. These managers have been given up the responsibility of handling loads of money, that belongs to the investors funds which if in case of not monitored correctly will turn out to become a lapse in the economy. Imrooz institution is committed to operate its business with accordance to that of Islamic Shariaa in its true spirit. The company tries to engage its funds in the best possible way and to promote the proper use of human talents in order to maximize the profit. Imrooz provides products and services which are designed to exceed the need and expectations of their customers in a cost effective manner and to give them a satisfactory returns to all their principals and stake holders. The company aims to contribute to the Pakistan society and help in building a stronger and progressive nation (Bagsiraj, 2009)
Product Services & Market:
First Imrooz Mudaraba specializes in chemical distribution and trading. FIM is committed with their services done according to the sharia Islamic law. The company is listed in the KSE and is considered as a different financial institution. It has been in terms of numbers that FIM is the second largest sector company. The present market position of FIM in Pakistan is un-predictable reason being the investments are single sector investments which is the chemical distribution or trading sector. This makes an understanding that the funds are already invested trading of chemical distribution which will result in forcing the businessmen to entire in this field. The solution to this is a slump in the sector which can appears in the future, and hence this might lead to the down fall value for the mudaraba investments rapidly. All this sequence will result in high defaulter's rate and high bankruptcies which can be from a specific area. There can be a loss of investors which might even lose out on the process (Gafoor, 1995)
Current most of the mudarabas companies in Pakistan are depended on either commodity or the textile sector in order do trading. This will result in more number of companies not participating in the basic industries of needs such as the machine, electronics and tool etc. These basic industries have the nature of delivering more during the general economic downturn and surely carry the ability to push the economy in the upward direction. In all the mudaraba's companies it is noted that knowledge and awareness of infrastructure investment with regards to the strategy made in the market is very less with all the managers, since most of the mudaraba managers still have the same old techniques of old trading It is important that investors coming to invest in mudaraba must be aware of the situations where the management has the right to have a fee based on the charges which is not only real profit in the midterm of the year, but shall rather have a fee which is flat in terms of number of volume transactions made in the assets. (Gafoor, 1995)
Two Tier Systems:
The two tiers mudaraba is an initial concept followed by the Islamic banking. This structure is designed in such as way that Islamic banking was to get engage by transcation done by mudaraba companies. Firstly it will be the depositors who deposit's their money and second shall be the people who are providing the finance to the FIM companies. The first mudaraba deal in FIM shall be made in between the company and the client who is for the capital so called as the depositors and the second one is between the company and the clients this time the person who need the financing. The first tier mudaraba which is made in between the depositors and the company will be an Islamic act as Rabbul mal and the bank acting will be said as theÂ Mudarib. In this transaction the depositors is supposed to put their funds in the FIM company without getting any kind of guarantee for return of the principal amount, but there will get a return based on the profit made by the investments by the FIM company on their behalf the investors. With regards to the other Mudaraba, the depositors will have to bear any losses and share profits with the Islamic bank as per the regulation of the company which is as agreed ratio. The second tier mudaraba is in between the company and the people who are getting the finance here in this case the company is said to be acting asÂ Rabbul malÂ and the customers acting asÂ mudarib.
The company shall bear all the losses if any due to the wrong investment made by the company, except in the cases of fraud done by theÂ mudarib. The profit will have the share with the customer as per the deal. In every two tier mudaraba, the company will have to act as a mediator in between the depositor and the customer. In thos process FIM is expected to achieve greater resources so that the depositors are protected from the risks that are associated with each individual who are in agreement with the second tier mudaraba. As per the rules of the Islamic banking, the company will have the authority to retain all the liability for the losses made, which disturbed with the depositors. The problem with the two tier mudaraba model is that it is not only having the depositors principle amount on the risk but together with that they are also likely to get the significant changes in the profits paid over to the deposits (Usmani, 1999)
Rules and principles:
FIM speaks about the sale which is different when compare to that of the general trading, in this sale the selling team will be given the option to decide the cost of commodity sold and they can even sells it to another person by adding some profit or so called mark up there on. The profit in Murabahah is determined by partnership made which is done as a lump sum in few cases or sometimes agreed with the ratio of profit to be charged over the cost. The expenses carried out by FIM is taking up with the commodities which are the custom duty, freight etc. All of this will be included with the cost price and again the company can make mark up which is applied to the entire cost. Other expenses of the business which are the salaries of the staff, the premises rent and rest other can't be included considering as cost of an individual transaction. In fact the profit which is claimed over the cost can takes care of these expenses (Ahmad, 1994)
FIM will have a valid murabahah only in case of the exact cost for the commodity and if it is completely discovered. In the case of any exact cost that is not met, then in such cases the commodity should not be sold on murabahah basis. In such circumstances the commodity can be sold off on a bargaining basis which is called the 'musawamah'. This transaction in the company can be carried out without any reference in due to the cost or with of profit made that is the mark up amount. The price of the commodity shall be determined in bulk amount which is by mutual agreed between the seller and the buyer. For example in case of purchase made for a pair of shoes which is worth Rs. 100 the owner wants to sell it on Murabahah sceme then he shall have the liberty to make the mark up of around 10 percent on the original prices, in such cases the extra cost is said to murabahah sale (Ahmad, 1994)
The implementation for mudarba system in FIM had to undergo the needs of the new attitude which is cultivation and parts of participants.Â Mudaraba will demand more of single participation and shall also give more back to the individual and to the society as a whole.Â Â From the investor point of view one must understand that they are possibility of incurring losses and on the other hand the profit can be achieved after waiting for a long period of time. The one assurance with regards to the profit will be that the profit is riba free income. FIM managers are trained to be very cautious because the first concern shall be the safety and the guarantee of the funds which are deposited with them.Â In the current system managers at
FIM are relieved of the fact that because the investors have agreed to take the risk, and therefore in case of losses they are not fully liable. This attitude of the managers can have the company loss out on many opportunities which is at the investor's expense. On the other hand it is noticed that too much of adventurism might bring low profits or even loss, and that may lead to the loss out the customers (Saleh, 1986)
This system of mudaraba is often seen heavily dependent on proper, accurate accounting and auditing.Â Â This all will require having the availability of a well trained book keeping staff. This staff should be well aware and professionally responsible, well trained accountants with a strong auditing background.Â Â These people are considered as the back bone of the entire system, since the system requires a high level of integrity from this group. It will be the interest of all the participants in the system to respect it.Â Â Different and continuous investments are necessary with the training of each individual. They must possess natural talent in order to spot all the profitable projects and to avoid the bad ones, plus they should develop it into a professional tool.Â Â The intermediary's staff will have to be carefully picked and trained to bring out inherent entrepreneurial talent (Saleh, 1986)
High level vs. Low level Mudaraba
The First Habib Mudaraba group is one of the oldest and most recognize modaraba financial company in Pakistan, formed in the year 1985. FHM had the basic aim to contribute themselves into the financial system of Pakistan with line to the principles of Sharia law. This company is a multipurpose mudaraba company having various Islamic financial services like Ijara Mudaraba, Musharakah and various other products of Islamic finance. On the other hand FIM is a small institution running only few products of mudaraba (HabibModaraba, 2010)
Comparing the financial data FHM has recorded a total net asset value of Rs 3,775.20 Million in the mudaraba sector in the year 2010 when compare of FIM which is Rs 58.50 Million. The basic difference between the high profile company and a low is the maintaining of accounting policies which is seen proper at FHM rather compare to the FIM. FHM management tries to work and build a better quality strategy and this show that they have come a long way every since the formation of the institution. The business strategy and the risk management policies is very well supported by the FHM management, maintaining outstanding assets quality over all on the company value. Management at FHM has always believed in growth which is steady and hence there are no policies implemented aggressively in the company. All the business truncation is carried out through economic considerations always keeping the safety of the investor's funds. On the other due to lack of experience with FIM the funds are been mi handle and lack of accounting standards add more misery to the financial plan (Imrooz, 2010)
This is a new institution called mudaraba and it has been developed keeping in mind the difficulties and concerns of Muslims.Â Â The system does not have any parallel impact on the conventional economy, but with the help of all the individual products and techniques it is possible to prove all the conventional setting. The biggest problem with regards to the muderaba concept is, firstly there is been lack of monitoring and supervision which should be made through agencies which is in the procedures of guidelines, rules and regulations in order to protection the investors. This will also help in drawing a clear line of definition between major responsibilities of the mudaraba and the managers with limited powers. Secondly all the mudaraba companies must be held with clear procedure and strategy to invest the funds.