Historical Background of Modarabas in Pakistan
A further step towards implementing the process of Islamic banking, a Modaraba concept was for the first time introduced in Pakistan in 1980 through the Modaraba Companies and Modaraba (Floatation & Control) Ordinance, 1980. The Rules governing Modaraba's were introduced subsequently in 1981 as one of the first steps taken by the Government towards establishing a Shariah compliant financial system in accordance with the injunctions of Islam.
The formation of a Modaraba is done under an arrangement made between two parties: one provides the capital (rabb-ul-maal), and the other party, called the Mudarib, contributes through its skills. A Modaraba can undertake virtually any business activity that is not repugnant to Shariah, the Islamic Law, as described in the PROSPECTUS issued, duly approved by the Religious Board through the Registrar of Modaraba's. The prospectus, interalia, also serves as by-laws for the particular Modaraba for which it is issued at the time of floatation.
Moreover, a Modaraba may be either a multipurpose or a specific purpose Modaraba, and can be formed for either a fixed or an indefinite period known as Perpetual. Capital is raised from the public in the form of Modaraba Certificates, which do not carry any voting power otherwise they are similar to shares of companies traded on the Stock Exchanges of Pakistan.