In conventional financial systems, seed money for early stage start-up ventures broadly comes from venture capital and angel funding as banks generally do not fund such enterprises having little financial track record with questionable viability.
Such finance is primarily meant for new business units which have viable ideas but little finance to convert them into economic activity. Thus private money provided in small chunks is diverted towards early stage, high-potential/ high- risk new areas which, in turn, promote entrepreneurship and innovation in the economy.
In Islamic finance, modaraba is a financial product under which finance from one party combines with the skills/ideas of another person to initiate an economic enterprise.
Conceptually, it engages two segments of economy; firstly, by providing finance to young and passionate persons having innovative ideas, and secondly, by ensuring a productive outlet to savings of relatively older people who are shy to take risk of an economic pursuit. As a result, a larger part of society can take part in trade and the volume of business can increase.manifold.
Currently, modaraba financing is generally in two forms. Liability Side modaraba takes savings of other people for investment/business. This provides an economic opportunity to those already in business. This sort of modaraba is vulnerable to mis-utilisation as savings of a large number of people reaches a few hands. Whereas the Asset Side modaraba can ensure availability of finance to those who want to undertake a new business. It can largely engage the young and youthful who have viable ideas but can not work on them due to lack of funds. Business impact of this type of modaraba would be widespread because a larger number of persons will benefit from this. It would not only add to the overall volume of the business but also promote entrepreneurship in the economy.
Modaraba is a financial product under which finance from one party combines with the skills/ideas of another person to initiate an economic enterprise
Islamic economic system assigns a higher status to a trader with strong ethics. The success of modaraba depends upon honest and dedicated execution of the business by the Mudarab- the person to whom the money is trusted. Since the loss in the modaraba business is to be borne by the provider of the money called Rab-ul Mal, such trade helps foster a culture of honesty and responsibility among the persons doing this business.
Pakistan has experience of Liability Side modaraba financing during the two bouts of Islamic banking. In the first attempt, leading banks and other business houses established modaraba companies by mobilizing money from public for conduct of business in certain areas. However they could not provide any reasonable return to their investors.
In the second attempt, Islamic banks are now mobilizing savings of general public under modaraba (Liability Side) but do not offer any financial service under Asset-based modaraba for young and youthful to start their own business.
According to the latest State Bank survey on Islamic banking, there is an overwhelming demand for Shariah-compliant banking in the country that is evenly distributed amongst rural and urban areas, varied income strata and education levels. Dr. Murat Cizakca has noted in his book ‘Islamic Capitalism’ that bulk of expenditure on education and health used to met from private sector’s donations and scholarships during the Ottoman Empire. Despite current sluggishness, our economy still offers huge economic opportunities for educated boys and girls to start small, innovative projects in education, health and livestock.
Under a three-pronged strategy, modaraba financing could be used to kick- start entrepreneurial activity in our economy. Firstly, modaraba financing should be included in the curriculum of leading business schools where students pursuing post-graduate degrees in management, commerce and banking may undertake research on different aspects of this new financial product. This would motivate educated youth towards trade and business instead of running after petty jobs in the government and private sector institutions after completion of education.
Secondly, highly profit earning enterprises like banks, oil and gas companies, mobile companies and established business houses should allocate sufficient funds for utilization under modaraba business.
The writer is President of Institute of Banking and Business Learning Lahore
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