Experience of Equity-based Islamic Shares in Pakistan

Mohammed Nishat
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Mohammed Nishat: Department of Finance and Economics, Institute of Business Administration, Karachi.

The Pakistan Development Review, 2002, vol. 41, issue 4, 583-608

Abstract: Modarabah and leasing stocks, which are listed on the Karachi Stock Exchange (KSE) since 1985, operate on the Islamic concept of financing under a well defined contractual framework supervised by the State Bank of Pakistan (SBP). The Islamic stocks had mushroom growth during the first sub-period of reforms1 and were exempted from various taxes during the initial 3 years of their operation. For investors these shares were a very attractive opportunity to build a quality portfolio and earn high returns. Due to bureaucratic and non-professional approach of banks in Pakistan these firms became popular alternatives lenders to medium and small sized business borrowers. The turn around time and efficient handling of the proposals made them more attractive. Practically all these Islamic firms in Pakistan are undertaking financing activities on a mark-up basis, rather than profit and loss sharing. Under the mark-up system the return is predetermined and their risks are minimised. These Islamic stocks are operated similar to other firms that do not work on Islamic principles. In the case of Modarabah, the predetermined rate of return and even the agreed ratio of profit shares when calculated, the market rate of interest with other characteristics of party in contract are also taken into consideration [Khan (1987, 1989); Saeed (1996)]. The flurry of interest in floating Modarabahs was in part explained by the higher return to investors, and that when the provisions permitting tax exemptions

Date: 2002
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