Interview with Muhammad Naveed Alam — Resident Shariah Board Member, Meezan Bank
PAGE: Tell me something about yourself and your organization, please:
Muhammad Naveed Alam: I hold a Master’s degree in Islamic Banking and Finance from University of Karachi and Shahadat-ul-Alamiyah and Takhassus (specialization in Islamic Jurisprudence and Fatwa) from Jamia Darul Uloom, Karachi. I am also a Certified Shariah Advisor & Auditor (CSAA) from Accounting and Auditing Organization for Islamic Financial Institution (AAOIFI). I joined Meezan Bank in 2013 as a member of the Shariah Compliance Department with primary responsibilities including Shariah Compliance review and Shariah Audit of different departments and branches and Islamic banking training. Currently, I am serving Meezan Bank as Resident Shariah Board Member.
I am actively involved in teaching/training at Institute of Business Administration, Center for Excellence in Islamic Finance (IBA-CEIF) Karachi and Center of Islamic Economics (CIE) of Jamia Darul Uloom Karachi, as well as several other renowned universities. I am also serving as a member of the Shariah Board of NBP Funds. Prior to joining as RSBM, I served as Shariah Advisor of Premier Window Takaful Operations and also as a Shariah Coordinator at Indus Hospital, Karachi.
Meezan Bank, Pakistan’s best bank and the first and largest Islamic bank, is one of the fastest growing financial institutions in the banking sector of the country. With its vision to establish ‘Islamic banking as banking of first choice’, the Bank commenced operations in 2002, after being issued the first-ever Islamic Commercial Banking license by the State Bank of Pakistan. The Bank provides a comprehensive range of Islamic banking products and services through a retail banking network of more than 900 branches in more than 250 cities of the country. Backed by a state-of-the art T-24 core banking system, the branch network is supported by 24/7 banking services that include over 950 ATMs, VISA and MasterCard Debit cards, a Call Centre, Internet Banking, Mobile Application and SMS Banking facility.
PAGE: In Pakistan, the concept of Modaraba was introduced in 1980 when the government realized that there was a need for the Islamization of economy of Pakistan. Your views:
Muhammad Naveed Alam: Modaraba companies were introduced in Pakistan in 1980. By charter, a Modaraba company can take real sector risk. Modarabas may invest in commodities, involve in actual trading without taking prior commitment from customer like Islamic bank. Modaraba company by its nature is a trading company. Additionally, there are tax incentives for Modaraba if they distribute majority of the profit as dividend to their shareholders. This feature is introduced for providing incentive to investors.
PAGE: How would you comment on Mudarabah Al Muqayyadah which is a restricted Modaraba?
Muhammad Naveed Alam: As per Shariah law investor has a right to put certain conditions and restrictions on Mudarib to control or protect the investment. Category of Mudarabah Al Muqayyadah is very well implemented and commonly practiced. Investor i.e. Rabb-ul-Maal may put a condition that Mudarib is restricted to perform business in specified vicinities, or perform business in selected commodities, or business segments etc. However, it should be observed that these conditions should not create hurdles in core business objectives. For example, Investor in Mudarabah Muqayyadah is not allowed to work/participate in business decision making. As this condition is against the Modaraba, Mudarib must be free to take business decisions.
PAGE: What is your perspective on Prudential Regulations for Modaraba?
Muhammad Naveed Alam: The latest Modaraba Regulations were issued by the Securities and Exchange Commission of Pakistan (SECP) in March, 2021 which provides a detailed legal a framework for Modaraba companies. The framework is comprehensive in nature which provides safeguard to the interest of investors (Rabb-ul-Maal) through strict regulations and limitations on Modarabas and on the other hand provides regulations for prudent, strict and industry best practices while taking exposures on persons or groups. Key points of the prudential regulations are listed below:
- Maximum exposure of a Modaraba to a person or group.
- Exposure limits in capital markets i.e. a Modaraba’s aggregate exposure in listed equity securities.
- Minimum conditions for providing finance to customers.
- Linkage between equity of the customer and total exposure.
- Financial indicators of the borrowers.
- Minimum margin requirements against finance.
- Restrictions/requirements on certain types of transactions.
- Investment in shares of unlisted company.
- Regulations for housing finance for individuals.
- Limit on aggregate liabilities of a Modaraba.
- Creation and building up of reserves.
- Classification and provisioning of non-performing assets and reversal of provisioning regulations for overdue, default and recovery.
PAGE: Islamic banks practice Modaraba in its both forms. Your views:
Muhammad Naveed Alam: Islamic banks are practicing Modaraba on deposit side for savings i.e. remunerative accounts. Islamic bank accepts deposits in remunerative accounts from customers (who are called Rabb-ul-Maal i.e. investing partners) and the Islamic bank works as Mudarib i.e. Manager of the funds. Under the rules of Modaraba, profit is shared between Islamic bank and customers as per pre agreed profit-sharing ratio (PSR) whereas the loss is borne as per investment ratio. Islamic banks obtain deposit and invest in various financing assets pools. Investment pools may include but not limited to house finance, car Ijarah, corporate and commercial financing etc. On asset side, Islamic banks are practicing running Musharakah where Islamic bank is investing on the basis of Musharakah in working capital of any company.