A sovereign Modaraba Sukuk is the Islamic form of a bond issued by the government of a country. It is based on the concept of partnership where one party provides the capital and the other provides expertise for a business project.

ROLES

– Rabb-ul-Mal are the investors who provide funds for the business project.
– Modarib is the partner who uses its expertise to manage the project and generates profits.
– Modarib may set up a special purpose vehicle (SPV) to hold assets, and use funds to manage the Modaraba business.
– Modarib may engage an agent (bank) for the issue of sukuks.

CONDITIONS

– Profits are shared between the two partners in a pre-agreed ratio.
– Loss is borne by the capital provider except when Modarib acted with negligence or misconduct.
– Real assets must be provided to back sukuks which ensures that the investment relates to economic activities.
– The underlying assets must be Shariah compliant.
– The Modarib owes a fiduciary duty in managing the business project on behalf of its partners.
– All repayments are guaranteed though the rate of return is not guaranteed.
– Taxation is applied as per the law.
– Modaraba sukuks are usually tradable subject to any specified conditions.
– Modaraba sukuks are generally used for large development and infrastructure projects.

PROCESS FLOW

– Sovereign Sukuks are issued in Pakistan under the Public Debt Act of 1944.
– The Ministry of Finance, Government of Pakistan (GOP) acts as the Modarib or originator of Modaraba Sukuks.
– GOP sets up an SPV to manage the business and capital, and issue the Modaraba Sukuks.
– The State Bank of Pakistan acts as the issuing agent of GOP for Sukuks.
– Sukuks are denominated into a minimum investment amount and issued to institutional and individual investors for a defined tenor.
– GOP regularly transfers funds to SPV to distribute advance profit payments to the investors during the tenor of Sukuks.
– Advance profit payments are based upon the concept of expected profits, and remain subject to adjustment at maturity.
– On the maturity date, GOP repurchases the investors’s share in the Modaraba project and pays back their investment amount.
– Any surplus over expected profits may be retained by GOP as bonus.
– Any shortfall between actual profits and distributed profits is adjusted against final payments to the investors.