Non - bank Financial Intermediation 211
sectors, using its own capital and investors’ funds, which are mobilized
by issuing certifi cates or shares on a profi t and loss basis. A mudarabah
contract can be used for either multi - purpose or specifi c - purpose transac-
tions. All mudarabah contracts are independent of one another, and no
one transaction is liable for the liabilities of, or is entitled to benefi t from the
assets of, any other mudarabah transaction.
In 1980, Pakistan’s State Bank issued a law under which fi nancial insti-
tutions could register themselves as mudarabah companies and mobilize
general investors’ funds through issuing mudarabah certifi cates. The major-
ity of Pakistan’s “Modaraba Companies” (MCos) specialize in leasing, and
are therefore also a valuable source of funding for small - and medium -
sized enterprises for trade, commerce and fi xed assets. By the late 1990s,
49 Pakistani companies had been granted licenses authorizing them to fl oat
mudarabah certifi cates.
However, the MCos have acquired a tarnished reputation, with a very
small proportion of their funds purportedly being used for profi t/loss - sharing
transactions.^3 Regulatory mismanagement and a lack of rigorous screening of
company listings have also resulted in losses to investors. This outcome has
discouraged other countries from experimenting with mudarabah companies.
As a profi t/loss-sharing commitment, a mudarabah gives preference to
fi nancially sound business ventures over mediocre ones, therefore facilitat-
ing enhanced resource management. If administered appropriately, muda-
rabah companies can serve as catalysts for economic growth in Islamic
economies. In order to increase investor confi dence, regulatory agencies
must perform diligent screening and controls, and require mudarabah com-
panies to enhance transparency and operational effi ciency.
Specialized Leasing Companies
Leasing is becoming increasingly popular as a form of asset fi nancing.
Traditionally, leasing services — whether conventional or Islamic — have been
provided by commercial banks. In recent years, the growth and develop-
ment of specialized Islamic leasing companies has paralleled the rise of their
conventional counterparts.
Islamic leasing is more commonly used for real estate and automobiles,
but equipment leasing is also growing. Leasing companies typically use an
ijarah contract, in which the ownership of the asset, associated risk, and
responsibility for its maintenance remains strictly with the leasing company.
The company is typically not the original owner of the asset, but acquires
it at the request of the client. At the end of the leasing term, the institution
may sell the asset to the client. For the leasing of equipment, some compa-
nies, particularly in the Gulf States, use murabahah, where ownership of the
asset is immediately transferred to the lessee, and the leasing company does
not retain any rights to sell or transfer the asset.
Leasing enables businesses to employ a range of capital goods with-
out having to purchase them. Therefore, it can both promote economic