ISLAMABAD, April 3: Executives from the Islamabad Stock Exchange announced on Wednesday that religious elements had begun taking deposits from investors and offering extravagant returns.

This "gray market," they say, poses a risk to investors and the financial markets, though others believe that they are simply afraid of competition from newly sophisticated "religious elements."

Zahid Latif, the Director of ISE, explained that "religious preachers, sometimes operating out of their mosques, call this kind of transaction 'Musharika."

Two parties sign a stamp paper that bears the amount of the investment and states that the investment complies with a "Shariat-compliant Islamic mode of business" in which profit and loss are shared.

The phenomenon has been seen throughout the country, including the twin cities. Without any uniform regulatory system to address frauds and scams, executives believe that such activities happen most often in rural areas and small towns, where they are more likely to go unnoticed.

Mian Ayyaz Afzal, MD of ISE, said Musharika deposits lacked all legal justification. The deposits, he said, offered a substantial but unrealistic profit of up to 120 percent, of which the depositor is offered between 50 and 60 percent based on the profit/loss sharing agreement.

"It's not possible to generate that kind of profit from any business," Zahid Latif said, noting that depositors were likely to lose their savings at some point in the future. Both executives agreed that the trend could threaten Pakistan's financial system, since estimates, based on informal sources, suggest that there may already be Rs50 billion circulating through these investments.

"Something has to be done to regulate this," the directors said, adding that "If there is some sort of scam, it will besmirch the sanctity of Islam and give the mosque a bad name."

In addition, a scandal could discourage others from investing, neutralising efforts by the stock exchanges and the SECP to have more mid-level persons invest in the capital markets, as opposed to the unproductive ventures such as gold and real estate.

The ISE directors suggested that the authorities, including law enforcement, put a cap on the business. However, they said, it was equally important to educate the population so that they were able to avoid such seemingly lucrative offers.

Ayyaz Afzal added that the ISE and other stock exchanges had launched outreach programmes to bring in new investors. Among them, he mentioned the Islamabad Electronic Exchange System, whose second phase is to be completed by June.

"Through the IEES, our members will be able to establish trading platforms in remote areas and different districts in northern Punjab, KPK, and Gilgit-Baltistan," he said, “which would hopefully pull investors away from illegal investment houses and into the capital markets.”