Ayaz Dawood, Chairman Modaraba Association of Pakistan and also Chief Executive, Providence Modaraba Limited, shares his views about the working and importance of Modarba sector in Pakistan.
Q: Is Modaraba sector showed healthy growth in the previous financial year. If the sector was slow what were the major impediments ?
A: Performance of the Modaraba sector during the previous year has remained in the mixed trend. Inspite of the lower rate of IRR and tough competition with the Leasing Companies, Commercials Bank and other DFIs who are undertaking leasing business, most of the Modarabas have performed well. Two Modarabas namely Standard Chartered Modaraba and B. F. Modaraba have announced bonus shares at the rate of 5% and 10% respectively. Most of the Modarabas have declared handsome profits to certificate holders while only two Modarabas reported loss which is a better sign of the performance of the sector.
The first quarter ended 30th September, 2005, most of the Modarabas reported increased profit as compared to the same period last year.
It is a matter of great importance for the Modaraba sector that First Equity Modaraba has been chosen by the Karachi Stock Exchange as one of the top 25 Companies for the year 2004.
The total assets of the Modaraba sector increased from Rs 16.6 billion to Rs 20.1 billion during the year, showing an increase of 20%. The sector is growing and would grow much faster if Bonus shares were allowed as part of our 90% distribution for tax purposes. This is allowed for the Mutual Fund industry.
Q: The Fund Mobilisation for Modaraba Sector is limited, What new avenues the Companies are tapping and how far they have succeeded?
A: Yes, the resources for fund mobilisation for Modaraba sector are limited. Certain Modarabas were raising funds from the general public by executing Musharaka and Murabaha agreements which has now been stopped by SECP. Only avenue left with the Modarabas are to raise the funds through issuance of Certificate of Musharaka (COM) and issuance of Musharaka based Term Finance Certificates (TFCs). Modaraba's with an investment grade credit rating should be allowed to issue COM to the public.
Q: What are the new challenges and scope Modaraba sector to face in the next fiscal year and how the companies will cater the needs?
A: Islamic banking system has been growing in Pakistan. With Commercial Bank starting Islamic banking branches and the State Bank of Pakistan has issued licenses to the new Islamic banks including First Dawood Islamic Bank, which should be starting operations next year. Modaraba's should be able to get funding from these banks. Also, the religious boards of both the State Bank and SECP, which has just been reconstitute, agree on a common documentation then the Islamic modes of finance can take off.
In case of Modaraba sector floatation of new Modarabas was at halt and no new products were introduced as there was no Religious Board for the last three years, which approves the new products for Modarabas and prospectus for floatation of new Modarabas. In March, 2005 new Religious Board was constituted by the Federal Government and Justice Ret'd Mian Mahboob Ahmed has been appointed as Chairman of the Religious Board. In its first meeting two pending applications for establishment of new Modarabas were considered. Moreover, three Modarabas namely First Al-Noor Modaraba, First Prudential Modaraba and First Fidelity Leasing Modaraba approached Religious Board for amendment in their prospectus to undertake house financing business, which is still pending with the Religious Board. If the religious board acts quickly then the Modaraba sector can flourish with new products.
Q: Despite the setting of Religious Board, the market sources were of the opinion that the Modaraba companies have failed to get some incentive like allowing them to lend money to housing sector. What are the major hurdles?
A: Previously Modarabas were prohibited to enter into housing finance. In January, 2004, SECP amended Prudential Regulations for Modarabas and allowed them to enter into housing finance. To enter into this business Modarabas are required to get their prospectus amended from the Religious Board which was not existed at that time as such prospectus could not be amended. Secondly Rules and Regulations for undertaking housing finance could not be framed. Now the Religious Board has been constituted and as I said earlier, some of the Modarabas are interested in undertaking housing finance and they have approached the Religious Board for amendment in their prospectus to undertake house financing, which is still pending with the Board.
Q: Is State Bank of Pakistan made mandatory to Modaraba Companies to get credit rating. What is the progress?
A: In case any Modaraba wants to borrow funds from the commercial banks, the banks will allow exposure to only those Modarabas which are rated BBB and above, whereas, for lower rating, the banks will seek approval from SBP. This conditions has been imposed only on Modaraba sector while there is no such restriction for other sectors. This disparity should be removed to enable Modarabas to expand their business. Restriction like these are no longer needed because the banking sector is in private hands.
Q Why only Al-Zamin Leasing Modaraba succeeded in selling TFC, why other companies are not issuing TFC?
A: Al-Zamin Leasing Modaraba took initiative to generate funds through issuance of Musharaka based Term Finance Certificates. Al-Zamin has issued two tranche amounting to Rs 300 million in first tranche and Rs 325 million in second tranche. Al-Zamin has developed the module with the help of AMZ Securities and Modaraba Association of Pakistan has got it vetted with the Shaiah Scholar and it is open to all and every Modaraba can raise funds through issuance of TFCs.
Q How many Modaraba companies have disbursed loans for micro finance sector, CNG and other sector, please specify the amount and sectors?
A: Most Modarabas have allowed financing to microfinance sector. But a large number of Modarabas have financed CNG Sector such as Al-Zamin Leasing Company, Guardian Modaraba and First Paramount Modaraba. First Paramount has started its own CNG stations as well. In fact Modarabas have adopted a very selective approach for leasing and other business activities and preferred funding in strong sectors related to client performance and standing.
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