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SECP-led reforms push modaraba’s asset base to Rs41bn in six months

The scope of modaraba needs to be expanded across the country

Modaraba sector is catering to a wide range of Shariah-compliant businesses, including leasing, manufacturing, trading, financial services, SME and halal food. Recent reforms and strengthening of regulatory framework by the Securities and Exchange Commission of Pakistan (SECP) has pushed up modaraba sector’s asset base by 11 percent to Rs41 billion in six months ending Dec 2016. The surge in assets indicated a growth of 11.41 percent from June 2016; when the total assets of the modaraba sector were recorded at Rs36.8 billion. Listed Islamic banks have 25,000 shareholders whereas modaraba sector has around 80,000 investors, analysts told PAGE.

Giving details about growth of modaraba sector in Pakistan, analysts said the concept of modarabas in the country’s organized sector emerged way back in the year 1979 following government’s initiatives towards Islamization of the economy. Modaraba Companies and Modaraba (floatation & control) Ordinance was promulgated in 1980, to provide the statutory framework for organizing business enterprises according to the injunctions of Islam.

Sharing his views about the modaraba business in Pakistan, expert said that majority of the modarabas in Pakistan are in the financial sector, although, there is no restriction on the nature of business except that it should be according to the injunctions of Islam. The business/financing activities currently undertaken by modarabas in Pakistan are ijarah/leasing, morabaha, musharika, trading, equity/portfolio financing and manufacturing /distribution.

According to experts, there were two types of modaraba practiced in Pakistan i.e. multipurpose modaraba with more than one objective and specific purpose modaraba with a particular purpose. Modarabas have a dynamic and progressive role to play in the Islamization of the financial system of the country. The total market capitalization of modarabas is still a tiny fraction of financial sector cap.

Experts believe modarabas have not been very successful in mobilization of savings or deposits or diversification of their products to differentiate from other market players such as leasing companies. Modarabas need to innovate, improve their products and operational capabilities and at the same time become more competitive in their cost of funding. Reliance on banks would always place them at a cost disadvantage and there is a need to tap other sources, which remain unrealized and do not flow to the banking sector, they added.

Financial experts said the growth in the modaraba sector was due to low level of leverage, healthy dividend payouts and other tax incentives available to sector. Though the sector has managed to shake off its lackluster image and moved to the forefront of non-banking financial institution (NBFI) segment, one of the key challenges is its concentration in a few large cities.

According to them, modaraba sector is unique form of Islamic finance that was started in 1980 in the country. Currently it is catering to a wide range of Shariah-compliant businesses, including leasing, manufacturing, trading, and financial services. They said investors should invest only in the regulated modaraba sector.

On the other hand, the Federation of Pakistan Chambers of Commerce and Industry (FPCCI) has recommended a ‘One-time Amnesty Scheme’ aimed at utilization of hidden liquid assets in the mainstream of the economy to stop the flight of capital from Pakistan.

A spokesman of the FPCCI pointed out that several developing countries had introduced amnesty scheme during last three years to create informational efficiency in financial markets and growth of economy. He said that the objective of the proposed ‘One-time Amnesty Scheme,’ is not to provide a shelter to corrupt practices but to bring the frozen or isolated liquid assets into mainstream of economy for its utilization to provide funds for the growth of national economy, construction of badly-required infrastructure, provide employment opportunities at large scale.

As per recommendation, if the assets are invested in the modes of Islamic Financing/formation of new Modaraba Management Companies (as defined by Modaraba Ordinance 1984) and the objective of modaraba management company is to invest in the project to reduce the poverty or to improve the health and educational standards or to achieve those targets of Millennium Development Goals (MDGs) which have been described by the Government of Pakistan. Investment in the modes of Islamic Financing for participation in those infrastructure development-related projects which are commercially viable. It is expected that Islamic modes of financing will be applied as a substitute of Development Financial Institutions (DFIs) and their contribution in the economic development will be significantly improved.

Given the reforms on economic front, it is set modarabas which are involved in leasing business would grow in time ahead, however, they should concentrate on consumer leasing rather than indulging in big-ticket leasing. They should also give attention to operating lease.

The scope of modaraba needs to be expanded to across the country instead of concentrating the business in few big cities. The regulator, SECP must hold fake modarabas accountable.

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