June 1 - 7, 2009

Analysts often boast the strength of Pakistani commercial banks. However, without undermining the contribution of commercial banks, one could say that they have proliferated only because of vanishing DFIs and weakening NBFCs. Some of the financial sector experts go to the extent of saying that the cartelization of commercial banks and permission by the central bank to fix their own service charges is responsible for the disappearance of DFIs and extinction of NBFCs. Yet another group holds Securities & Exchange Commission of Pakistan responsible for the current dismal performance of NBFCs in the country.

It is necessary to put on record that the Government of Pakistan (GoP) granted permission for establishing separate institutions like DFIs, commercial banks, investment banks, leasing companies and modarabas. Each type of entity has a specific mandate. However, allowing the banks to undertake activities for they are not mandated has created the mess, which is leading to virtual death of investment banks and leasing companies. Modarabas have succeeded in surviving because they are being regulated under a different framework. However, the number of operating modarabas is on the decline.

An interesting debate could be who should undertake consumer finance commercial banks or leasing companies? The proponents of universal banking system say that commercial banks should be allowed to undertake all types of financing because have huge deposits at their disposal. However, the opponents of this policy say that universal banking would ultimately lead to the death of NBFCs. It is simply because NFBCs are not allowed to accept deposits and their cost of fund is certainly much higher as compared to the commercial banks.

Cost of fund of commercial banks is low mainly because of availability of millions of Rupees free of cost deposits, mainly maintained as current accounts. Bigger share in total deposits is because of greater outreach. Availability of funds at extremely low cost has allowed them to acquire stake in insurance companies, establish asset management companies. However, they have mostly abstained from establishing separate entities for undertaking leasing business.

For years leasing companies have been pleading that undertaking leasing business gives banks an undue advantage over leasing companies, mainly due to extremely low cost funds. However, commercial banks did create modarabas, in an attempt to cater to a niche market looking for Shariah compliant mode of financing.

Ideally, leasing companies and mdarabas should have confined themselves to providing funds to micro enterprises, and SMEs, who are normally not served by the commercial banks. However, involvement of both the leasing companies and modarabas in 'big ticket leasing' drifted them away to their globally recognized mandate. While some sponsors of leasing companies and modarabas still grudge, others have moved their focus from large corporate to SMEs, micro enterprises and even individuals.

One of the reasons of the success of leasing companies and modarabas was prompt processing of papers and better quality of service. The borrowers were willing to pay relatively higher interest rate because banks were not keen in catering such clients. Leasing became a preferred mode of financing because no collateral was demanded and rental being treated an expense resulting in tax advantage for the borrowers. As the concept got acceptance commercial banks and even investment banks embarked upon this business.

Since October last year leasing companies have been in a fix because banks stopped disbursing funds to them. As a result leasing companies also stopped underwriting new business and have to live on rental received for discharging their liabilities. The point of concern is that neither the central bank intervened nor came up with any other alternate arrangement. Thanks to the recessionary trend, which has kept credit off take low, else interest rate would have skyrocketed.

At one stage leasing companies issued certificate of investment (CoIs) and also issued term finance certificates (TFCs) to overcome cash crunch. However, it seems that leasing companies are no longer confident that they could beat commercial banks, having access to low cost funds. The central bank has also been failing in convincing the commercial banks to establish subsidiaries to undertake leasing business.

Modarabas also face liquidity crunch because of a long drawn process for issuing TFCs. On top of this if they wish to borrow they have to seek their credit rating. Interestingly, Islamic banks seem to be doing roaring business, apparent from rising deposits and financing. However, they seem reluctant is extending funds to modarabas, as these are considered competitors. In fact modarabas do not compete with Islamic banks but complement their operations. Any effort to cooperate can help in achieving greater synergy.

One of the serious issues is that unless leasing companies succeed in obtaining credit line on competitive rates they would continue to suffer from cash crunch and high cost of fund would affecting their profitability. In the prevailing scenario the first step to be taken by the central bank is to ensure that commercial banks establish independent subsidiaries to undertake leasing business. At the same time the central bank should also intervene and convince commercial banks to resume disbursement of funds to leasing companies.

Modaraba Association of Pakistan should also work closely with Islamic banks and designated Islamic banking branches of conventional banks to extend credit lines to the modarabas. The Association should also get the credit rating requirement removed. No such requirement is in force for any other borrower.


The State Bank of Pakistan has notified the change of name of "SAUDI PAK COMMERCIAL BANK LIMITED" to "SILKBANK LIMITED" with effect from June 01, 2009.

This change has been notified by the State Bank in exercise of the powers conferred on it (SBP) by clause (c) of sub-section (2) of Section 37 of the SBP Act, 1956.