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Leasing and Modarabas

The GoP must resolve the outstanding issues on priority basis

May 21 - Jun 03, 2001

Presently market forces guide the allocation of resources and the government intervention is on a constant decline. The role of DFIs and subsidized credit is diminishing. Over the last couple of years the DFIs have given way to the leasing companies and Modarabas who have assumed an important role in the capital formation. These financial institutions have emerged as the major provider of medium term financing for trade, industry and consumer financing.

As a matter of fact most of the DFIs are cash starved and are struggling for their own survival. Banks Equity is being liquidated, National Development Finance Corporation (NDFC) has its own problems, Industrial Development Bank of Pakistan (IDBP) is loaded with non-performing loans. The only DFI which has managed to overcome its problems is Pakistan Industrial and Credit Corporation (PICIC). However, it has diversified into commercial banking lately by acquiring a substantial equity stake in Gulf Commercial Bank.

Therefore, there is a need to look at companies involved in leasing business, their performance and the problems facing such an important sector. According to Etrat Rizvi, Managing Director, National Development Leasing Corporation (NDLC), "Providers of medium term funds have a continuous appetite for long-term funds to avoid mismatch. Till Pakistan conducted nuclear tests such credit lines were common which have dried up after 1998. In the absence of such lines, the importance of mobilizing domestic savings for the financial sector through debt instruments and their derivatives can hardly be over emphasized."

According to Naseem Khan of Sigma Leasing, "Most of the problems faced by the leasing companies are known to policy planners and regulators. However, the delay in decision making and more importantly the delay in implementing the agreed measures are the biggest irritants. Some of the key issues are: policy towards initial depreciation, deposits from clients being treated as income by tax authorities, maximum value of motor cars. However, the other two important issues facing the leasing companies are: transforming the existing financial products into Riba free instruments and meeting enhanced paid-up requirement of Rs 200 million."


As regards meeting the enhanced paid-up capital requirement, the situation is real alarming. The deadline fixed by the Securities and Exchange Commission of Pakistan (SECP) expires on June 30, 2001. At present there are 32 leasing companies operating in the country. Out of these only 12 companies qualify the new benchmark. Out of the remaining 20 companies 8 are exactly at Rs 100 million, whereas paid-up capital of 8 companies is below Rs 100 million and another 4 have paid-up capital below Rs 10 million.

According to some sector analysts, it is true that conditions are not conducive for enhancing paid-up capital. But a crisis like situation has arisen due to lack of any constructive dialogue between the SECP and small leasing companies. It is unfortunate that most of the leasing companies have never taken the deadlines fixed by the SECP seriously in the past. The SECP seems to be committed this time. However, other analysts believe that recent decision of the SECP to delay inclusion of six companies in T+3 system only indicates the weakness of regulators in implementing a decision which is good for the market and investors.


According to Sohail Usman Ali, Chairman, Modaraba Association of Pakistan, "The payout ratio of Modarabas is comparatively higher than any other sector listed at the Karachi Stock Exchange. But the sector is striving hard to improve its image among the investors. The conditions of Modarabas were precarious in the past and most of the certificates were traded below par."

Sohail has requested State Bank of Pakistan (SBP) to direct banks to invest in Musharika Certificates to encourage investment in modaraba sector but no response has been received so far. Over the years performance of Modarabas doing core business in leasing has not been as good as that of leasing companies. This has been due to a restriction on Modarabas to borrow from banking system.


The leasing sector, being the sole provider of medium term funds, has tremendous potential for growth provided the irritant affecting its performance are removed. An analysis of fresh leases written by the companies, during ten months of current financial year, indicates considerable increase as compared to the corresponding period of the previous year. Bulk of the fund has gone to textiles, information technology and oil exploration. However, results will start appearing within next six to twelve months.

As regards meeting enhance paid-up capital requirement there is a need to enter into a meaningful dialogue with the SECP. As a first step the sponsoring directors have to take a lead by contributing their share. If they themselves are not committed how can they expect from the others to invest in their business. AT the same time it is imperative for the government to resolve outstanding issues, if it is serious in accelerating the GDP growth rate.