Restructuring process in the
financial sector is aimed at improving their viability to face the
growing competition
By SHABBIR H. KAZMI
May 20 -June 02, 2002
One cannot undermine the importance of financial
institutions in the economy of Pakistan. As the sector is now being
dominated by the private sector, acquiring funds has become easy and
less time consuming. Over the last twenty years both leasing companies
and Modarabas have played very important role in capital formation and
will also have a bigger role in the future.
It may be true that the regulators have been
cognizant of the problems faced by the players, their response is often
delayed and by that time the damage has been caused. For example,
despite the long standing demand of leasing sector to put a constraint
on other financial institutions to undertake leasing business, more and
more banks are allowed to commence leasing business.
It may be true that commercial banks and investment
banks have surplus and low cost funds at their disposal, but they should
lend the money to leasing companies or enter into Musharika arrangements
with Modarabas rather than establishing their own leasing divisions.
LEASING COMPANIES
The performance of leasing companies for the year
ending June 30, 2001 was commendable, keeping in view the global as well
as local conditions. During the year business was mostly driven due to
textile and automobile sectors. However, provisioning was relatively
higher in case of a number of companies. The competition was intense and
further fuelled by entry of other financial institutions in leasing
business.
It was one of the rare events in Pakistan that
regulators put their feet down and refused to extend date for enhancing
paid-up capital of leasing companies. It was also evident that
regulators gave an opportunity to the companies to come up with their
own plans, including issue of right shares at discount.
There was also a shift from the way leasing business
was conducted in the past. Previously only large corporates were keen in
acquiring assets on lease but now even smaller and SMEs are availing
this option. In the past there was an inclination towards financial
lease but more and more clients are now going for operating lease.
Analysts, say that there is still a huge latent demand for funds.
The largest number of TFCs have been floated by the
leasing companies and more are in pipeline. On the one hand leasing
companies are able to mobilize funds at competitive rates and on the
other hand, TFCs offer attractive opportunities for those investors who
are looking for a regular and predictable income from their investment.
MODARABAS
The financial results for the year also indicate
commendable performance despite economic slow down. Dividend payout for
the year seems encouraging as 19 out of 35 members of Modaraba
Association of Pakistan (MAP) declared dividend ranging from 1.5 per
cent to 46 per cent as compared to a payout of 4 per cent to 30 per cent
for the previous year.
One of the biggest achievement during the year was
the introduction of Certificates of Musharika (CoM). Though, only one
Modaraba was able to issue CoM, others are also planning to avail this
mode for raising funds. Efforts are also being made to float Term
Finance Certificates (TFCs) based on Islamic mode of financing to raise
funds. The MAP has already made presentation at the Religious Board and
expected to receive the approval in due course of time.
Yet another achievement was flotation of Fayzan
Manufacturing Modaraba by Faysal Management Company. The Modaraba has
been floated for the specific purpose of setting up an additional plant
to manufacture PSF and/or its variants by ICI Pakistan. Its paid up
value is Rs 900 million and it is initially for a period of five and a
half years and can be renewed with the mutual consent of both the
parties.
OUTLOOK
The GoP’s efforts to revive the economy have
started yielding results and the demand of private sector for funds is
growing, may be not as high a rate as desired. Textile industry has
already initiated major BMR and expansion plan. With the greater access
to the US and European Union, investment in made-ups manufacturing has
also started. Leasing being the major source of medium term fund is
expected to reap the benefits.
The two factors expected to impact profitability of
companies doing core business of leasing are: interest rate movement and
provisioning against non-performing lease portfolio. While interest
rates are expected to witness a declining trend, there are serious
apprehensions about growing delays and defaults by the borrowers.
However, the real impact will not be visible during the year ending June
30, 2002.
A sector grossly ignored so far is the housing
finance. Since the funds have to be committed for 15 to 25 years,
private sector has been shy. However, the issue has to be addressed on
top priority. Can the leasing companies and Modarabas assume this
responsibility?
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