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Excerpts from an exclusive interview with Basheer Chowdary, Chairman, Modaraba Association of Pakistan

Feb 18 - 24, 2002

During the year 2001 performance of modarabas have been quite satisfactory. Out of 35 working modarabas, 19 have declared dividend to their certificate holders ranging between 1.5 to 46 per cent as compared to 5 to 30 per cent for the preceding year. Whereas out of 38 mutual funds 28 declared dividend ranging from 3.5 to 60 per cent. Out of 32 leasing companies 13 declared dividend ranging from 3.5 to 45 per cent. Out of 15 investment banks 5 declared cash dividend ranging from 10 to 30 per cent. As on 30th June, 2001 paid up capital of the modaraba sector was about Rs 7.8 billion as compared to Rs. 4.6 billion of mutual funds, Rs 4.94 billion of leasing companies and Rs. 4.6 billion of investment banks.

Securities and Exchange Commission of Pakistan (SECP) has always been cognizant of the importance of modaraba sector and introduced policies aimed at strengthening of the sector. SECP has appreciated the role of the modarabas in the process of Islamization and economic development. Recently, SECP invited Modaraba Association of Pakistan (MAP) to participate in the review process to bring necessary amendments in Modaraba Ordinance, Modaraba Rules, Prudential Guidelines for modarabas and Companies Ordinance. The Association has recommended various amendments in the above Ordinances and Rules and it is expected that the SECP would consider these on merit.

We foresee a bright and prosperous future of the modaraba sector. For the year ending June 30, 200l, modarabas have been able to post better performance and announced cash dividend from 1.5 to 46 per cent to their certificate holders. A new modaraba, Fayzan Manufacturing Modaraba, has recently been floated with a paid-up Capital of Rs 900 million. It is being managed by Faysal Management Services (Pvt.) Ltd. Fayzan Modaraba has been formed to provide off-balance sheet financing to ICI Pakistan for its intended PSF capacity expansion. The Modaraba is for a five and a half year period, after which ICI Pakistan is bound to buy the plant from the Modaraba. PICIC is also planning to float a modaraba during the year 2002. Floatation of modarabas by Faysal Management Services and PICIC is indicative of the improving fundamentals for the modaraba sector.

Modarabas have not been able to mobilise funds due to various reasons and restrictions. Some of these are: mandatory credit rating, stringent conditions for flotation of certificates of Musharika and excessive reporting requirements. Modarabas are the only Non-Banking Financial Institutions (NBFIs) where credit rating is mandatory for availing financing facilities from the commercial banks. None of the other NBFIs, such as leasing companies and investment banks, are required to meet this mandatory requirement. The minimum credit rating of B-3 is required for obtaining financing facility (whether fund based or non-fund based).

Although the SECP has granted permission to a number of modarabas to float Certificate of Musharika (CoM) but the guidelines need to be reviewed and updated by following a practical approach to create a more conducive working environment for the flotation of these certificates. More specifically, rules relating to liquidity resources, redemption reserves, audit and administrative guidelines should be addressed pragmatically to ensure smooth and viable resource mobilisation through CoM.

Commercial borrowings, on the basis of modarabas documentation approved by the Religious Board, is almost impossible as commercial banks follow documentation on the formats prescribed by them. Efforts should be made to develop legal documentation which are based on the guiding principles of modarabas without sacrificing the legal rights of the lenders and the conceptual requirements of the modarabas.

The SECP is aware of the difficulties being faced by the sector and plans to take effective steps in collaboration with State Bank of Pakistan to improve the working environment of the sector.

We expect more mergers and acquisitions in the year 2002. Mergers and acquisitions are indicative of a general strategic shift towards consolidation which is required to usher in greater financial stability and operational flexibility for modarabas.

Khalid A. Mirza, Chairman, SECP and Dr. Ishrat Hussain, Governor, SBP have categorically suggested in the various meetings that good performing modarabas with sound financial health should take over the weak players so that strong entities emerge in the market which are capable of improving the image and performance of the sector.