Nov 01 - 07, 2004





ZUBAIR R. PALWALA is a Chartered Accountant (Intermediate) by profession, with a long experience of national and multinational financial institutions at different levels to his credit. He also acquired Masters Degree in Business Administration. Zubair has been successfully managing two Modarabas, First IBL Modaraba and First UDL Modaraba. He has been playing a significant role in the preparation of different rules, regulations and laws for the Modaraba sector and dealing with the strategic matters with the regulators and other market players. Recently, Palwala was elected Chairman of Modaraba Association of Pakistan. Zubair also dealt with the Income Notes devised by IFC, which provided funding facilities of US$ 30 million to three Modarabas under the scheme, for the purpose of developing the Modaraba sector in Pakistan. The funds were given for ten years with a grace period of seven years. This was a substantial support towards the resource mobilization and credibility of the Modaraba sector.

PAGE: Dr. Ishrat Husain has recently talked about potential threat for financial institutions operating under Shariah. How do you foresee the threat?

ZUBAIR: From the day one the institutions working according to Shariah have been facing a very tough competition from conventional financial institutions. I believe the two types of institutions have entirely different niche markets. The people who do not wish to receive Riba have been declining the returns from conventional banks. However, they were forced to bank with these institutions because they did not have any other alternative. Now, they have an option and the size of Islamic banking is on the rise. It is on record that assets of Islamic banks have tripled during the first nine months of current financial years. Therefore, I do not feel any major threat for financial institutions working according to Shariah. Saying this, I would like to bring on record that government must provide some incentives to these institutions as these are still in their infancy.

PAGE: How do you review the performance of Modaraba sector?

ZUBAIR: The sector has faced many ups and downs in more than two decades. Both the players and the regulators have emerged stronger with the passage of time. Total equity of the sector has been registering constant growth and players have diversified their businesses. However, leasing still remains their core business. Modaraba Association of Pakistan as well as Leasing Association of Pakistan has been demanding from the government to ensure level playing field. We do not wish the government to impose restriction on entry of other financial institutions into the leasing business. But we may be justified in demanding creation of separate entities by the commercial banks for undertaking leasing business.



PAGE: We have not seen listing of new Modarabas lately, Are there any reasons?

ZUBAIR: Lately, two major Modarabas have been floated but the number of listed Modarabas is on constant decline. However, it does not tantamount to any weakness of the sector but being done for consolidation. One of the major impediments is the non-existence of Religious Board for about two years. In the absence of this Board the process of development of new products has been constrained. As regards shrinking number of Modarabas, this can only be attributed to mergers and acquisitions. It has become evident that having a large number of weak players is neither beneficial for the certificate holders nor for the trade and industry. In a very competitive environment, costs have to be reduced and one of the viable options is merger of weaker institutions with the strong players. Initially, there was some resistance but the ultimate message has been heard loud and clear by all.

PAGE: How the Modarabas intend to beat the competition?

ZUBAIR: As I have said earlier, we are not afraid of competition but certainly have a right to demand level playing field. Most of the players have redefined their business strategies. Most of them are now focusing on small and medium enterprises as compared to the previous practice of catering to needs of corporates only. The paradigm shift has proved beneficial for players as well as the business community in general. It is heartening to note that the government is also focusing the need for funds of small and medium enterprises. Reverting back to catering the needs of small and medium enterprises is also closer to the spirit of the concept of Modaraba.

PAGE: Do the Modarabas also invest in equities?

ZUBAIR: As such Modarabas are not barred from investing in equities. However, the basic parameter for selection of any scrip is that the company should not be drawing its income from Riba-based operations or involved in a business does not approved by the Shariah, i.e. banks or companies involved in the manufacturing of alcohol. Most of the Modarabas have invested in the shares of each other as well as in the shares of companies in the manufacturing business. For example one of the members of MAP, First Equity Modaraba, draws bulk of its income from equities market operations.

PAGE: What are the future prospects for the sector?

ZUBAIR: The general perception is that Modarabas are the less aggressive players of the financial sector. This perception precipitates from two facts 1) the news pertaining to the sector are printed with long intervals and 2) the name hardly seen in the list of volume leaders of a day. Whereas the fact is that the dividend payout by a large number of Modarabas is very attractive. The reason for not being among the top volume leaders are 1) most of them have relatively lower capital as compared to the volume leaders and 2) it is very difficult to maneuver the quoted price. Since the chances of making abnormal gains are not there, Modarabas cannot be the pick of speculators.