Challenges and opportunities


May 09 - 15, 2005



The two news items deserve specific mention before exploring the outlook for Leasing and Modaraba sectors. First the bad news, return of about 13,000 leased cars due to inability of the acquirers to pay the rentals. The good news is formation of Religious Board for the Modaraba sector. Both the news demand a little deeper probe but one factor is very bright there are emerging challenges and opportunities. And it is the responsibility of the government to create conducive working environment.

According to newspaper reports, nearly 13,000 cars have to be repossessed by the auto financing companies because persons acquiring these cars have defaulted on payment of monthly rentals. This is only the beginning of the sad story and it is very difficult to quantify how many more cars would have to be repossessed by the auto financing companies. This raises two questions: 1) was the financing provided imprudently? 2) Is the default circumstantial?

On the face value, it appears that both the factors are responsible for the default. It has been said for some time that a bubble was being created by auto financing companies. In an attempt to secure more business, they became a little imprudent. They did calculate the default percentage but reality is proving too cruel. Another factor making cars unaffordable is the rising prices of petrol as well as CNG. It is also being said that some of the people who acquired car also face substantial decline in their monthly income but there seems no such proof, except those people who were making substantial daily gains in the stock market becoming broke.

The news also raises alarm for the auto assemblers because one out of three cars is sold under the auto finance plan at present. Keeping in view the growth in demand for cars assemblers as well as component manufacturers have invested heavily to expand their production capacities. If the down trend starts they would come under pressure due to poor capacity utilization.

Defaults would also affect the auto financing companies in two ways: they will be required to make heavy provisioning and disposal of repossessed cars would also be difficult to sell. These could only be sold in the secondhand cars market at a substantial discount. It is expected that only a few players would suffer huge losses but the situation can cause serious problems for the entire financial system of Pakistan.



In the absence of Religious Board growth, Modaraba sector was impaired very badly. The process of flotation of new Modarabas as well as new financial products was virtually halted. The working environment became depressing for the existing players and merger of Modarabas with leasing companies and investment banks became common.

The news alone that the Religious Board has been established provided a new lifeline. It is believed that at least three Modarabas have applied for the approval for undertaking housing finance and two groups have applied for the flotation of new Modarabas. The instant response should not be a surprise for the critics of Modarabas, who have been saying that Modarabas on the path of extinction.

The opponents of Islamic financial system have been saying from the day one that the system is not workable. However, they were proved wrong because of the exponential growth of financial institutions offering products and services, which are Shariah compliant. The biggest proof of the success of the new system is the exponential growth in the assets being managed by banks offering Shariah compliant products and services.

The first Islamic bank started its operation in Pakistan about two years ago and many conventional banks have established their designated Islamic banking branches. The growth in assets as well as well deposits maintained with these institutions also proves the success of the strategy being followed by the central bank. The central bank decided to provide an alternative system, by creating an enabling environment, and left the choice with the clients.

It is necessary to reiterate that for more than two decades leasing companies and Modarabas have been the major source of medium-term financing. Their new focus is Small and Medium Enterprises, enjoying an enormous growth potential. However, it is also important to highlight that leasing companies and Modarabas continue to face various irritants. It is heartening to note that now regulators are following a consultative approach, rather than imposing the rules and regulations unilaterally. This policy has helped in creating better working environment but a lot more remains to be done.

Last but not the least, demand for credit by the private sector is growing at a faster pace. The days of surplus capacity in the manufacturing sector are over. Now the funds are required in larger quantum for adding new capacities and achieving higher value addition. The government has also expressed its intent to mobilize funds for infrastructure projects from the capital market. Financial system has ample liquidity, it is only a question of channeling the funds to right destination.