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
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
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
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
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.