Restructuring process in the financial sector is aimed at improving their viability to face the growing competition

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.


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.


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.


The GoPís 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?