MODARABA SECTOR

Consolidation through mergers and acquisitions

By SHABBIR H. KAZMI
Jan 26 - Feb 01, 2004

With the commencement of process of Islamization in mid eighties Pakistan saw the dawn of Modarabas. The first ever Modaraba was listed in 1985 and the decade of nineties witnessed the largest number of listing. Over the years the total number of listed Modarabas touched as high as 48. Subdued economy during nineties, growing competition and constraints in resource mobilization brought the balance sheet of a number of Modarabas into red. Not only that the situation was a source of concern for the Modaraba certificate holders, but also regulators were also perturbed.

In late 1998, when some crucial measures were taken for the restructuring of financial institutions and revival of economy, efforts were also made to revitalize this important mode of Islamic financing. Management of a number of ailing Modarabas was handed over to better managed entities. Around the same time the process of mergers and acquisitions was seriously looked into and since then a number of weaker entities have been merged into financially strong Modarabas.

According to the data available with Modaraba Association of Pakistan (MAP), about its members, the number of management companies has come down from 39 companies in 1998 to 30 companies in 2003. During this period paid-up capital went up from Rs 6,799 million to Rs 7,633 million. Yet another indicator of the growing strength of Modarabas is the growth in profit after tax. The cumulative profit of 38 members of MAP was as low as Rs 25 for the year 1999, which touched Rs 1,072 million level for the year 2003.

The single largest contribution of Modarabas is that they are playing a dynamic role in the process of Islamization of financial system in the country. They have the capacity to bring the change as an appropriate infrastructure is in place with more than twenty years of experience. Modrarabas are capable of undertaking any kind of business that is in conformity with the Sharia. A large number of Modarabas are engaged in the leasing business. Others are engaged in trading and portfolio management. One modaraba is in manufacturing.

It may be necessary to look at the two latest entrants in the sector, i.e. Fayzan Manufacturing Modaraba (FMM) and National Bank Modaraba. FMM is a specific purpose modaraba floated for a period of five and half years, commencing March 22, 2001. FMM has issued Rs 900 million certificates. It has been floated to construct, operate, manage and own a polyester staple fibre (PSF) spinning and processing plant. The plant has commenced commercial operations in April 2002. National Bank Modaraba is a multipurpose and perpetual Modaraba with paid-up capital of Rs 250 million. Out of this Rs 131.25 million is owned by the Management Company and another Rs 45.75 million was raised through private placement. The public offer for Rs 75 million was over subscribed.

The story of Modaraba sector may not be complete without mentioning First Equity Modaraba (FEM). Cognizant of the growing competition, it ventured into investment in capital markets. FEM acquired membership cards of all the three stock exchanges of Pakistan. The regulators endorsed this stewardship by allowing FEM to invest in capital markets up to 30% of its equity as against 20% laid down in the Prudential Regulations. In August 2002 the Securities and Exchange Commission of Pakistan (SECP) granted FEM the requisite license to operate as broker.

Since Modarabas have certain restrictions on borrowing from conventional banking system, one of the serious constraints faced by the sector is resource mobilization. The various options are being explored with the help of SECP to develop Sharia complaint instruments i.e. Musharika-based Term Finance Certificates (TFCs). Al-Zamin Leasing Modaraba is the first Modaraba that has successfully floated such TFCs amounting to Rs 250 million. AMZ Securities were the advisor and arranger for the issue and the public offer was heavily oversubscribed.

The other constraints faced by the Modarabas pertain to regulatory environment. The MAP is actively pursuing with the regulators, the SECP and State Bank of Pakistan (SBP), the key issues. The Association has asked the regulators to specifically amend the rules pertaining to borrowing of Modarabas from commercial bank under Musharika arrangements. As per existing rules, Modarabas enjoying B3 credit rating are eligible for borrowing from the commercial banks only.

Modarabas are contributing towards the economic development of the country. The close liasion of the regulators with the MAP has helped in improving working environment and capacity building of the players. The recent mergers and acquisitions indicate the general shift towards consolidation, much needed to usher in greater financial stability and operational flexibility.

MAP MEMBERS AT A GLANCE

(Rs in million)

 

1998

1999

2000

2001

2002

2003

MEMBERS

42

38

36

35

34

32

PAID-UP CAPITAL

6,799

6,828

6,867

6,648

7,603

7,633

TOTAL INCOME

3,577

3,911

4,021

4,127

3,930

4,235

PROFIT AFTER TAX

272

25

687

97

636

1,072

Source: Modaraba Association of Pakistan