MODARABA ASSOCIATION OF PAKISTAN

Creating awareness about the sector and making it vibrant and strong segment of the financial sector

By MUHAMMAD SAMIULLAH,
Corporate Secretary

Jan 26 - Feb 01, 2004

The Modaraba Association of Pakistan (MAP) plays a vital role by keeping an effective liaison with the regulators and improving the image and market perception of the sector, both domestically as well as internationally. Pakistan is in a unique position enjoying the established infrastructure and legal framework and can also help other Muslim countries in achieving the Riba-free financial system.

Locally, the MAP has been trying to improve upon public awareness regarding the role of Modaraba sector in providing Islamic mode of financing. On the international front, a number of MAP members recently attended the 9th Private Sector Investment Conference organized by the Islamic Chamber of Commerce in Sharjah. This was an appropriate forum for projecting the achievements of the modaraba sector.

One of the most important contributions of the MAP is its active participation in at length discussions with Securities and Exchange Commission of Pakistan (SECP) regarding Prudential Regulations pertaining to Modaraba sector. However, a lot of credit goes to Etrat H. Rizvi, Commissioner, SECP, for taking the pains to spend hours to improve upon the Regulations. It may not be wrong to say that his education, experience and hands-on experience in leasing has been an asset, both for the SECP and non-baking finance companies (NBFCs).

The Modaraba sector has chronically suffered from the problem of resource mobilization resulting in limited growth opportunities. The regulators have taken effective steps, in consultation with the MAP, to improve the operating environment for Modarabas. The Modaraba Ordinance and Rules are constantly reviewed and necessary amendments are being made that will further improve the regulatory and operational environment. One of the recent achievements has been floatation of Musharika-based Term Finance Certificates by Al-Zamin Leasing Modaraba. The concept paper was prepared by AMZ Securities in consultation with MAP and thoroughly examined and approved by Sharia scholars.

To some extent most of the Modarabas operating in Pakistan are like closed-end mutual funds. They are exempted from income tax provided they distribute 90% of their profit among the certificate holders. The most common business/financing activities currently undertaken by Modarabas are Ijarah, Morabaha, Musharika and trading. The term Ijarah is analogous to leasing. Approximately one-third of the MAP members are actively involved in leasing. Morabaha is the second most popular activity undertaken by Modarabas. Musharika concept is being used to develop innovative products both on asset as well as liability side. One of the examples is the Income Notes Arrangement devised by International Finance Corporation (IFC). A number of Modarabas are involved in trading that includes trading in commodities as well as equities. A manufacturing Modaraba has been floated recently.

Having faith in the potential of Modaraba sector, the IFC during 1995, offered US$ 80 million to five Modarabas. This offer from IFC was based on Income Notes Agreement under which IFC had agreed to lend US$ 40 million on profit and loss sharing basis for a period of up to 10 years. After the completion of this arrangement, some Modarabas have once again approached IFC and it is expected that they would get the funds in due course. In this connection a representative of IFC recently visited Pakistan and had discussion with MAP, Modarabas and leasing companies.

Another major achievement of Modaraba sector is that Swiss Agency for Development and Cooperation (SDC) recently signed agreement with four companies undertaking leasing as core business and among them was one Modaraba, Al-Zamin Leasing Modaraba. This is the third phase of funding from SDC. This financial support is aimed at capacity building of micro and small enterprises, with special emphasis on funding to women entrepreneurs belonging to less developed northern areas.

The Modaraba concept has gained substantial popularity and appreciation. Many financial institutions and industrial groups have floated Modarabas. Amongst the early entrants were ANZ Grindlays Bank (now Standard Chartered Bank), Habib Bank, Habib Bank AG Zurich and some established local business houses. The latest entrant is National Bank of Pakistan.

The growing strength of Modarabas is evident from improving bottom line for the last couple of years. The MAP Members posted an aggregate profit after tax of Rs 97 million for 2001 that improved to Rs 636 million for 2002 and crossed one billion rupee mark for 2003.