SHARIAH COMPLIANT FINANCIAL SYSTEM

Modarabas playing important role as solution provider

By SHABBIR H. KAZMI
Mar 27 - Apr 02, 2006

The Modarabas can be rightly termed as the pioneer of long drawn process of Islamization of financial system in Pakistan.

The first Modaraba was listed in 1985 and the subsequent years witnessed the largest listing. At one stage the number of listed Modarabas touched as high as 48. Subdued economy during nineties, growing competition and constraints in resource mobilization brought the balance sheets of a number of Modarabas into red. Not only that the situation was a source of concern for the Modaraba certificate holders but the regulators were also perturbed. In late 1998 efforts were initiated to revitalize this important mode of Islamic financing. 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 compiled by the Modaraba Association of Pakistan (MAP), in its Year Book 2005, the number of management companies has come down from 32 in 2001 to 27 as on 30th June 2005 and number of Modarabas declined from 35 to 28. However, this should not be considered a sign of weakness. During this period aggregate paid-up capital of the sector grew from Rs 6,648 million to Rs 7,406 million, with the highest being Rs 7,827 in 2004. The other, but credible indicator is the growth of total assets, growing from Rs 15,216 million to Rs 21,131 million. Yet another indicator substantiating their strength is growth in net profit, going up from Rs 97 million to Rs 794 million - also touching the highest level of Rs 1,072 in year 2003.

The single largest contribution of the Modarabas sector is that it has been playing an important role in the whole process of Islamization of financial system in the country. The sector has exhibited capacity to usher in the change by establishing an elaborate infrastructure, which is also fully supported by the regulators. The players have also proved their capability to undertake any business, be it leasing business or establishing state-of-the-art manufacturing facilities. Though, a large number of Modarabas are still engaged in the leasing business, others have undertaken equities trading and portfolio management, establishing of CNG stations and the latest being establishment of mobile telephone towers on sharing basis.

Over the years the sector has faced two serious constraints 1) availability of limited options for resource mobilization and 2) stringent regulatory framework. According to the rules of the game if any Modaraba wishes to exercise income tax exemption it has to distribute 90% of its income. This may have helped the players in distributing handsome profit among the certificate holders but also does not allow them to improve their balance sheet footing and the result is that the listed capital has not shown any substantial growth. The other constraint was that due to non-existence of Religious Board for a number of years new Modarabas and financial products could not be floated. Therefore, the general perception remained that the sector lacks innovation.

It is heartening to note that the Securities and Exchange Commission of Pakistan (SECP) is now playing a proactive role. It is making careful assessment of the rules and regulations. It has already made certain amendments in consultation with the Association. It is also busy in the review of Modaraba Ordinance and Modaraba Rules to make these more comprehensive, practicable and to remove the irritants. The constitution of a new Religious Board, for a term of three years in March 2005, has yielded some positive results.

According to Ayaz Dawood, Chairman MAP, a number of positive news regarding Modaraba sector deserve appreciation, the most important being selection of First Equity Modaraba among the Top 25 Companies by the Karachi Stock Exchange. Collectively performance of the players has been improving. Despite tough competition posed by the commercial banks 18 members out of 26 were able to declare dividend, ranging from 2.5 to 47 percent, last year. The First Habib Modaraba achieved another milestone, as it became the first modaraba to have equity exceeding one billion rupees.

Another exhibit of the efforts of the regulators is the statement given by Mahmood Shafqat, Joint Director, State Bank of Pakistan, Islamic Banking Department at a seminar organized by the MAP in May 2005. He stated that launching of Islamic Money Market Fund would help Modarabas to recoup themselves from liquidity shortage. The other positive development is establishment of Islamic banks and designated branches for undertaking Riba-free banking by the conventional banks. This is expected to provide additional liquidity to the Modaraba sector and enable the players to diversify their business.

It is believed that the renewed commitment by the players and support by the regulators will help the Modarabas sector to play its role in providing much needed medium term financing.

PERFORMANCE OF MEMBERS

(Rs in million)

 

2001

2002

2003

2004

2005

No of management cos

32

32

30

30

27

Paid-up capital

6,648

7,603

7,633

7,827

7,406

Total assets

15,216

17,243

15,852

17,574

21,131

Total income

4,127

3,930

4,235

4,140

3,939

Profit after tax

97

636

1,072

956

794

Source: MAP Year Book 2005

 


 

TOP 10 MODARABAS

(Book Size, Rs in million)

Standard Chartered Modaraba

2,725

First Habib Modaraba

2,657

Al-Zamin Leasing Modaraba

2,276

B.R.R. International Modaraba

2.030

Fayzan Manufacturing Modaraba

1,357

First Punjab Modaraba

1,325

Guardian Modaraba

1,288

First Habib Bank Modaraba

1,215

First National Bank Modaraba

1,206

First Equity Modaraba

742

Source: MAP Year Book 2005