News players are making entry with diversified plans

SHABBIR H. KAZMI, Special Correspondent
Aug 07 - 13, 2006

After a lapse of many years permissions have been granted to float six new Modarabas, at least. Interestingly all the new entrants have expressed intentions to venture into those areas where they would be able to get "early bird" advantage. Not only that these areas enjoy enormous latent demand but also offer potential for earning higher profit because of enjoying monopolistic situation. Persistent rise in mark-up rates, growing competition with other financial institutions and threat of deceleration in economic growth could pose new challenges for the sector. However, the interest of regulators to facilitate transformation from conventional financial system to Shariah compliant system is expected to create new opportunities for those interested in earning Riba free income.

The six new entrants are: 1) Allied Rental Modaraba, sponsored by Allied Engineering Management Company (Pvt.) Limited for proving Caterpillar equipment, 2) First Treet Manufacturing Modaraba, sponsored by the promoters of Treet Corporation Limited with a paid up capital of above Rs 140 million and 3) Total Modaraba for establishing and operating a hotel. The other three have been initiated by JS Finance. These are 1) Modaraba Al-Makatib for providing office on rent, 2) Modaraba Al-Tameer for undertaking construction work and 3) Modaraba Al-Souk for the real estate developers.

With the increasing number of banks providing complete range of Shariah compliant banking services and establishment of designated branches by the conventional banks a rather odd situation has arisen. Modarabas and Islamic banks are competing with each other. To overcome the situation a Co-ordination Committee of Securities and Exchange Commission of Pakistan (SECP) and State Bank of Pakistan (SBP) has been established. This Committee having representatives from both the regulators will overview the common issues and problems of their respective sectors. Efforts will be made jointly to identify the problems being faced by Modarabas and Islamic banks and to propose harmonization of Islamic products. This effort is aimed at creating healthy competition among the institutions offering Shariah compliant products and services. The committee will also try to create environment where both types of institutions complement each other rather than competing.

Modaraba Association of Pakistan (MAP) has been meeting and discussing with the Registrar Modaraba various issues of the sector. In this regard the Association has suggested various amendments in the Ordinance which are under SECP consideration. The involvement of the regulators can be gauged from the fact that the maximum permissible limit has been enhanced from 30 to 50 percent and the required circular has also been issued.

After having discussed the bright prospects it is also necessary that various challenges facing the Modarabas must also be highlighted once again. One such issue is cost of funds for the Modarabas. This issue has become real contentious for those players which are small and also not backed by any financial institution. A number of Modarabas have been floated by commercial banks and enjoy the facility of large scale borrowing at relatively lower cost from the parent company. This is one of the reasons that most of the Modarabas floated by the commercial banks have emerged stronger.

According to an analyst distribution of 90% profit, to qualify for tax exemption, has become a serious impediment. In an attempt to avail this incentive most of the Modarabas prefer to distribute 90% of the profit and continue to suffer from liquidity constraints. There are two opinions regarding this. The overwhelming demand is that income of all the financial institutions offering Shariah compliant products should be exempted from all types of taxes. The other group is willing to pay tax but also demands nominal rates. This group also demands that rate of tax on listed companies should also be brought down substantially, not more than 10%.

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. His statement seems to be coming true with the entry of new players.

It may not be out of place to recall a statement of Ayaz Dawood, Chairman MAP. He had said a number of 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.


(Rs in million)







No of management cos






Paid-up capital






Total assets






Total income






Profit after tax






Source: MAP Year Book 2005

It may not be out of context to say that Modarabas were the pioneers of Islamic financial system in the country. It may be another thing that now people talk more about Islamic banking. However, it remains a fact that had there been no Modarabas operating in the country the creation of enabling environment for Islamic banking would have remained a far cry.