SADAF AURANGZAIB, Senior Correspondent
Aug 07 - 13, 2006

Al-Zamin Leasing Modaraba commenced its operations in August, 1992, with a paid-up capital of Rs.100 million. The promoters of the Modaraba include five financial institutions of the country, professional bankers and retired civil servants. While Pak Libya Holdings have 25% of the equity of the Management Company, Investment Corporation of Pakistan, National Development Finance Corporation (now National Bank of Pakistan) and Pakistan-Kuwait Investment Company (Pvt.) Limited are co-sponsors of the Modaraba. The Board of Directors includes professional bankers with vast experience of domestic and international banking and investments. The presence of a strong professional team ensures that the Modarabaís business is managed with highest standards of competence, capability and professionalism.

Al-Zamin is a multi-purpose modaraba focusing on leasing as its main business, also undertaking equity marketing operations, managing portfolios, project financing, providing long and short-term finance and rendering consultancy and advisory services for syndication of leasing and project financing.

We got the chance to talk to the Chief Executive Mr. Basheer A. Chowdry about the current scenario of the modaraba and leasing sector.

PAGE: Tell us a little bit about Al-Zamin leasing modaraba, how did it start its operation?

BASHEER A. CHOWDRY: Al-Zamin Leasing Modaraba was established in 1992 with the participation of five financial institutions. This was the modaraba that was established with a sole purpose of becoming a role model of an Islamic institution which is run by professional bankers and with that aim in mind I think we have achieved and we have progressed well. The initial paid up capital was 100 million which was over-subscribed. At the moment our equity is nearly 400 million and our balance-sheet size is about 2,800 million rupees so the progress has been satisfactory as far as modaraba sector is concerned. It could have been better if you compare it with the growth which has happened in the overall financial activity for the last 10 to 15 years. The banking sector has grown manifold, the NDFC sector has also grown, but the modaraba sector has not grown to that level.

PAGE: Do you think that the success of Al-Zamin is mainly because of the team that work for it?

BAC: Financial services are a service industry. It is the quality, caliber, vision and hard work of the team which matters. We are very lucky that in our board and management we have very senior bankers and some of them have run very large banking organizations not only in Pakistan but also abroad. So the mix of the experiences, the combination of the talent actually is the one reason. What we have done is that with our senior bankers we have also built a team of a younger people so that there is a clear path of succession in management. Al-Zamin has the image of being very professional, very appropriate and very prudent and at the same time very progressive.

PAGE: Despite the intense competition by the commercial banks, Al-Zamin remained successful in expanding its base of leasing contracts. What made this all possible?

BAC: The competition whether in the banking sector or in modaraba sector or in any service industry is actually a sort of motivating factor to improve your operations so that you will be able to compete with others. I would rather operate in a competitive environment than in an environment where there is no competition. Banking competition came about three years back when the commercial banks came very aggressively in the leasing business. At that time I was the chairman of the Leasing Association of Pakistan so all of us from leasing and modaraba sector sat down and discussed the situation and then went to the Governor State Bank who at that time was Dr. Ishrat Hussain. Our case was that the banks have a large number of products to sell but the leasing companies have one single instrument (leasing) which they have developed, nurtured and for which they have gone through the learning curve of actually suffering losses and gains as well. And if modaraba and leasing companies will compete with the banks which have a host of the products to offer, have a bigger outreach and have cheaper resources of funds, whereas we have to borrow from the banks then in such kind of competition we will be nowhere. The governor said that he would not like to discourage the open competitive environment. He said that the banks have both the liquidity and demand so I will not stop them but, at the same time, I will encourage you to diversify to a wider range of products and find your own niche in the market. We did a lot of hard thinking and came to the conclusion that we should accept the fact that we are not banks and we donít need to compete with the banks so what we should do is to go to the areas where the banks are not active. For example, most of the leasing operations of the banks were in the main cities so we decided to increase our outreach and some of the leasing companies like ORIX, Crescent and Al-Zamin started opening branches in smaller towns. Secondly, we could not compete with the banks on the rates which they offer to their large and corporate clients; we chose the medium and small sectors to be our niche in the market. Thirdly, the process of approval and efficiency of the process is the one thing where we can beat the banks. So the first year was a bit difficult but after that the leasing and modaraba sector has not only faced the competition but achieved constant growth as well.


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PAGE: Now tell us a little bit about Al Zaminís Term Finance Certificates. How successful is the launch of TFCs?

BAC: Al-Zamin has the privilege of introducing this Sharia compliant product, which is a five-year Musharaka based profit and loss sharing term finance certificate. We developed the product, got it approved by the Shariah scholars and SECP and gave the product to Modaraba Association of Pakistan so that it could be used by all Modarabas. Al-Zamin got the shelf permission of one billion rupees and of which we have so far launched two tranches of 625 million. Both the tranches were heavily subscribed which proves three points (1) There is an appetite for the instruments based on Islamic principles. (2) If the instrument is launched and marketed by an organization which has got the image of being a meticulous and reputable organization then there are buyers. (3) The Islamic institutions such as modaraba instead of borrowing from financial institutions can actually generate their own resources directly from a variety of investors. The major issue with the modaraba sector has been the mobilization of funds but Al-Zamin has proved that by developing their own market instruments, modarabas can also generate their own resources successfully. Al Zaminís TFCs are rated A by JCR-VIS, are listed on Karachi Stock Exchange and all fully secured.

PAGE: Your TFCs are supported by Takkaful Fund, what is a Takkaful Fund?

BAC: While devising TFCís we concentrated to make it fully secured against the floating charge on the unencumbered assets and receivables of the Modaraba to cover the outstanding principal amount of the TFC investors. We also provided an additional incentive to the investors in the form of Takkaful reserve fund and that fund is for the benefit of the TFC holders. If there are any losses to be attributed to the TFC holders as it is a profit and loss sharing instrument, the first 47 million will be absorbed by Takkaful reserve fund so it is a kind of assurance to take care of any possible losses that may occur.

PAGE: How do you see the current situation where State Bank has raised the interest rates, how much does it affect the Islamic finance system?

BAC: I think you should look at it from different angles. One is the overall impact of the increase of the rates in the market to curb the inflation; itís a bitter pill that needed to be swallowed. To a certain extent it is going to affect all the financial institutions, banks, modarabas and leasing companies. The banksí lendings are linked with KIBOR so any increase in KIBOR is automatically reflected in the rates which they charge from the customers so there is no lapse of time between the increase of rates and the recovery of the interest rates. But the situation with the leasing companies is different as most of their contracts are on fixed rate specially the agreements with the small sector. Naturally, any increase in the interest rate reduces the net margin for the leasing sector and modaraba sector. The increase in KIBOR is going to hit the leasing as well as modaraba sector at least for the next six to seven months. By that time we will increase the rates on the new contracts so that impact will then be reduced.

As far as Islamic banking is concerned, I donít think there is any particular impact different from the remaining banking sector.

PAGE: Does your company also deal in high profile projects, how many projects have your financial guidance?

BAC: We are a multi purpose modaraba. Although our name is Al-Zamin Leasing Modaraba but actually we are a multi functional modaraba. Our core business is leasing but other than that we can do so many things. We can do diversification, we can participate in trading activity, we can participate in the venture capital investments and also in the capital markets. So there is a whole range of activities which is available to us. Al-Zamin mainly does leasing but it is also participating in the development of property projects. We have also set up a division which will run CNG stations. This is to provide diversification of businesses to Modaraba so that it doesnít solely rely on leasing as its main revenue generator.

PAGE: How do you see the presence of two Shariah boards and its conflict of interest?

BAC: Naturally Modaraba came into being in early 80ís, whereas Islamic banks have come into existence very recently. State Bankís Shariah Board is comparatively a recent phenomenon. State Bankís Shariah Board has approved agreement formats which are used by the Islamic banks. The modarabas use the agreements which are given to them by the SECPís Shariah Board. The basic principles of both types of contracts is the same, there is no difference as far as fundamental concepts are concerned. The contracts run by State Bank are much up to date, modarabas contracts were drafted in 1980ís so the research and development of the last twenty years is not reflected in them. State Bankís Islamic board has that benefit of being more current and up to date and that benefit is reflected in the flexibility of the contracts. What State Bank has given is a basic infrastructure of the contract to which you are permitted to add or subtract according to a particular nature of the transaction whereas the contracts by the modaraba sector canít be changed. The State Bank and SECP have already set up an operational committee to arrange coordination between Islamic banks and modarabas. There is no conflict as far as the spirit is concerned; itís only the expressions and the modalities which are needed to be reviewed. Their effort is to have a uniform policy to be followed by both the modarabas and Islamic banks.

PAGE: How do you see the role of modaraba and leasing in generating economic activity?

BAC: Leasing companies and modaraba traditionally and historically are the only medium to have provided financial credit to the small and medium sector for the last twenty years. Also, this sector has been a source of credit delivery for medium term needs of the industrial sector. Therefore, we have contributed significantly in the economic development. Now with the new developments in the modaraba sector we see our role as enlarged, particularly since we have the experience and capability to deal with the micro, small and medium sectors.

PAGE: There is much confusion regarding the Islamic products and sometimes it is thought that the Islamic banks are misleading an individual towards this. How do you see this situation?

BAC: You have to look at this situation from two points of which one is institution and the other is client. As far as the clients are concerned, there is a need for them to be educated about these concepts. Islamic finance is not something which should not have any resemblance whatsoever to some aspects of the conventional banking. The conventional banking on the other hand has also borrowed heavily from Islamic concepts. For example, unit trusts, equity participation and some aspects of investment banking have drawn heavily from the Islamic financial principles. If an Islamic bank is going to finance a product, of course, the basic principle will be profit and loss sharing and for that reason certain modalities were needed to be established but at the end of the day itís financing but based on the principles of participation. In conventional set-up the bank is the lender and the client is the borrower but in Islamic system they both are partners but here the bank like the conventional bank has to rely on the capabilities, honesty and the proficiency of the client so that the business can be run successfully. So in the Islamic banking there is a lot more to be seen about the suitability of the product, it needs a lot deeper monitoring but at the end of the day financing must prove to be profitable for both the parties.

PAGE: How do you see the growth prospects of both the modaraba and leasing sector?

BAC: At the moment there is a market of about 700 billion dollars in 38 to 39 countries that are operating on Islamic principles. A recent study has been done by the Islamic Development Bank and itís a 10 year master plan of the Islamic financing. It projects that Islamic financing could have an average growth rate of 10-15% for the next ten years which is very high rate. If you take those figures for the next five to ten years, then Islamic financing is going to become a very significant sector. As far as Pakistan is concerned, currently Islamic banks are only 2% of the total banking sector but it is projected that by 2010 we will have at least 15-20% share in the banking sector. I have no doubt that it will happen. In the past, the modarabas were the only Islamic institutions. Now with the help of Islamic banks there will be an Islamic financial system in the country in which both the modarabas and Islamic banks will be significant partners.

PAGE: Message to prospective customers?

BAC: I shall go back to your earlier question that some of the institutions are blamed for offering the conventional products in the garb of Islamic products. I shall humbly say that Islamic financial sector is in the early days of development and therefore most of such doubts are based on lack of understanding. The same situation also applies to some of the clients. They want to have the Islamic products that are based on the principles of participation, sharing of losses and profits but no depositor of Islamic bank in reality wants to lose his money by sharing the losses. He wants only profit and that too better than that of a conventional bank. This anomaly of the belief and expectation needs to be rectified. If you are really dedicated to have pure Halal banking then please accept the fact that while putting money in Islamic banks you can earn more than a conventional bank and you can earn less than a conventional bank or you can have losses too. I believe that the performance of Islamic banks and modarabas in the next few years and overall improvement in the understanding of Islamic finances by the clients will remove such doubts.


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