Modaraba is an Arabic word which means a business (project) in which capital is provided by one party (a company or individual), while the effort and skill are contributed by the other party (beneficiary, entrepreneur or borrower). Modaraba (participation or trust financing) is a specialist investment made by a financial expert in which the bank and the customer share profits, whereas Ijarah (leasing) is a leasing agreement whereby the bank buys an item for a customer and then leases it back to a specific period - commonly used in the leasing of machinery, equipment, buildings and other capital assets.

SADAF AURANGZAIB, Senior Correspondent
Aug 07 - 13, 2006

Siddque Dawood Group has a long history of Islamic financing; currently they are operating two Modarabas that are BRRI Modaraba and Guardian Modaraba.

Mr. Siddique Dawood, an eminent member of Dawood family, in collaboration with National Development Finance Corporation Limited, formed B.R.R. Investments (Private) Limited (BRRI) - formerly B.R.R. Investment Services (Private) Limited - in April, 1983, to promote investments in Pakistan through leasing. The company was registered on August 7, 1984 as a Modaraba Management Company under the Modaraba Companies and Modaraba (Floatation and Control) Ordinance, 1980. The company floated two Modarabas in the name and style of B.R.R. Capital Modaraba and B.R.R. Second Modaraba in 1985 and 1990 with a paid-up fund of Rs. 20 million and Rs. 100 million, respectively. The first lease was executed on 26th March, 1984. Besides, in August 1993, Equity International Modaraba (EIM) was floated with a paid-up capital of Rs.150 million by Equity International (Pvt.) Ltd. (EIL). It was sponsored by BRRI, International Finance Corporation (IFC), Robert Fleming and Company (Flemings), and Saudi Pak Industrial & Agricultural Investment Company (Pvt.) Ltd. (SAPICO). International Finance Corporation (IFC) joined BRRI as equity partner in 1999.

The first merger in the history of Modarabas took place when B.R.R. Second Modaraba and Equity International Modaraba merged with B.R.R. Capital Modaraba on March 1, 1998. The name of B.R.R. Capital Modaraba was subsequently changed to B.R.R. International Modaraba on April 14, 1998. As a result of the merger the paid-up fund of B.R.R. International Modaraba rose to Rs.481.93 million making it the largest Modaraba in Pakistan in terms of equity. The Modaraba offers lease financing to corporate entities as well as creditworthy individuals. The Modaraba also provides Musharaka, Morabaha and Equity Investments to cater to the requirements of trade & industry.

Providence Modaraba Limited (PML), which was established in 1988, is the Management Company of Guardian Modaraba (GM). It was acquired by Dawood Leasing Company Limited (DLC) in March 3, 1999. GM was floated in June 1991 as First Providence Modaraba (FPM) with the intent to function as a multipurpose perpetual Modaraba. FPM was acquired by DLC on December 8, 2000, which then merged FPM with Guardian Leasing Modaraba in 2001. Since then, GM has made profits every year. Its performance has been successful. It is due to the hard work and dedication of the team and innovative thinking of its management team.

We met the Chief Executive of Guardian Modaraba, Ayaz Dawood, who is also the Chairman of Modaraba Association of Pakistan.

PAGE: Tell us a little about the BRRI Modaraba?

AYAZ DAWOOD: BRRI Modaraba is actually a merger of three Modarabas i.e. BRR Capital Modaraba, BRR Second Modaraba and Equity International Modaraba. This is the first merger ever happened in the Modaraba sector. We acquired Guardian Modaraba from Shahnawaz Group and then floated it as First Providence Modaraba which was later merged with Guardian Leasing Modaraba into great Guardian Modaraba.

PAGE: Do the Guardian Modaraba and BRR Modaraba work separately or do they work as one?

AD: These are two separate Modarabas. We are intending but not yet approved by the various boards to merge these two into the great Guardian Modaraba.

PAGE: How did BRRI come into being?

AD: BRR is actually the abbreviation for Bismillah-hir-Rehman-nir-Rahim. It was a first perpetual Modaraba created in Pakistan in 1983. It has a history of twenty plus years. For the last ten years it has paid cash dividend of at least 10% every year. It is rated A by JCR-VIS credit rating Company. It started the concept of profitable investment and leasing and was the first entity into lease finance services.

PAGE: What are the main areas where you provide lease financing?

AD: Mainly SMEs as we can't compete with the commercial banks for the big corporate businesses so we have to look for the smaller clients.

PAGE: Tell us how did you come into this business; where have you taken your education from?

AD: I did my MBA from Columbia University but I didn't create the BRRI Modaraba, it was the idea of my father and he came up with this idea in early 80's to open a leasing company for lease finance. BRRI Modaraba was actually set up in partnership with NDFC, at the same time NDFC also supported another leasing organization that was NDLC.

PAGE: BRRI Modaraba is ranked quite strong in relation to its strong liquidity position along with controlled level of borrowings and strong capitalization. What makes this all possible?

AD: As we are a growing BRR, its leveraging is growing; its asset base is increasing. The issue, which hinders the growth of this sector, is because we have to distribute 90% of the profit in cash which keeps our reserves quite low and also holds back the equity to grow. Originally Modaraba sector use to give bonuses on the profit and it helps the sector to grow, we have been asking the government to allow us to start giving bonuses.

Guardian on the other hand is the fastest growing Modaraba. When we acquired it in 1999, its equity was approximately 70 million rupees, now its equity is about 600 million rupees. When we acquired it, it hadn't paid the dividend for the last five years; we give the dividend every year and have also raised the dividend ratio.

PAGE: It's been stated that the market share of Islamic banks have now reached over 2% of the total banking? How successful do you think is Islamic banking from conventional banking and how Modarabas are taking help from these banks?

AD: I believe that Islamic financing will grow faster. But there is a huge problem at the moment that is the conflict of two Shariah boards where one is introduced by the State Bank that regulates the Islamic banks and the other that regulates the Modarabas come under SECP. As a Modaraba you can only use an agreement approved by the Shariah board of SECP which could be termed as non-Islamic by the State Bank's Shariah Board. Right now Islamic banks can't lend to the Modaraba because the two Shariah boards don't agree. This is hurting the Modaraba sector otherwise Modaraba sector will lead differently if it gets the lending from Islamic banks.

PAGE: What is the quality of Modaraba that gives it an edge over the conventional banking?

AD: There are lots of people who don't believe in Riba (interest), those people are not banking and they keep money on cash or in gold. If that money comes into the banking sector it will be very useful for the banks as well as for the country. A person who is having no return on his savings is actually losing out. Islamic banks provide a kind of platform for these kinds of people and hence it's very useful in that sense.

PAGE: Talking about the project financing, how many projects your company is dealing with?

AD: As a leasing company or Modaraba we should not do project financing because project financing is at very high risk so we deal with the small spreads as we can't take the big risk. Most of the leasing companies now do not do project financing; they are more into BMR & SME's.

PAGE: How many Shariah-compliant products that you offer?

AD: Most popular is Ijarah (Lease Finance), Morabaha & Musharaka.

PAGE: What are the challenges that Islamic financing is facing by its counter part conventional financing?

AD: The biggest problem that the Islamic finance or banks face is the lack of liquidity products, today there are not enough liquidity products in Sukuks, which is the main problem.

PAGE: It is also a notion that sometimes the conventional finance products are marketed in the garb of Islamic finance products. How strong do you feel about the situation and what is the remedy for that?

AD: First of all there should be the Shariah Board of the State Bank and SECP so that there is a level playing field both for the Modarabas and the Islamic banks. Second thing is that as you know that the Faysal Bank used to be called an Islamic Bank but it is declared as non-Islamic by the State Bank. There should be a regulatory body and there should be rules for the Islamic mutual funds, Islamic insurance, etc. so that the regulator could see which organization is following the rules and which is not.

PAGE: Talking about the recent increase in the interest rates by State Bank, what impact do you think such kind of fluctuation has on the growth of Modaraba sector?

AD: For non-bank finance, the greater the interest rate the more is the loss. It affects both the recovery of fund as well as the profit margin. As most of our leases are fixed rate hence we tend to bear the losses through such kind of increase.

PAGE: In which area do you think that the demand for credit is at its most?

AD: Property is the main area, as property prices have gone up and people want to build their own property. Also it's a good asset to borrow on lease.

PAGE: How strong do you think Modaraba is playing its role in generating the economic activity?

AD: Modaraba is very strong in the sense that they actually work for small and medium sized businesses. This sector relatively deals with the small companies, as they are our niches. We are not giving lease finance to the big companies; we are giving it to smaller and medium ones, as they are the ones which actually trigger the economic growth.

PAGE: What you want to say to the prospective customers who want to invest in this sector?

AD: I would say two things that if you are an investor in the modaraba sector then it is a most under valued sector because we are the only sector that give cash dividend every year and we are all trading at very low.

Secondly there are more than enough customers. Although the modaraba sector is growing, all the non banks are disappearing because of mergers and acquisitions; the last one to disappear was Allied Bank modaraba merger to Allied Bank. Most successful modarabas are the ones that are banks modaraba. Habib Bank has one, National Bank has one and Standard Chartered Bank has one so they have an easiest source of funds. It's much easier for them to get money because of the bank's backing which if they have then there is no problem. Otherwise it's very difficult for a non-bank modaraba to raise money of its own.