RESURGENCE OF MODARABA SECTOR

An exclusive interview with Basheer A. Chowdry, Chairman Modaraba Association of Pakistan

SHABBIR H. KAZMI
Mar 12 - 18, 2007

PAGE: Modaraba sector has witnessed some shrinkage in the year 2006, what could be the possible rationalization?

BASHEER A. CHOWDRY: Allow me to briefly describe the performance of Modaraba sector and let the critics give the judgment. During the year ended 30th June, 2006, the sector has registered considerable overall growth. Out of 25 Modarabas, 18 declared cash dividend ranging from 5% to 52% and two announced issue of bonus shares. First Imrooz Modaraba declared 52% dividend compared to 47% paid last year. Fayzan Manufacturing Modaraba declared 29.4% dividend compared to 9.5% last year. First Habib Modaraba declared 20% dividend in spite of doubling of paid-up capital during last year. The payout stood at Rs 745 million as against Rs 584 million of the previous year depicting a growth of 27.56%. The total assets of the sector increased to Rs 23,736 million from Rs 21,131 million showing a growth of 12.32%. The income increased considerably from Rs 3,939 million to Rs 5,025 million showing an increase of 27.6%. The sector has, in fact, expanded during the year and the trend will continue.

PAGE: How is the addition of six new Modarabas going to change complexion of the sector?

BAC: The year 2006 has witnessed resurgence of the Modaraba sector. The Religious Board approved setting up of six new Modarabas, namely 1) First Treet Manufacturing Modaraba, 2) Allied Rental Modaraba, 3) Modaraba Al-Makatab, 4) Modaraba Al-Tameer, 5) Modaraba Al-souq and 6) Total Modaraba. Out of these, two Modarabas - First Treet Manufacturing Modaraba and Allied Rental Modaraba - have been floated with a paid-up capital of Rs 142.8 million and Rs 300 million, respectively. It is expected that Modaraba Al-Makatab will offer its certificates for public subscription shortly. The diversity of the business interest of the new entries reflects strong business potential of Modaraba.

PAGE: Has the introduction of Islamic banking affected Modarabas negatively?

BAC: Development of Islamic banking sector during the last year is a very significant phenomenon, enlarging the scope and potential of Shariah-compliant financial activities. Modarabas are expected to directly benefit from the product development, public awareness of Islamic finances and emergence of Islamic money market being spearheaded by the Islamic banks in the country. In particular, difficulties faced by Modarabas in resource mobilization will be removed as Islamic banks will find Modarabas to be ideal Shariah-compliant counter-parties, for their banking assets and investments. The association is playing an active role in promoting collaboration between Modarabas and Islamic banks. It is also assisting the Securities and Exchange Commission of Pakistan and the State Bank for achieving maximum integration of their operations.

STRUCTURE OF ISLAMIC BANKING PRODUCTS:

PRODUCT CATEGORY

PRODUCT CONCEPT

BUSINESS SEGMENT

Deposits

Mudaraba
Musharaka

Retail / Corporate /
Institutional Depositors

Consumer Financing

Car Ijarah
Personal Murabaha
Home Musharaka (diminishing)

Individuals

Business Financing
& Investment Banking

Mudaraba
Musharaka
Murabaha
Ijarah
Istisna
Salam

Corporates
SMEs
Financial Institutions

PAGE: What are the major challenges being faced by the players?

BAC: In order to ensure accelerated growth Modarabas will have to address a number of challenges. Issues like capital enhancement, diversification of business modes, outreach, innovation of products and services and enhancement of professional skills have to be addressed expeditiously with courage. Without anticipating and meeting the market dynamics, Modarabas may not be able to capture the opportunities offered by the evolving Islamic financial system and economic growth of the country. In fact, the sector has to show greater exuberance to prove its presence for exploiting its real potential.

PAGE: Are the regulators fully cognizant of the irritants and what has been their response?

BAC: In order to overcome the prevailing problems both the players and the regulators have to join hands. Scholars have to come up with innovative but Shariah-compliant models. The basic Modaraba model has to be revisited to come up with a newer model. It is encouraging that the SECP is keen in coming up with appropriate regulatory environment to facilitate growth of the Modarabas. In fact, detailed deliberations are taking place between the association and the Registrar Modarabas to bring out radical changes in the entire modalities and structure of the sector so that, on the one hand, it can maximize the dynamism of the Islamic financial system and, on the other, contribute effectively in the economic development of the country. Modaraba sector is also capable of exporting its knowledge and expertise to other Islamic countries and, in return, benefit from the valuable research undertaken by the countries like Malaysia and Bahrain to update its own operations. The SECP and the association are also working closely with State Bank to ensure maximum collaboration of Islamic banks and the Modarabas. You would soon witness the impact of all these efforts.

In order to enhance awareness among people about the Modaraba sector, the association releases Year Book annually. We have recently launched the 9th Year Book-2006 covering the activities of the Modaraba sector during the year ended 30th June, 2006. Over the period, the Year Book has become a comprehensive and useful source of information on the Modaraba sector for all the stakeholders, research analysts and other interested entities. It also provides an overview of the growth of the sector and enlists major events held by the association during the year.

I am delighted to inform that Dr. Muhammad Zubair Usmani has been engaged as Shariah Advisor of Modaraba Association of Pakistan. Dr. Zubair Usmani is a renowned Shariah scholar. He is on the advisory boards of a number of institutions offering Shariah-compliant products.