LEASING & MODARABAS IN 2007

Growing defaults?

By SHABBIR H. KAZMI
Jan 01 - 14, 2007

Resurgence is evident in Modaraba sector. Having reduced from 52 players to almost half, two new Modarabas have been floated in 2006 and four others are in the process of flotation. However, the process of merger and acquisition may further reduce the number but paid-up capital may continue to rise. The paradigm shift is evident as Modarabas are moving away from leasing business to other businesses from financing of CNG stations to mobile telephone towers to real estate development and rental business of power generation equipment. One Modaraba is endeavoring to become full-fledged Islamic commercial bank.

A review of more than two decades of history shows that Pakistan pioneered the concept of Modaraba among the Muslim countries. It may have experienced many ups and downs but has certainly emerged stronger and now is in a apposition to share its experience with other Muslim countries. At times regulators had shown some adversity towards the players but by and large the consultative process has helped in creating enabling environment. The largest incentive being exemption from paying corporate tax if it distributes 90% of profit among the certificate holders.

It is only a perception that people consider this an incentive. In fact this exemption is responsible for retarding the growth of Modaraba sector, simply because 10% of profit goes towards management fee and distribution of remaining 90% does not leave any thing in the kitty for expansion. Ironically, the players boast of distribution of very high percentage of dividend but they hardly reckon the fact that if this incentive is withdrawn they would not be able to maintain such payouts.

According to Bashir A. Chowdry, the mergers and acquisitions has reduced the number of players with the paid-up capital showing modest growth. As on June 30th 2006 the paid-up capital was around Rs 7 billion. Subsequently, the amount decreased by Rs 900 million due to completion of tenure of Fayzan Manufacturing Modaraba. Similarly, Allied Modaraba had been merged into Allied Bank. As against this two new Modarabas namely Treet Manufacturing Modaraba with Rs 142.8 million and Allied Rental Modaraba with Rs 300 million paid up capital have been floated. Once the remaining four Modarabas make their public offering the amount is bound to increase. One may recollect that in the past Modarabas were floated with smaller paid up capital by recent ones having larger capital. First National Bank Modaraba was floated with Rs 250 million paid-up capital and recently floated Allied Rental Modaraba has Rs 300 million paid up capital.

TOTAL SANCTIONS AND DISBURSEMENTS OF THE HOUSING FINANCE COMPANIES (HFCS)
IN BILLION

 

SANCTIONED

DISBURSEMENT

Leasing Companies

18.55

18.28

Modarbas

7.13

6.94

First 9-months of 2005-06

As regards profit and dividend payout Bashir Sahib was of the view that profit has improved from Rs 793 million in 2005 to Rs 871 million in 2006. As against this payout improved from Rs 584 million to Rs 745 million. Better payout was possible because income improved from Rs 3,939 million to Rs 5,025 million. Out of total 25 members 18 distributed dividend and two announced bonus shares. Issue of bonus shares is rather unusual in Modaraba sector as they often prefer to pay cash dividend.

Bashir Sahib as one of the propagators of Islamic financial system in Pakistan believes that Islamic commercial banks are not the competitors of Modarabas. He believes that the natural evolution is that Modarabas convert themselves into Islamic commercial banks. This is because one of the serious constraints hampering growth of Modarabas is their inability to mobilize deposits. As such they are not allowed to take deposits. They also face difficulty in borrowing from conventional banking system. On top of this the requirement of mandatory rating for borrowing puts them at a disadvantageous position.

One may say that some of the Modarabas are contended with the size of their local operations. Modarabas Association of Pakistan worked hard and succeeded in developing Shariah compliant term finance certificates (TFCs). However, the fact is that only one Modaraba, Al-Zamin Leasing Modaraba, could dare to issue TFCs. As against a permission to float TFCs for one billion rupees, Al-Zamin has mobilized Rs 625 million through two tranches and intends to issue the third tranche in early 2007.

MARKET CAPITALIZATION
(Million Rupees)

SECTOR

June

2005

2006

2002

2003

2004

2005

2006

October

November

December

January

Modarabas

4,655.4

7,184.0

8,903.0

6,942.4

6,568.8

6,752.9

7,240.3

7,712.2

7,937.4

Leasing Companies

3,692.9

7,094.7

6,661.3

7,424.8

8,472.3

7,665.2

8,479.4

8,569.7

8,794.3

Source: State Bank of Pakistan

As regards diversity and innovation it is necessary to talk about Allied rental Modaraba in some detail. Electrical breakdowns and load-shedding have become a norm in the country. Industrial and commercial entities often face the adversities. To facilitate the suffering entities the local distributors of Caterpillar brand of power generation equipment has established this business. According to Murtuza Ahmed Ali, CEO of the Company, "In a short span of time we have been able to cater to the needs of our clients not only in Pakistan but also in Afghanistan.

According to Muhammad Samiullah, Corporate Secretary, Modarabas Association of Pakistan, the cordial relationship between the players and the regulators has played a key role in the development of the sector. Revival of the Religious Board and grant of permission to six new entrants is a good omen. More mergers and acquisitions many reduce the number of players but the sector would certainly emerge stronger. The diversification into new businesses, particularly into real estate would help the country in overcoming shortage of residential units as well as boosting construction activities in the country.

The expectations are that growth of Islamic commercial banking and greater awareness about Islamic financial system would provide new impetus to the Modaraba sector. The shift of focus from large business houses to small and medium enterprises and micro businesses is bound to lead to quantum leap.