Chief Executive, Al-Zamin Leasing Modaraba

Nov 12 - 18, 2007

Al-Zamin Leasing Modaraba commenced its operation in August 1992 with a paid-up capital of Rs.100 million. It was listed on the Karachi, Lahore and Islamabad Stock Exchanges in July 1992 through public offer which was seven times oversubscribed. Since inception, Al-Zamin has managed to establish itself as one of the most successful and growth oriented financial institution of the country.

The current status of Al-Zamin in the context of the Modaraba and Leasing sectors is highlighted by the fact that its image in the market is that of the highly professional and progressive organization distinguished on the basis of its quality and stability. As a part of its growth strategy, Al-Zamin successfully completed two mergers by way of amalgamation of the operations, assets and liabilities of Ghandhara Leasing Company Limited and First Professional Modaraba into Al-Zamin Leasing Modaraba. Al-Zamin's equity stands at Rs.401 million and asset base at Rs.3,647 million as per audited accounts of 30th September 2007. The Chief Executive Mr. Basheer Ahmed Chowdry of Al-Zamin Leasing Modaraba replied to following questions that I asked him during an interview.

PAGE: How do you think that the Non Banking Finance Companies (NBFCs) are helping the economy to confront the challenges unleashed by the globalization of trade?

BAC: NBFC Sector generally provides the services and the facilities which are not undertaken by the commercial bank as their primary lines of business. Investment banking, leasing, project financing and portfolio managements are some of the specialization of the NBFC sector. Further, the recent growth of the mutual fund industry has enlarged the size, potential and contribution of the NBFC sector in the overall economy of the country. Globalization of trade requires substantial value adding and competitiveness for which project financing, corporate lending and leasing facilities are being expanded by NBFCs.

PAGE: What is the impact of leasing on the medium sized industry and how it is contributing towards its growth?

BAC: Traditionally, the leasing and Modaraba sector of the country have been focusing on the medium to small sized companies. In fact, the NBFC sector was the only financial intermediary for the industry when the commercial banks were not concentrating on the medium to long term lending, project financing and venture capital. With the aggressive entry of commercial banks in the leasing business over the last four years, leasing companies and Modarabas have further concentrated their attention on the medium and small sized clients. The growth of the medium sized industry depends directly on the capability and availability of the NBFC sector to meet their requirements.

PAGE: How do you see the role of leasing companies towards consumer finance, how effective it is when also the banks are giving a cut throat competition?

BAC: Leasing companies have not indulged in the consumer finance in any significant manner except leasing of motor vehicles and motorcycles. One or two companies went into the hire purchase of the domestic equipment and computers but discontinued the activity in a very short time due to the recovery problems experienced by them. The commercial banks have undertaken significant volumes of consumer finance but have started retracting due to the large percentage of overdues and defaults. After registering an extraordinary increase of 70.5 per cent in July-March FY05, the growth in consumer loans has been decelerating, dropping to 30.6% in July-March FY06 and further to 11.9% in July-March 2007. The deceleration in auto loans, in particular, has the largest share of 8.7 percentage points in the total 19.7 percentage points. The slow down in July-March 07 was mainly due to the increase in interest rates and more restrained lending by banks. Banks also became more cautious as in the Jan-Mar 07 quarter, the non-performing loans (NPLs) of the banking system increased by Rs.8.7 billion to Rs.184 billion. Agriculture and the consumer sectors were the main contributors. Consumer finance portfolio contributed around one-third of the total addition in NPLs. Thus the infection ratio of this sector increased from 2.2 to 3.2% in 2006. This deterioration was more visible in unsecured consumer products i.e. personal loans and credit cards. An important aspect which discouraged the leasing companies in this regard is that the leased asset like the domestic equipment or computers can either be repossessed easily or resold at the price which would salvage the amount. In fact, consumer finance like leasing is a specialized field which requires in-depth risk evaluation, constant monitoring and intense recovery efforts. Personally, I do not expect any substantial growth in the consumer finance activity by the banks and certainly no growth as far as the NBFC sector is concerned.

PAGE: What are the appropriate hedging instruments your company is using to cover the interest rate risk characterized by markup volatility in this de-regulated environment?

BAC: Being an institution operating strictly within the Shariah compliant discipline, we have to be extremely careful in addressing our liquidity and mark up exposures. Our major line of business is leasing where most of the time our IRRs are fixed for the entire lease period. Over the last few years, leasing companies and Modarabas have been trying to operate on a fluctuating IRR for only to the corporate sector middle to large ticket leases. Smaller lessors are not in a position to fully understand and accept the variable lease payments and, therefore, insist on fixed rentals. Consequently, we have to monitor and balance our cost of funds and net yields very carefully. Al-Zamin has been endevouring to raise funding against its own COMs and Term Finance Certificates which are based on profit and loss sharing pattern and automatically provide hedging against any adverse reduction in the net yields. This, inter-alia, proves that the Islamic financial system is equipped with inbuilt and attractive measures for projecting costs and yields which need to be understood and appreciated.

PAGE: What challenges the leasing sector faces in accessing the money market in the same manner the banking sector does?

BAC: Being a much smaller sector than the banking, the money market operations of the leasing sector are quite limited. Nevertheless, leasing companies with good credit rating and satisfactory track record operate freely and conveniently in the money market both for borrowing and lending on short term basis. Naturally, they have to pay slightly more than the inter-bank rates which again vary from company to company. There is absolutely no problem for well-managed leasing companies to raise funds from the money market for their short term requirements whereas the long term requirements are met by obtaining term finances from the commercial banks and DFIs or issuing term finance certificates.

PAGE: What is the response of the general public towards the products introduced by the leasing companies in the market? How big is this response in %?

BAC: The main products of the leasing companies are the leasing of equipment and vehicles. Different companies have developed their marketing products and specific schemes which they market through their offices and sales forces, whereas commercial banks spent substantial amount of their budget on advertising their leasing products in the print and electronic media. Even then, the leasing companies are generally regarded as the first port of call for the leasing requirements of the individuals and small to medium sized companies. There is a need for the leasing sector to innovate and introduce more interesting products in the leasing field.

PAGE: How best we can enhance this side of the business and how hopeful your firm is in venturing into the same mode of investments?

BAC: The business of the leasing sector has been growing at the steady rate of around 15% per annum over the last few years, in spite of aggressive competition from the commercial banks. The main reason is that the leasing companies bring the facilities to the door-step of the users and are capable of responding to the needs of the clients very quickly. Over the last few years some of the leasing companies have improved their outreach and established their offices in the smaller towns as well. Leasing to the micro and small sector has also been undertaken and promoted quite actively over the last few years. Even then, the leasing sector has touched only a fraction of the total potential which needs to be explored. A large number of small businesses, vendors, retailers, artisans and entrepreneurs are still looking for the opportunities to supplement their skills and resources. Also, the agriculture sector has not been even touched upon by the leasing sector, except one or two companies. With a careful strategy, the leasing companies can continue spreading their risk portfolio and income streams in the years to come.

PAGE: What are the obstacles that you think are really impeding the growth prospects of this sector?

BAC: The main obstacle in the growth of leasing sector is the business handling capacity of the leasing company which is linked with their equity base and funding resources. The total leasing sector of the country is around Rs.125 billion which is equal to assets of a medium sized commercial bank. I sincerely believe that recent trends of the financial sector for mergers and acquisitions are changing the market scenario to the situation where any financial institution with the limited equity base and reliance on two or three products would find it difficult to survive and grow. There is a dire need for the leasing companies to work towards voluntary mergers so that their capital base is enhanced for better resource mobilization and risk taking. Instead of 21 leasing companies and 24 Modarabas, it would be better to have a maximum number of 10 to 15 leasing companies and Modarabas with each of them having a capital base of say Rs.One billion and above. Those who understand the imperative of the current trends are already moving in the direction. Al-Zamin Group has already completed acquisitions and mergers and plans to do more to achieve this objective.

PAGE: Lastly any other thing that would like to be mentioned?

BAC: The financial sector of the country is going through an extensive change. The NBFC sector has also been responding to the market trends and demands. I believe that the process could be expedited particularly when we are very fortunate to have a progressive, supportive and futuristic regulatory environment which has been encouraging both, health and growth of the NBFC sector. The market operators being the most important stakeholders need to play their due role more actively.