FIRST HABIB MODARABA (FHM)
LEADING THE MODARABA BUSINESS

AN INTERVIEW WITH THE CEO FHM, MOHAMMAD SHOAIB

SADAF AURANGZAIB
Feb 04 - 10, 2008

First Habib Modaraba is a perpetual, multi-purpose Modaraba managed by Habib Modaraba Management (Private) Limited. It is listed on all the stock exchanges of Pakistan. The Modaraba is engaged in the business of leasing, Musharika, Murahaba financing and other related business like equity investment and certificate of Musharika.

The Habib Group with vast experience in the industrial, financial and commercial sectors floated FHM in 1985. The basic aim of the First Habib Modaraba (FHM) was to make contribution towards the transformation of mercantile as well as financial system and dealing in line with principles elaborated in Sharia

FHM commenced its business operation in March, 1985 with an initial capital of Rs.25.0 million (US$ 400,000) only. Continuing with solid, dynamic and prudent approach now the FHM has a total equity base of around Rs.3.0 billion (US$ 40,000,000) and an assets size of approximately of Rs.5.0 billion (US$ 83,000,000).

It can be observed that FHM is much stronger today in terms of the healthy size of equity, strong balance sheet footing and sound profitability with stronger management talent and vibrant human resource.

We took an interview of the CEO and Managing Director of FHM, Mohammad Shoaib, who in his interview with PAGE brought about the major issues concerning the Modaraba sector of Pakistan.

Mr. Shoaib told that the FHM is the oldest Modaraba in the Modaraba sector. FHM is having the highest equity base which is about three billion rupees. Besides equity base the Modaraba has the highest asset base and the profitability factor is also the highest in the Modaraba sector. This position has been maintained by FHM since last three years. It is the leading Modaraba in the Modaraba sector.

The main area of working is "Ijarah", i.e. leasing. FHM leasing operations include:

* Manufacturing concerns
* Banks and other service organizations
* Trading concerns

As a number of players are coming in this business, so FHM is diversifying its asset portfolio. It is also involved in equity market operation, in Morahaba and in other mode of Islamic finance. Recently, FHM has sent ten new Islamic products to the Registrar of the SECP. They are in process and FHM is hopeful that within a month or two, it gets the approval from the SECP, from the religious board and this will benefit the whole of Modaraba sector.

While defining the trading activity with the Equity Market, he said that FHM has gained good gains in the equity market and that entirely depends on how you play in the capital market. FHM has maintained its position for the last three years and with a lucrative portfolio, it has almost 1.4 billion rupee underlying gains in the balance sheet of the company.

About the competition in the Modaraba sector, he said that there is no tough competition between different Modarabas which are working in the market these days as all Modarabas are not involved in a single activity, they have diverse activities, few Modarabas are doing leasing as their prime activity, few are working with Equity Market, few are doing trading, few are doing investment banking and there is no such competition between different Modarabas. The way it is there between different Islamic banks as they are offering similar kind of products and their mode of financing is much more similar.

Modarbas' REIT: He also brought about that the Modarabas are also targeting the real-estate market and have already submitted the papers to the regulators and this whole thing is linked with REIT's (Real Estate Investment Trust) regulations. These rules are in final stages with the regulators. Once these rules will be finalized by SECP, there would be Islamic REIT's regulations available and Modaraba can play a very vital role in the real estate sector. He said that the main focus is not on housing finance as it needs long term finance available that is for about 15 to 20 years and banks can play more important part in that regard. Modarabas do not have the long term finance available with them. Modarabas however will look into the other activities of the Real Estate Sector. He said that people are not much happy with the "theke dari" nizam and when corporate entities will come forward then they will get more response from the public and a big market will come into play. With the availability of the Islamic REIT, a few restrictions would also be enforced so to give more room to the players and investors who want to build premises in accordance with the Shariah Compliant activities and not just interested in building hotels, bars, and casinos.

On my enquire as to why the Modarabas are working as sister organization, where most of the Islamic banks are offering the same kind of services as the Modaraba company, why can't the Modaraba companies merge themselves with the Islamic Banks, he said that the while operating a Modaraba company, the capital requirement is much less and a small investor can easily invest in this activity while the banks capital requirement to open up a Modaraba is much higher i.e. approx 6 billion rupees. Modaraba companies are much quick in giving response and services to its clients and they are working as small boutiques which can also support Islamic Finance. Further more, Modarabas as a non-banking entity can work in may areas which a bank can't do due to the restrictions by the Central Bank like trading activity, real estate activity etc.

He also iterated that in future there may happen few mergers in the Modaraba sector but there is a dichotomy involved as banks will only purchase a well performing Modaraba where as a well performing Modaraba might not be willing to sell itself but one can't ignore that certain restriction like raising capital limit for Modaraba companies by the State Bank can make it easier for banks to purchase the Modaraba companies.

He said that by only working towards the awareness of Islamic finance would make us able to generate a good market for it. Like in Malaysia he said that for a 60% Muslim population, they have 15% Islamic Banks share in the economy and Malaysian Banking sector is ten times bigger than Pakistani Banking Sector spread. In Pakistan, for a 99% Muslim population, we just have 3% share by the Islamic Finance, this demand needs to be created, and nonetheless we have a big market available in Pakistan for Islamic finance.

The biggest challenge that Islamic finance is facing is the Human Resource. We don't have Islamic Finance as a subject in our commerce colleges and university courses. Islamic Banking hence will take time for its widespread and will take time to generate human resource for its various purposes.

The future of Modaraba sector is very promising and FHM will work towards a better fitted entity in the Modaraba sector. The management of FHM is confident that they will keep embarking their ambitious target with high level of customer satisfaction. FHM will continue to keep its growth momentum with dedication and deep sense of commitment while maintaining financial discipline, adhering to professional and moral codes

PROFILE HIGHLIGHTS

1. CONTINUOS PAYMENT OF DIVIDENDS

Paying a good and constant return to Certificate Holders is the prime business objective of FHM.

As per record, the FHM paid average return of 16% per annum to Certificate Holders since business operations.

2. INFECTION FREE LEASE PORTFOLIO

Non Performing Loan (NPL) is a major threat to Financial Sector world over. It is worth mentioning that in business operations of more than two decades not a single advances portfolio has become bad or doubtful.

3. CREDIT RATING

With continuing sound financial position, the FHM is also maintaining "A" category credit rating since almost last 10 years. M/s Pakistan Credit Rating Agency Ltd. (PACRA) has awarded rating scale of "A1+" for short term and "AA" for long term. "A1+" is the highest level in PACRA's rating scale for short term rating.

PACRA is a very reputable rating agency of Pakistan. It was established in 1994 as a joint venture among IBCA Limited (the international credit rating agency), International Finance Corporation (IFC) and the Lahore Stock Exchange Pakistan. As first credit rating agency in Pakistan, PACRA has widely acknowledged for its professionalism and integrity.

MAIN POINTS OF PACRA'S ASSESSMENT ABOUT FHM:-

* A very low expectation of credit risk emanating from very strong capacity for timely payment of financial commitments.

* Strong capital structure and sustained outstanding asset quality.

* Continued ability of maintaining its performance and effective risk management policy.

* Has strong equity and asset base which currently is the highest in the Modaraba Sector.

* Enjoying long term rating in "A" category since last several years.

4. BEST PERFORMING MODARABA AWARD BY MODARABA ASSOCIATION OF PAKISTAN

FHM has also been securing the "Best performing Leasing Modaraba" award from Modaraba Association of Pakistan. Including the year 2007, the FHM so far has received 7 awards in different years within 10 years.

The best performing award was started by association in the year 1997, for encouragement and motivation amongst the members of association.

So far FHM has clinched following awards in appreciation of best performances.

5. CORPORATE EXCELLENCE CERTIFICATE AWARD BY MANAGEMENT ASSOCIATION OF PAKISTAN

During the year 2006, FHM has secured the "Corporate Excellence Certificate Award" from Management Association of Pakistan (MAP). The MAP is a forum of reputable entrepreneurs and professionals.

It was a great achievement by the FHM as in the entire Non-Banking Financial sector (NBFC) only two companies qualified for MAP award and FHM was one of them.

While evaluation of the companies main focus of MAP is on:

Corporate Governance
Operational Management
Leadership
Customer & Market Focus
Social Responsibility
Human Resource
Strategic Responsibility
Information Management
Strategic Planning & Communication

6. HIGHEST EQUITY BASE AND ASSETS SIZE

Through judicious administration of funds and sound investment policies, the FHM has assembled a very handsome asset base and strong equity size. According to audited accounts for the year ended June, 2007, the total asset base of FHM was approximately Rs.5.0 billion (US$ 83 Million) and Equity size was Rs.3.0 billion (US$ 40 Million) which are the highest in the entire Modaraba sector for the year 2007.

This is also a great achievement that amongst the almost 28 peer group of Modaraba companies which most of them backed by very strong financials banks in Pakistan; the FHM is leading in profitability, assets and equity size.

7. MEMBERSHIP WITH ISLAMIC FINANCIAL SERVICES BOARD (IFSB)

Recently FHM has become the observer member of Islamic Financial Services Board (IFSB). At present FHM the only member of IFSB in entire Modaraba and Non-Banking Financial Companies (NBFC) sector representing in Pakistan.

The IFSB is an international standard-setting organization that promotes and enhances the soundness and stability of ht Islamic Financial services industry by issuing global prudential standards and guiding principles for the industry.