Mar 23 - 29, 2009

When the government decided to liberalize, deregulate and privatize one the finest initiative was creation of specific purpose institutions within the financial sector. This included creation of modarabas, leasing companies, investment banks and asset management companies. However, with the passage of time commercial banks, having access to low cost funds opened their wings. They became the sponsors of modarabas, leasing companies, investment banks and asset management companies. At times banks even did not bother to create separate entities to undertake activities i.e. leasing and lately have either incorporated insurance companies or acquired controlling shares. This paradigm shift has been given the name 'universal banking'.

The recent global financial crisis is also attributed to universal banking. Some of the critics now believe that following the universal banking phenomenon has caused more damage to these institutions. Even experts in Pakistan have started demanding segregation of activities under separate umbrella for ensuring stringent but efficient regulatory infrastructure. They say, "One of the reasons for a strong commercial banking sector is the role being played by the central bank. While, Pakistan has also faced two crises i.e. cooperatives and investment companies, the commercial banks in Pakistan have remained immune to various crises faced elsewhere in the world. This includes property related lending fiasco in Fareast, the worst being in Japan and subprime loan bubble recently burst in the US.

A review of the Non Banking Financial Companies (NBFCs) operating in Pakistan shows that most have these have become virtually insolvent because of carrying huge accumulated losses, while others have been merged with rather efficient entities. One such category is the leasing companies.

According to Teizoon Kisat, Chairman, Leasing Association of Pakistan, "The first leasing company was incorporated in Pakistan in 1984 and by the end of year 2000 the number had gone up to 32. However, there are 14 leasing companies at present. A number of leasing companies are under severe financial crunch. It may be true that lately business environment became unfavorable but some of the issues impairing profitability of the leasing companies could be resolved amicably".

"Leasing companies emerged to be the worst victim of policy of universal banking being followed by the central bank. In order to survive, most of the companies opted to finance weaker customers and invested in assets outside their core business. In October 2008, commercial banks stopped lending, particularly to NBFCs. This forced the leasing companies to freeze fresh disbursement and all internal cash generation was diverted to meeting debt servicing obligations. The cost of borrowing rose sharply and some companies had to resort to short-term borrowings at exorbitantly high cost. As a result during July-December 2008 period leasing companies reported aggregate losses of Rs 463 million, which was in sharp contrast to profit of Rs 695 million posted for the year ended June 30, 2008, said Teizoon.

Modaraba companies also come under NBFCs category. It is story of 'glass half filled half empty'. If one looks as the oldest category of entities offering Riba-free investment/income opportunities the performance can be termed lackluster more so with the recent proliferation of institutions offering Shariah compliant products and services. In past the sector has remained 'over regulated' and suffered because of absence of Religious Board. This did not allow flotation of new Modarabas for considerably long time. On top of this, restriction on borrowing from conventional financial institutions and mandatory credit rating for borrowing restricted resource mobilization opportunities. This is evident from sharp decline in number of operating Modarabas to 24 from as high as 52 at one time.

Despite many challenges and hurdles Muhammad Shoaib Ibrahim, Chairman, Modaraba Association of Pakistan seems reasonable satisfied with the performance of sector. He says' "Globally the Islamic financial services industry has witnessed a phenomenal growth. In Pakistan, the players have created a place for themselves as financial intermediaries, a niche market. The business model enjoys a unique position in the global Islamic financial services industry."

Unlike others, Shoaib has all the praises for the two apex regulators i.e. State Bank of Pakistan (SBP) and Securities and Exchange Commission of Pakistan (SECP). He said, "The role of SBP has been acknowledged globally with the declaration of SBP the 2nd best central bank in promoting Islamic banking. In developing non-banking Islamic financial services, the SECP has played a key role by providing an enabling environment and level playing field. In year 2008, the SECP through the office of Registrar Modaraba has approved several new Shariah compliant products, besides, upgrading three model agreements. This move was made after a lapse of almost 20 years."

One of the strengths of Modarabas companies has been prudent credit appraisal. This is evident from distribution of dividend. Public interest in this Shariah compliant business is evident from the numbers available for the year ended June 30, 2008. Total assets of the Modaraba sector increased to more than Rs 29 billion from Rs 26 billion registering 13% growth and profitability of the sector increased by 27% to Rs 962 million as compared to previous year. Out of total 24 Modarabas, 18 paid dividend ranging from 2.5% to 40% and two Modarabas issued bonus certificates.


Over the years, modarabas and leasing companies have emerged as one of the major source of medium term financing. Though, commercial banks are still involved in leasing and or medium term financing, it is being demanded that banks should focus on less than one year lending because of the nature of deposits. In Pakistan bulk of the deposits fall under less than one-year tenure therefore, extending funds for above one-year period could prove disastrous. The commercial banks should also be asked to create subsidiaries for undertaking leasing business. If banks can establish asset management companies, one fails to understand what is stopping them from floating separate entities for undertaking leasing business.