LEASING, MODARABA-KEY SOURCES OF MEDIUM TERM FUNDS
SHABBIR H. KAZMI
May 11 - 17, 2009
Pakistan is among the few countries of the world, which has an elaborate and robust commercial banking system but having no institutions capable of medium and long term funding. Most of the DFIs established in the past have been closed or merged and commercial banks are being used to fill the gap. The growing dependence on commercial banks and ignoring leasing and modaraba companies has also resulted in virtual bankruptcy of these institutions, which have played the crucial role of providers of medium term financing in the past.
The first leasing company was established in early eighties and soon the number exceeded 32 in year 2000. However, at present about 15 leasing companies are in operation and most of them face bleak future. As on December 31, 2008 most of them were carrying huge accumulated losses. For the year ended June 30, 2008 the members of Leasing Association of Pakistan had posted an aggregate profit of two billion rupees, which was turned to more than one billion loss by end December 2008.
The economic downturn, political uncertainty, and above all sudden disbursement of credit to leasing companies by the commercial banks have put all the players at an odd. In the absence of fresh credit, they did not have any option but to virtually put all disbursement at halt. The cash inflow was also disrupted due to delayed payments and mounting delinquencies. The situation can best be explained by examination of nine-month financial results of Orix Leasing Pakistan. It results in no way are the true representative of the sector but certainly show that smaller companies experienced even more difficult situation.
The Company posted loss after tax of Rs105 million for third quarter of ongoing financial year as compared to profit of Rs57 million for the corresponding quarter of last year. The accumulated loss for the nine month period were Rs139 million as against profit of Rs223 million for the corresponding period last financial. On the flipside total revenue of the company increased to Rs2,415 million in 9MFY09 as compared to Rs2,306 million for 9MFY08. However, the benefit was eroded due to expenses going up Rs2,619 million from Rs2,233 million during this period. This reduced the income to Rs56 million as compared to Rs344 million. On top of this provisioning of Rs168 million against potential lease installment and other loan losses and about Rs14 million impairment on available or sale securities jacked the losses up to Rs126 million. The Company has accounted for impairment loss through balance sheet. Had the impairment loss charged to income statement, loss for the period would have been higher by Rs40.65 million.
Leasing companies are required to enhance their paid up capital to Rs350 million by end June 2009. It is evident that at least five companies would not be able to meet the requirement. Therefore, it is suggested to the Securities and Exchange Commission of Pakistan (SECP) to extend the deadline. The State Bank of Pakistan has already set the precedence by extending the deadline for meeting minimum paid up capital for the commercial banks. Therefore, the SECP should also follow the footsteps of central bank.
Modarabas operating in the country can rightly take the pride for not only the pioneer of Islamic financing in Pakistan but also the first among the Muslim countries to have such a business model. The players have withstood ups and down successfully. It was made possible by following a strong business model, active support from the regulators and above all pragmatic policies of the players.
Modarabas operating in Pakistan are not only unique but also undertake a variety of business activities that include Ijarah and use Murabaha and Musharikah modes of financing. One of the incentives available to this sector for a long time has been the income tax exemption if they distribute up to 90% of their profit among the certificate holders. The largest contribution of the sector is that it caters to the needs of small and medium enterprises. Prudent financing has helped in containing delinquent loans.
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 Rs29 billion from Rs26 billion registering 13% growth as compared to preceding year. Profitability of the sector increased by 27% to Rs962 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.
Modaraba Association of Pakistan in collaboration with the regulators has redrafted the existing model agreements and also succeeded in developing new products. Its efforts have yielded results as the Religious Board has approved these model agreements. Preparation of these model agreements is likely to provide the level playing field for the players and also help in diversifying their activities through introduction of new products.
It is expected that with the introduction of Shariah compliant banking, Islamic asset management and takaful operators, modaraba companies would benefit, particularly in resource mobilization. However, unless economic activities in the country gain momentum and demand for credit picks up activities of the financial sector, including modarabas is expected to remain subdued. Islamic banks should also join hands with modarabas to achieve synergy. In fact, these institutions do not compete but complement each other.
Both the regulators, SBP and SECP, must jointly examine the issues facing leasing and modaraba companies because these are the sole providers of medium term funds in the absence of DFIs. Unless cost of funds is reduced demand for funds cannot be generated.