FHM A DISTINGUISHED PLAYER

SHABBIR H. KAZMI
(feedback@pgeconomist.com)

Apr 9 - 15, 20
12

First Habib Modaraba with an enviable track record of more than quarter of a century is the success story of sheer hard work and commitment to provide the investors Riba free income. Consistency in distribution of dividend among the certificate holders along with increase in certificate holders' equity has made FHM the largest Modaraba enjoying one-fourth of the total equity of the sector.

Over the years, performance of the Modaraba has been recognized at various levels. Muhammad Shoaib Ibrahim, Chief Executive Officer of First Habib Modaraba unfolds the success story of it for the readers of Pakistan & Gulf Economist (PAGE).

PAGE: WHAT FACTORS HAVE CONTAINED GROWTH OF MODARABA SECTOR OVER THE YEARS?

MUHAMMAD SHOAIB: Since 2008 global economy has been under distress and Pakistan can't remain immune. On top of this, the country suffers from some contentious issues, which have been affecting economic growth and country could not achieve even the desired GDP growth rate. These issues include from political instability and terrorism to energy crisis and high inflation and on top of all is the global downturn and financial crisis in the euro zone. Overall financial sector of the country has been affected but adverse impact on nonbanking financial companies (NBFCs) has been more pronounced. The NBFCs include leasing companies, investment banks, Modarabas and mutual fund. If one examines performance of Modaraba sector, it has done reasonably well but outstanding are only a few players.

PAGE: TOTAL EQUITY OF CERTIFICATE HOLDERS OF MODARABA SECTOR IS AROUND RS12 BILLION. OUT OF THIS, NEARLY ONE FOURTH IS CONTRIBUTED BY FHM. WHAT ARE THE REASONS FOR THIS OUTSTANDING PERFORMANCE?

MUHAMMAD SHOAIB: Due to a number of reasons, Mordaraba sector growth has remained subdued and often quoted price of Modarabas certificates are below par value. The subdued capital market has kept the sponsors away from issuing right certificates for enhancing the capital base. While distribution of 90 per cent of profit earned in a year allows the Modarabas to enjoy exemption from paying income tax, the rule does not allow building retained earnings. FHM has emerged one of the most distinguished players due to outstanding performance and distributing good return among the certificate holders. Price of FHM certificates is always quoted well above the par value. This has encouraged us to issue right certificates, which were always fully subscribed.

PAGE: WHY THE DAILY TRADING OF MODARABAS CERTIFICATES HAS REMAINED MINISCULE?

MUHAMMAD SHOAIB: The main reason behind low trading volume of Modaraba certificates is underperformance of the sector and weak sentiments for long-term investment. In the prevailing conditions, investors prefer to invest in risk-free instruments i.e. National Saving Schemes and government bonds offering good return and their investment is also secure due to sovereign guarantee. Having said that I still believe that profit distribution by the leading players has been outstanding. Though year 2008 was a difficult year, 18 out of 26 Modaraba distributed an aggregate amount of Rs642 million. Total 21 Modarabas out of 26 declared profits and out which around 17 distributed dividends amongst its certificate holders for the year 2011.

PAGE: HOW FHM SPONSORS HAVE RAISED EQUITY SO SUCCESSFULLY?

MUHAMMAD SHOAIB: To qualify for tax exemption, Modarabas are required to distribute 90 per cent of its profits to among the certificate holders. Due to such distribution of profit, they could not retain profit for enhancing their equity base. However, as far as equity enhancement of FHM is concerned, I would say that it is due to better performance and excellent return to certificate holders every year without skipping of any single year. This better return to our certificate holders has supported us and whenever we offer right certificate to our existing certificate holders, it is always fully subscribed.

PAGE: WHILE THERE IS AN EMPHASIS ON ISLAMIZATION OF FINANCIAL SYSTEM, WHY THE NUMBER OF MODARABAS HAS SHRUNKEN TO NEARLY HALF FROM 52?

MUHAMMAD SHOAIB: The largest number of Modarabas was floated in early nineties. At that time, the license issuing authority was corporate law authority. At that, there was a mushroom growth of Modarabas. Due to lack of prudent regulations, many of the Modarabas entered into speculative transactions and often imprudent activities and ended up incurring huge losses and ultimately becoming delinquent. The other reason of declining number was merger and acquisition within the sector.

PAGE: COMMERCIAL BANKS ARE OFTEN RELUCTANT IN LENDING TO SMALLER ENTITIES. WHY AREN'T THEY APPROACHING MODARABAS AS THE PROVIDERS OF MEDIUM TERM FINANCE?

MUHAMMAD SHOAIB: I agree that Modarabas have the potential to become provider of medium term. In fact, FHM has been doing this successfully. However, due to liquidity crunch the Modarabas can't cater to the needs of private sector. One of the technical hitches is that Modarabas cannot borrow from conventional commercial banks and if at all they succeed in striking a deal under Islamic mode of financing, the cost of fund is quite high.

PAGE: IS IT TRUE THAT THERE HAS BEEN A PARADIGM SHIFT AND MODARABAS ARE NOW FOCUSING ON SMALL AND MEDIUM ENTERPRISES?

MUHAMMAD SHOAIB: I believe that from the day one, focus of Modarabas has been on small and medium enterprises. Due to limited size cash flow they just can't meet the needs of big companies. Having successfully met the needs of large cities, Modarabas are now opening up branches in smaller cities as well as introducing innovative Shariah compliant financing products and services. Recently, SECP has approved several new Shariah compliant financial products for the Modaraba sector.

PAGE: WHAT DISTINGUISHES FHM FROM OTHER PLAYERS?

MUHAMMAD SHOAIB: FHM commenced its business operation in March 1985, with an initial capital of Rs25 million only. Now it has equity base of over Rs2.5 billion and assets of over Rs4 billion. FHM has always remained among the top performing entities within the Modaraba sector. The management of FHM is heir to the rich tradition of trading, banking, and finance. Business operations of FHM have always been backed by valuable expertise in the field of fund management. Over the years, FHM has been maintaining its position among the top performance Modaraba. For the year ended 30th June, 2011, its board of directors approved distribution of 22 per cent cash dividend. Since commencement of operations, FHM has maintained the history of continuous payment of dividend among the certificate holders, with an average payout of around above 17 per cent. For the last 12 years, the average payout comes to around 20.40 per cent. This is due to the firm commitment to pay Riba-free as well as handsome dividend among the certificate holders.

PAGE: WHAT HAVE BEEN THE REASONS FOR POSTING PROFITS AS WELL AS PAYING OUT HANDSOME DIVIDENDS YEAR AFTER YEAR?

MUHAMMAD SHOAIB: Over the years, FHM has remained one of the best performing Modarabas. FHM is well on its way to realizing its vision "To be a leading Islamic financial institution within the Modaraba sector". The management of FHM has always emphasized on building up quality asset portfolio. The efficacy of FHM's business strategy and prudent risk management has ensured sustainability of performance, despite increasingly competitive operating environment in Pakistan's financial market.

Business transactions have always been done on economic considerations, keeping in view the security of investor's funds. Twenty-six years history is enough to convince that 'Stability of Operation' and 'Sustainability of Growth' has been retained year after year. Maintaining superior quality of service is an integral part of FHM's philosophy. It is our constant endeavor to provide services with wider accessibility. Our corporate slogan is "Customer First".

FHM is committed to promoting sustainable business practices. We believe that our responsibility is primarily about conducting our business in transparent and ethical way that not only enhances value for all stakeholders but also by giving support to events that enhance the well being of the community. The main component of FHM' success is excellent teamwork at all levels of the organization. The dedication and hard work of staff members has made FHM a prominent player within the Modaraba sector.

MAJOR ACHIEVEMENTS

* Unbroken history of payment of dividend to certificate holders every year.

* Remained a profitable venture throughout the business operations.

* Maintaining "AA+" category credit rating for last several years.

* Leading Modaraba in terms of size of assets, equity and profitability.

* Recipient of "Corporate Excellence Award" from Management Association of Pakistan for last four consecutive years.

* Recipient of best performing Modaraba "1st position" awards for last several years from Modaraba Association of Pakistan.

* Recipient of Best Corporate Report Award from the Joint Committee o ICAP & ICMAP.

* Recipient of Certificate of Merit from SAFA, the apex body of South Asian Association for Regional Cooperation (SAARC) for Best Presented Accounts and Corporate Governance Disclosures.