NBFI & Modaraba Association of Pakistan consists of 24 Modarabas, 9 leasing companies and 3 investment banks. Owing to the unique nature of these entities, these sectors have immense potential for the growth in the economic development of the country.

MODARABA SECTOR

The concept of Modaraba as a Shariah compliant mode of business was evolved and introduced as an institutional framework in Pakistan as back as in 1980 with proper legislation, regulatory and monitoring structure and operating guidelines. This privilege of translating the concept into an institutional and properly regulated structure is unique to Pakistan. In fact, the Modarabas as Islamic financial institutions are the forerunners of Islamic banking and mutual funds in Pakistan.

The modaraba Companies & Modaraba (Floatation & Control) Ordinance was issued in June, 1980. The office of the Registrar Modarabas being a part of Securities & Exchange Commission of Pakistan (SECP) monitors and controls the sector through Rules, Regulations and Guidelines. Modarabas are subjected to reporting requirements, prudential disciplines and on-site inspections like the rest of the financial institutions. A properly constituted Religious Board of eminent scholars approves and guides the functional integrity of the Modarabas for Shariah compliance. No modaraba can undertake any modes of business or execute any form of agreements other than those specifically approved by the Religious Board. The business model provides a two tier system of management company being the Modarib and Modaraba being fund of the investor.

The first modaraba was floated in July, 1980. Then came a boom and total number of Modarabas at one time went upto as high as 52. These Modarabas were not only the trend setters of Islamic modes of financing in a pre-dominant conventional financial system in Pakistan but also built confidence among the general public regarding the practice of Islamic modes of finance.

There are two types of Modarabas: Multupurpose and Specific purpose Modarabas. Multi-purpose Modarabas are perpetual entities undertaking mostly financial activities like Ijara, Musharaka, Diminishing Musharaka, Murahaba, Salam, Istisna transactions. The diversity of the concept also resulted in setting up of Trading and Manufacturing Modarabas. Specific Modarabas have a specific purpose of a defined project and time frame. Such Modarabas were established to handle designated projects and were successfully concluded. All Modarabas are listed on the Stock Exchange.

The immense potential of the Modaraba concept has not been fully utilised primarily due to lack of awareness on the part of entrepreneur and lack of enthusiasm by most of the market operators. It is worthwhile to note that the performance of the modaraba sector is increasing gradually. In the year 2012 Modarabs booked a profit of Rs 1.3 billion and this year Modaraba Sector has crossed Profit of RUPEES TWO BILLION whereas results of some of the Modarabas are yet to be announced.

ADVANTAGES OF MODARABA CONCEPT

There are distinct strengths of using Modaraba concept as a business module:

(i) The concept provides Halal earnings and advantage of a well developed operational and regulatory structure.

(ii) Modaraba can be a single purpose or multi-purpose institutions, floated fo a one-time project or a perpetual model comprising of a variety of business.

(iii) The special tax treatment for the non-trading Modarabas, being tax exempt upon 90% distribution of the yearly profit, makes it highly attractive for the investors. The trading modarabas also enjoy a privileged maximum tax level of 25% which provides at least 10% benefit as compared to the prevalent company taxation.

(iv) All Modarabas are listed on Stock Exchnages.

(v) Most of the modarabas are paying cash dividends to their certificate holder consistently.

(vi) Having an operational structure for assets backed financing and trading activities, modarabas were not affected by 2008-09 financial meltdown thereby establishing their intrinsic strength and resilience.

LEASING SECTOR:

Pakistan’s Leasing sector is a major component of Non Banking Financial Institution (NBFI) segment and has played a vital role in expanding economic growth and containing poverty. Broadly speaking, leasing is an institutional arrangement that channels resources to small and medium size enterprises to fund their business needs.

The NBFC Sector includes Leasing companies, Investment Banks, Mutual Funds and Insurance Companies. Pure leasing business is undertaken by Leasing companies and Commercial Banks while Modarabas are undertaking leasing business in the shape of Ijarah, an Islamic product. The core business of most of the leasing companies is Equipment and Vehcile leasing while other products have been added to expand the overall business.

Today the products offered by the leasing companies are:

— Corporate lease

— Consumer Auto lease

— Operating lease for Generators

— Commercial vehicle lease

— Micro-financing; and

— SME Leaing

Hire purchase is the legal term for a contract in which persons usually agree to pay for goods in instalments and when a sum equal to the price plus interest is paid the goods are transferred into their names. Hire purchase is very common in Pakistan.

The leasing sector has been an essential component of the financial industry and a significant arm for the development of the SME sector of the country and also the investment regime. Over the years, the sector made progressive growth both in number and business volume until it was hit by the liquidity crisis of 2008-09.

The leasing sector was performing well since inception of the first leasing company in 1984. However, the global financial meltdown, economic downturn, adverse business conditions and liquidity crisis affected the sector negatively during the fiscal year 2009. Leasing companies and Investment Banks remained largely dependent on Commercial Banks to fund their assets. In the wake of liquidity strains faced by banking sector , credit lines of leasing companies and Investment Banks have dried up to the extent that viability of on going operations of some companies has come under threat. Serious liquidity issues have forced companies in the leasing sector to utilise available cash flows from rental recoveries for repayment of borrowing leaving little or no room for new business. As a result, the year 2008-9 saw a huge drop in volume of business which declined substantially and leasing sector continued to show huge losses in their books of accounts. However, inspite of these circumstances, some of the leasing companies and investment banks have improved their performance and their equity, streamlined their recoveries and booked profit as compared to the loss. The year ended 30th June, 2013 showed a tremendous achievement and leasing sector and investment banks booked a profit of Rs 1,013 million as compared to a loss of Rs 1,772 million during the corresponding period.

INVESTMENT BANKS IN PAKISTAN

The investment banking concept emerged when long term projects/investments and financing were conceived to be financed through a separate banking channel. The target financial resources were therefore, envisaged to be equally long term based. Thus a system was evolved which though would function as a bank, but would not cater to day to day customers, cash counters and other sundry businesses which the commercial banking system is allowed.

The business model of investment banks varies from country to country, however, our system was jolted when the Central Bank assigned the regulatory function to SECP.

The year 2002-07 will be remembered as an era of a robust economic growth for Pakistan. The financial sector was amongst the most conspicuous as the banking and NBFC Sector both enjoyed tremendous growth in its assets base as well as profitability. However, abrupt global financial crisis in the year 2008-09 coupled with political upheaval in the country, affected the liquidity of the Commercial Banks. Consequently commercial banks withdrew their money market lines, without foreseeing that their this act would trigger an unwarranted defaults at the NBFC Sector and would render them striving for survival. However, the NBFC Sector managed to get out of the situation without the help of Commercials Banks and fulfilled their financial commitments.

The current year is a successful year for the Leasing and Investment Banking sectors whose performance has remained satisfactory.

Leasing Companies, Investment Banks and Modarabas are facing a variety of challenges such as absence of level playing field, limited resource mobilization, inability to tap debt and equity markets, high cost of borrowings, liquidity problems, dearth of skilled human resource, limited branch netwok etc. Securities & Exchange Commission of Pakistan (SECP) constituted a Reform Committee comprising of twelve leading market professionals possessing requisite expertise and four members from SECP to develop and provide a sustainable roadmap for these entities. NBFI & Modaraba Association was represented by its senior members Mr Basheer A. Chowdry and Mr Teizoon kisat. The Committee has submitted its recommendations which has been published and placed on the website of the SECP for the comments of the stakeholders and general public. The implementation of the Report will transform the scope and future of NBFI & Modaraba Sector.

*This article was published by Business Recorder. Read the original article here.