Interview with Mr Naim Farooqui – CEO, Sindh Modaraba
SME, construction sectors set to grow under current Government’s plans
PAGE: Tell me something about yourself and your organization please:
Naim Farooqui:Â I did my schooling from Karachi and proceeded to the United States in December 1973 for graduate studies. I obtained BSC in Industrial Engineering from University of Houston in 1978 and Masters in Business Administration from Texas Southern University in 1984. Upon my return to Pakistan I joined NDFC which was recruiting candidates with Engineering and Marketing background as the Institution was involved in financing industrial/manufacturing projects requiring technical expertise. From NDFC, I was seconded to Asian Finance and Investment Corporation (AFIC) in 1992, an affiliate of Asian Development Bank, Manila where I served till June 1998. At AIFC, besides my other job responsibilities, I was also serving as a Director in ORIX Investment Bank (OIB) in Pakistan when ORIX Corporation, Japan offered me a job as CEO, OIB. I served OIB till March 2009 and for a short stint of a few months worked as Head of Compliance at Pak-Kuwait Investment Co. Ltd. Subsequently, I joined Sindh Bank in December 2010 right after its incorporation as its Chief Operating Officer. At Sindh Bank, I served in various capacities, as President, Director in its affiliates at Sindh Leasing, Sindh Modaraba and Sindh Insurance and Chairman, Sindh Mirco Finance Bank. I have also served as CEO of Sindh Leasing and presently I am the Chief Executive Officer (CEO) of Sindh Modaraba since August 2016.
Sindh Modaraba:
Sindh Modaraba commenced its operations in February 2015. It is perpetual, and multipurpose Modaraba formed under the Modaraba Companies and Modaraba (Floatation and Control) Ordinance 1980. The company is managed by Sindh Modaraba Management Limited (SMML) a company 100 percent owned by Government of Sindh, however, Sindh Modaraba’s ownership structure is split into 5.64 percent (General Public) and 94.36 percent, (SMML).
Currently the Board of SMML comprises of seven Directors of which only one Director represents the owner i.e. GoS through its Secretary Finance while others are Executive Director, Independent Directors or non-independent Directors. By virtue of it being an Islamic Finance institution it is mandatory to appoint a Shariah Advisor to look after Shariah Compliance of the Modaraba Company. He reports directly to the Board. The Modaraba is rated A+ (long term) an A1 (short term) by JCR-VIS credit rating company.
Presently the company is operating with lean staff strength of 20 persons but is poised to increase as the business grows in the current year. Modaraba operates from two regions, North and South with a Regional in Charge, North, based in Lahore while South is managed by the CEO from the Head Office. It has branches in Sindh, viz Naudero and Hyderabad.
PAGE: What are the recent developments in Modaraba sector?
Naim Farooqui: The Modaraba sector till now had remained mostly neglected both by the sponsors and stakeholders alike. However, recently the Securities and Exchange Commission of Pakistan (SECP) has taken major steps to reinvigorate interest in the Modaraba sector. SECP considers NBFI and Modaraba sectors an integral part of the country’s financial system serving financial needs of different segments of the system. However despite a large number of Modarabas and leasing companies, the sectors performance, at best, had remained mixed. Towards meeting its goals SECP is revisiting the regulatory framework in consultation with the stakeholders including the NBFI and Modaraba Association, which is a representative body of Modarabas, Leasing Companies, Investment Banks (now called Investment Finance Services Companies).
SECP regularly consults the association to facilitate improvements in the Modaraba rules. Recently the SECP has notified draft Modaraba regulations for comments of the stakeholders. It is expected that a new set of regulations for Modaraba sector would be notified shortly. Amendments proposed in the Modaraba Companies and Modaraba (Floatation and Control) Ordinance, 1980 are also in the process of approval. It is expected that the same would be put up to the parliament in due course for approval.
PAGE: How much interest has been generated in the Modaraba sector in the past 2 years?
Naim Farooqui:Â As explained above the Modaraba sector had not been an area of interest, however, of late the regulator i.e. the SECP is now taking steps to address the issues confronted by the sector. This is likely to increase the profitability of the Modarabas, which should attract interest of new entrants both in terms of investors and sponsors.
PAGE: Your views on the performance of the Modaraba sector?
Naim Farooqui:Â The overall performance of the NBFI & Modaraba sector remained lackluster. Its assets base enhanced from Rs.94.6 billion to Rs.95.1 billion while total equity declined from Rs.38.2 billion to Rs.37.0 billion due to losses incurred by some Modaraba and Leasing companies. The performing companies of the NBFI and Leasing sector continued to pay good dividends which amounted to Rs.1.7 billion for the year ending 30 June 2019. However, the dividends came from only a few companies out of a total of 37 companies of the sector. The distribution of dividend ranged from 1.5 to 50%. The market capitalization of the sector reduced to Rs.17.7 billion in June 2019 from Rs.26.1 billion, the previous year. This was mainly due to severe recession in the stock market in 2018 and some mergers with parent companies.
PAGE: Could you tell us about the impact on Modaraba sector during current year in light of incentives announced by the federal government?
Naim Farooqui:Â Modaraba financing is considered as the most preferred mode of financing in the Islamic financial industry. Major portion of Modarabas financing is in the SME sector where SME sector as defined by the GoP/SBP consists of employees up to 250, total assets of up to Rs.100 million and sales turnover of Rs.300 million for companies involved in trading, manufacturing and services.
In order to promote SME sector, the SBP and SECP have embarked upon various initiatives for the SME sector development to facilitate the borrowers. It focuses in improving access to finance and develop capacity building of the borrowers, however, access to concessional finance to the NBFI and Modaraba sector may be a far cry. Considering GoP’s strategy for containing the economic downturn induced by pandemic, the economy is expected to recover in the current fiscal year 2021 with gradual increase in domestic consumption. Reduction in policy rate since September 2019 by over 6% is already generating interest in the private sector for implementing their plans, which had been shelved due to uncertain political and pandemic situation. As a result of incentives the most to benefit would be construction industry announced by the GoP, which envisages construction of 5.0 million homes during the term of the present government. It would give boost to more than 25 sub sectors of industry associated with the construction industry. Already the cement sector is experiencing improvement in sales.