- Leasing companies play a vital role in capital formation
Interview with Mr Shaham Ahmad — Honorary Secretary, ICMA-Pakistan
PAGE: Tell me something about yourself and your organization, please.
Shaham Ahmad: I am a Fellow member of ICMA and a member of the current National Council of the Institute for the three-year term from 2021 to 2023. The Council has nominated me as the ‘Honorary Secretary’ of the Institute in which capacity I am responsible to look after those affairs of the Institute as envisaged in the CMA Act and Regulations. I held the office of the Chairman of the Karachi Branch Council (KBC) of ICMA during 2013 and 2014 and have also been heading the CPD Committee of KBC for quite a long time. In this role, I took several initiatives to promote and strengthen Institute’s relationship with the corporate sector.
Currently, I am visiting faculty at several renowned business schools and academic institutions like SZABIST, MAJU, and PAF-KIET and playing role in imparting professional education to the younger generation. The CMA professional degree, coupled with my practical experience of working for almost over twenty years in the private sector, has helped me to perform the role of a teacher and mentor.
I am presently working in a senior executive finance position in Pakistan’s leading automobile manufacturing company where I have been employed since 2002.
PAGE: In Pakistan, the concept of Modaraba was introduced in 1980 when the government realized that there was a need for the Islamization of the economy of Pakistan. Your views:
Shaham Ahmad: The process of Islamization of the economy in Pakistan was initiated in 1977. The then government, on the recommendations of the Islamic Ideology Council, introduced certain changes in the ‘Banking Companies Ordinance’ and promulgated the ‘Modaraba Companies & Modaraba [Floatation & Control] Ordinance, 1980 to provide a legal framework for the Islamic financial system. This was a major initiative that led to the introduction and recognition of Modaraba financing as an Islamic financial institution and as a corporate entity. These Modaraba companies started to undertake Ijarah, Murabahah, Musharakah, Diminishing Musharakah, Salam, and Istisna financing activities; trading of Halal commodities, project financing, stock market investment, etc.
Today, after almost 40 years, the Modaraba companies are operating as a unique model and along with the NBFIs, are complementing the banking sector by serving the under-served segments of businesses, especially SMEs, thus contributing to the economic development of the country. As per Economic Survey 2021-22, till March 31, 2022, there were 31 registered Modaraba companies in Pakistan, out of which 28 companies are currently operating and listed at PSX. The aggregate paid-up capital, equity, and total assets of these 28 companies as of December 31, 2021, stood at Rs. 20.7 billion, Rs. 24.1 billion, and Rs. 57.3 billion, respectively. Out of 25 profit-making Modarabas, 19 declared cash dividends and/or bonuses for the year 2021. Almost 34 percent of total assets are tied up in loans & advances to customers. The market capitalization of the Modaraba sector as on 31st March 2022 stood at Rs. 23,912.47 million as against Rs. 14,489.79 million on 30th June 2021.
The SMEs in Pakistan rely much on financing from NBFIs and Modarabas. Almost 40 to 45 percent of financing goes to SMEs. One issue of the Modaraba sector is that their payout ratio is much higher than the other sectors listed on PSX due mainly to the fact that they have to distribute 90 percent of annual net profits to claim tax exemption; thus restricting them to build up equity.
The introduction of fintech would disrupt the primacy of both the banking and non-banking sector to reposition themselves. Hence, the NBFI and Modaraba sectors must align to the emerging tech realities and adopt digital technology to bring improvement in their services and also expand their outreach to those areas which are hitherto untapped within the country. They can make digital collaborations with the telecom sector and other tech startups to bring their services to the doors of small business owners and traders. They can leverage the high mobile phone penetration rate (85 percent) to reach out to SMEs via fintech channels.
PAGE: How would you comment on Mudarabah Al Muqayyadah which is a restricted Modaraba?
Shaham Ahmad:Â Well, there are two types of Modaraba viz. Modaraba Al Muqayyadah (Restricted Mudarabah) and Modaraba Al Mutlaqah (Unrestricted Mudarabah). Mudarabah Al Muqayyadah means a restricted Modaraba where the Rabb-ul-Maal [investor of money] may specify a particular business or a particular place for the Mudarib [financial manager], in which case he shall invest the money in that particular business or place. On the other hand, Modaraba Al Mutlaqah means unrestricted Modaraba where the Rabb-ul-Maal gives full freedom to the Mudarib to undertake whatever business he deems fit. However, he is not authorized to keep another Mudarib or a partner and mix his own investment in that particular Modaraba without the consent of Rabb-ul Maal.
PAGE: What is your perspective on Prudential Regulations for Modaraba?
Shaham Ahmad:Â The Prudential Regulations for Modarabas were issued in 2004 to provide a wide range of risk management tools for conducting the day-to-day affairs and business of the Modarabas. Over the years, these regulations have contributed towards improving the risk management capabilities and promoting corporate governance in the Modaraba sector. A separate set of regulations has also been incorporated for Modarabas to extend housing finance facilities to individuals. Criteria for provisions against non-performing assets of Modaraba have also been reviewed and conditions for reversal of provisions have been specified. Also, the enhanced disclosure requirements have helped in maintaining greater transparency in the sector.
PAGE: How would you comment on the leasing business in Pakistan?
Shaham Ahmad:Â Leasing companies play a vital role in capital formation by providing a hybrid form of a debt-cum-investment option. They meet the short to long-term funding requirements of businesses and provide a flexible, tax-efficient, and economic mode of raising funds.
The leasing business in Pakistan started in 1980 with its recognition as one of the financial services under the Islamic financial system. In June 1984, the first leasing company viz. the National Development Leasing Corporation (NDLC) was established by the NDFC in the private sector in joint collaboration with the Habib Group and the International Finance Corporation (IFC).
During the 1990s, several other companies also entered the leasing business and gradually the leasing sector emerged as one of the attractive sources of financing the businesses. According to the Year Book 2021 of the NBFI and Modaraba Association of Pakistan, there were a total of 6 leasing companies in Pakistan in 2021 (down from 8 in 2020) with paid-up capital of Rs. 3,207 million and total equity of Rs. 1,388 million. The total assets of the leasing companies have gone down sharply from Rs. 10,806 million in 2020 to Rs. 5,976 million in 2021.
As per the Economic Survey 2021-22, the market capitalization of the leasing companies stood at Rs. 478.90 million as on 31st March 2022 as against Rs. 5,403.17 million on 20th June 2021. The leasing companies have to face stiff competition from commercial banks due to which they have to diversify their businesses. The government needs to provide a conducive policy environment to the leasing companies so that they can play a more active role in the promotion and development of the industrial sector through capital assets financing.