There is a growing consensus among the investors that Modaraba sector is ‘over regulated’. This has not only impeded its growth but also deprived the investors from earning Riba-free return on their investment. On top of that the recent financial scam in Khyber Pakhtunkhwa (KPK), where some ruthless people ripped off investors and the act was termed as ‘Modaraba Scam’ by those who cheated people in the name of Islam. The amount embezzled ran into billions of rupees and criminals have not been rounded up and punished as yet.
Modaraba companies that emerged in mid-eighties grew to 52 but over the years the number has reduced to half, mainly due to mergers and acquisitions. The real point of concern is that no new Modaraba has been established since long. Allied Rental Modaraba commenced its operations in January 2007. Yet a point of satisfaction is that over the years paid up value of certificates issued has increased, rather than going down. This indicates the strength of existing players, who have also been distributing modest to high dividend among the certificate holders. However, trading of Modaraba certificates at the stock exchanges has remained low. This provides the critics an opportunity to say that Modarabas are not performing diligently and also demand making regulatory system even more stringent.
It has become imperative to review the situation dispassionately, undertake SWOT (strengths, weakness, opportunities and threats) analysis and come up with regulatory framework that can facilitate growth of the sector. Let one point be kept in mind that Pakistan enjoys the distinction of being the only country in the world where Modaraba companies are operating. Therefore, it is necessary to make the sector robust to enable other Muslim countries to benefit from Pakistan’s experience.
Some of the analysts and regulators may not agree with the statement that there exists some lack of a clear direction among the mindset of regulators. Unless all of these are on the same wavelength, overcoming the issues facing Modaraba sector will not be possible. Regulators have to have realistic approach that can help in solving the problems rather than creating hindrances. In one way or the other, Modaraba sector remains under the microscope of: 1) Securities and Exchange Commission of Pakistan (SECP) through Commissioner Specialized Companies and Registrar Modaraba, 2) stock exchanges and 3) indirectly the central bank because many of the commercial banks have established Modarabas. However, there is a need to coordinate the policies followed by the SECP and the stock exchanges for the promotion of Modaraba sector.
The SECP has set minimum paid-up capital requirement for Modarabas at Rs50 million but stock exchanges insist on minimum amount of Rs200 million being the requirement for listing. Over the years, two regulators have failed in arriving at consensus, which has delayed listing of new Modarabas, particularly after 2008 financial crisis. It is believed that the central bank can play the role of mediator because banks manage Modarabas, asset management companies and even insurance companies.
The reasons for asking the central bank to intervene are multiple: 1) Modarabas need credit lines, which commercial banks have withdrawn after 2008 financial crisis, 2) banks have established asset management companies which are not listed at local stock exchanges and 3) there is a lot of similarity between a closed-end mutual fund and a Modaraba. A question arises, if listing of mutual funds is not mandatory, why should it be mandatory for Modarabas?
The reasons for making this demand are: 1) asset management companies (AMCs) manage mutual funds and Modaraba management companies mange Modarabas, 2) both the entities mobilize funds from small savers, invest the money in profitable propositions to enable the investors earn modest return and 3) both the AMCs and Modaraba management companies are managed by professionals and rigorously regulated by the SECP.
To let the ball rolling the SECP should allow establishment of new unlisted Moradabad with paid-up capital of Rs50 million, with the condition that the amount will be enhanced to Rs200 million over the next five years. Compulsory listing of Modarabas should not be insisted upon, as is the case of Mutual Funds. In such a scenario Rs50 million will be mobilized through private placement and the exercise may continue till Rs200 million target is achieved. This is one of the ways to make the sector vibrant.
Actually, the prevailing intense and rigorous monitoring of Modarabas by the SECP does not leave any gaps, which are filled up by the stock exchange listing requirement. This requirement is in effect becoming an impediment in the expansion of Modaraba sector.
It is a common complaint of Modarabas that after 2008 commercial banks withdrew the credit lines. This is really ironic because Islamic banks are suffering from surplus liquidity issue. Extending funds to Modarabas can help them overcome surplus liquidity issue and make Modarabas vibrant.
The silver lining is the efforts of Saeed Ahmed, Deputy Governor SBP, who is ready to discuss any and every proposal that can strengthen Islamic finance in the country. It is also expected that appointment of Bilal Rasool as Registrar Modaraba will help in overcoming some long outstanding issues. The active deliberations between the two have the potential to make Modaraba a vibrant sector once again.
It is also suggested to the existing and prospective sponsors of Modarabas that they should revisit their business model, stop focusing the corporate and urban population and give more attention to SMEs and micro enterprises. Banks can take care of corporate needs but for financial inclusion Modarabas are best placed. Money mobilized from small savers should also be lent to SMEs and microenterprises.
NBFI & Modarabas Association should also approach the multilateral lenders that offer soft-term credit for undertaking plans/projects that help in accomplishing financial inclusion program.