Modarabas getting ready to play role in accelerating economic growth in Pakistan

Interview Raheel Qamar Ahmed, Chairman, NBFI & Modaraba Association

Modaraba companies operating in Pakistan are the unique entities. Around the world, Modaraba is an instrument, but in Pakistan these entities are an improvised shape of close-end funds making investments in diversified businesses from Ijarah to manufacturing to trading. In an exclusive interview with Raheel Qamar Ahmed, Chairman, NBFI & Modaraba Association of Pakistan PAGE discussed performance and outlook of the sector. Following are excerpts:

PAGE: How do you review the performance of Modarabas in the post COVID-19 era?

Raheel Qamar Ahmed: As you aware that Modarabas are managed by professionals, they are very prudent and do detailed analysis before committing any financial obligation. No doubt COVID-19 had wide-spread effects on businesses in Pakistan, but our members didn’t face any catastrophic situation. I am delighted to inform that during year 2020-21 the collective net profit posted by 27 members was reported Rs1.235 billion. Total asset base increased to Rs55.625 billion from Rs50.245 billion.

PAGE: Which are the Top 3 best performing members and why?

Raheel Qamar Ahmed: One can use different benchmarks for reviewing the performance. According to Profit declared 1) Allied Rental Modaraba, 2) First Habib Modaraba and 3) B.R.R. Guardian Modaraba. According Total Equity, the top 3 members are: 1) Allied Rental Modaraba, 2) First Treet Manufacturing Modaraba and 3) First Habib Modaraba. According to Dividend declared: 1) First Imrooz Modaraba, 2) OLP Modaraba and 3) First Habib Modaraba.

PAGE: What are the key areas of businesses?

Raheel Qamar Ahmed: Our members are involved in diversified businesses. In the beginning many were involved Ijarah (leasing). Almost all are multipurpose and perpetual. Over the years some manufacturing Modarabas were floated. A few specific purpose Modarabas were floated which proved successful. First Treet Modaraba, one of the largest, is also a manufacturing Modaraba. First Imrooz Modaraba is involved in trading. There was another Modaraba which was involved in equities trading. This has now ventured into textile manufacturing.

PAGE: What are the key strengths of Modaraba sector?

Raheel Qamar Ahmed: Our biggest strength is our linkage to common men’s financing requirements and our ability and willingness to help him. Our focus on SMEs, our products, our processes and our outreach remain our biggest asset in the mission to help Pakistan’s SMEs get the assistance required to function as the backbone of the country’s economy.

PAGE: What features distinguishes Modaraba sector with others?

Raheel Qamar Ahmed: The sector has achieved many firsts in Pakistan, which should not be discounted when talking about its role. Events such as the first biological asset financing, first energy efficiency financing and alternative energy financing in many industries, logistics and energy rentals, all were started within this sector and subsequently adopted by others.

PAGE: What is the outlook of Modaraba sector after the withdrawal of tax exemptions?

Raheel Qamar Ahmed: The tax exemption clause pertained to distribution of 90%profit among the certificate holders. This sector has approximately 80,000 certificate holder, which make up almost 30% of the total individual investors on the Pakistan Stock Exchange. With the withdrawal of this incentive income of these investors, who are keen in earning Riba-free income will be affected. Some of the players have decided to convert their businesses into private limited companies. This is likely to shrink the size of the sector.

PAGE: What impact do you foresee on Modaraba sector after the recent floods?

Raheel Qamar Ahmed: Our members are not affected directly in any significant manner, but those who have acquired fund may feel distress. As supply chains are disrupted they face production losses. However, a need may arise to restructure the existing agreements. This is the time business community need support to run the business as usual. I am delighted to inform that the sector has very low default rate. At time the borrowers face liquidity crunch but certainly these cannot be termed ‘habitual delinquent’.

PAGE: Please tell us what the association is doing for the flood affectees?

Raheel Qamar Ahmed: We as responsible corporate realize our duty to help people of Pakistan while facing trauma of such a large magnitude. Our members are making contributions individually as well as collectively, both in cash and in Kind. The real task is rehabilitation and reconstruction which needs billions of rupees and may take years.

PAGE: What is the outlook of the sector?

Raheel Qamar Ahmed: The share of the Modaraba sector in the economy of Pakistan is not where it should be. Our share should be 30 to 40 times higher. Our role remains very critical as we are the only sector that focuses on the engine of growth of GDP and job creation. Concerted efforts have to be made to facilitate SMEs in Pakistan.

In my opinion, now corporates should go for specific purpose Modarabas to finance their manufacturing businesses. The Government has successfully issued Sukuk, now it should finance its infrastructure projects by floating specific purpose Modarabas. This will reduce government borrowing for the construction of infrastructure projects and also ensure sustainable recovery through Toll Tax.