NBFI, Modaraba Association launch Year Book 2010: future roadmap needed for strong Islamic financial system: SECP Chief

In order to prove the viability of Islamic financial system as a true alternative to the conventional system, the Modarabas need to re-assess their role and develop a future roadmap to address the key issues currently being faced by them.
These views were expressed by the Chairman Securities and Exchange Commission of Pakistan (SECP) Muhammad Ali while speaking at the launching ceremony of Non-Banking Financial Institution (NBFI) and Modaraba Association of Pakistan Year Book 2010 at a local hotel here on Thursday.
The SECP Chairman said that issues being faced by Modarabas include discounted market values; product innovation; resource mobilisation; unique and specialised services etc.
He was of the view that Modaraba sector being a unique Islamic business model can contribute significantly towards the development of NBF sector.
He congratulated the members of NBFI and Modaraba Association for publishing their first consolidated Year Book after the merger of two separate associations (Leasing Association of Pakistan and Modaraba Association of Pakistan) in July last year. This merger will promote the operational synergies and will also provide a comparatively larger platform to its members for deliberating and resolving various industry issues, he added.
"Presently, the financial service industry is banking entirely on the banking sector which is not only vulnerable but also restricts the scope for innovation of new financial products," the SECP Chairman said. "It is imperative to promote an alternative non-banking financial (NBF) system to diversify the inherent systemic risk and to enhance the resilience of the financial system," he added.
The Chairman noted that a strong Modaraba and Leasing sector would not only cater to the specific needs of the participants but would also provide alternative fund-raising opportunities to the participants. Both these sectors can make a vital contribution in development of a vibrant NBF Sector.
He was of the view that leasing is a successful business model. "We would promote it by allowing operational flexibility to leasing companies to cater to the specific financial needs of the customers," he said. However, he advised the leasing companies to enhance their shock absorption capacity by way of consolidation through mergers and acquisition etc.
The leasing sector should focus on raising funds from capital and debt markets instead of depending upon conventional banking finance facilities only. Leasing companies should also expand their outreach to rural areas, as a potential target market where they would face lesser competition from commercial banks, he said.
Speaking on the occasion, Basheer A Chaudhry, Chairman NBFI and Modaraba Association of Pakistan emphasised that the NBFI sector has a crucial role to play in the economic development of the country. The number and business volumes of investment banks, leasing companies and Modarabas had reached a recognisable size in 2006-07 but the financial crisis of 2008-09 placed most of them in a very difficult situation. Consequently, the total assets of leasing companies, investment banks and Modarabas have come down from Rs 135 billion in June 2008 to Rs 84 billion in December 2010.
He said the June 2008 profits of Rs 2,157 million touched a colossal loss of Rs 4,298 million in 2009 but have registered a profit of Rs 565 million in December 2010 (Contributed mostly by Modarabas). Number of leasing companies has come down from 17 in 2006 to 10 while the investment banks have come down from 9 to 7. Luckily, Modarabas maintained their position well and with total assets of Rs 25 billion, the Modarabas have shown a half yearly profit of Rs 544 million against a yearly loss of Rs 158 million in June 2009.
The number of Modarabas has also increased to 26 from 24 in 2006. He pointed out that 18 Modarabas out of 26 declared dividends in 2010, the highest being 76 percent.
He said a number of leasing companies and investment banks are actually struggling for survival and operating only on a recovery mode. This is causing a continuous shrinkage of the overall sector which needs to be addressed through innovative and bold initiatives both by our members and the financial regulators i.e State Bank of Pakistan and SECP.
The NBFI Chairman said that the association has proposed enhancing products line of NBFIs for creating resources, providing financial services and undertaking non-funded businesses. Other operational issues of NBFIs and Modarabas have also been discussed.
He requested for extension of time for the relaxations granted by the SECP in respect to regulation 25 that is the provisioning and suspending of income on the over dues and also meeting the minimum equity requirements for a further period of three years. "We submitted to SECP that this was necessary due to the current economic climate of the country and the operational problems being faced by our members and have been assured of sympathetic consideration," he added.