A mosaic of financial products has emerged out of the abundant flow of funds but the financial sector is hesitant to enter into an agri-based market.
Having reached an exhausting level, after tapping areas such as consumer loans, auto loans, personal loans, house-building loans, credit cards, SMEs and corporate sector financing, (all being urban-based financial product), the market is getting dried up for banks.
Overheating and subsequent chaos is imminent. Investment is growing too quickly and will exceed market demand. Very soon they will be compelled to look for new sectors. Whereas, banks are concentrating on products to facilitate urban society, the field is wide open for the financial sector to enter into agri-based products and penetrate into the rural areas.
Modarabas can set an example as trend setters, instead of price receivers, by entering into the agri-based market.
In the present scenario the State Bank is very keen to encourage investors to come forward in developing an infrastructure to facilitate rural products.
Road network, warehouses, transportation, hydroelectric works, telephone network, education of artisans as components of infrastructure are due for improvement.
However, an ambitious economic recovery plan may be, with the extra dependence on an industrial plan with the present growth of population, at the rate of 2.3 percent, we cannot provide employment through industry because of the input required.
The masses will remain poor unless major improvement in the agriculture sector is carried out.
Forty percent of the population is living below the poverty line and they have to be fed. It is a universal truth that political independence without economic independence can be seldom safeguarded.
If we build an industry, which can absorb one million people, goods will be produced, but there cannot be a market unless people have purchasing power. Infrastructural changes are bound to come with government planning through even public sector borrowing.
There will be multiple projects for poverty alleviation. A portion of income from these projects will go to investors and help in revenue generation for the state. Large banks, having agriculture financing experience, are more hooked by corporate lending.
Agriculture Bank in the public sector have an extra burden of infected portfolio and lack the cash resources to come forward.
Agri-based economy has multiple of choices for investors and risk managers. Crop loans, seeds farming loans, project loans are few areas of interest.
Tractors, bulldozers, combined harvesters, fertilisers, pesticides, modern systems of irrigation, tube wells, lift-pumps and varied items of import are part of the requirement.
In the economy with a GDP growth target of 6%, the agriculture is offering multiple of choices to achieve self-sufficiency and export potential. Modarabas are sharing 90% of the profit by distributing it amongst investors.
They have undertaken activities of trade finance, leasing, stock market and various services. But investors, especially foreign, have shied away from investment in Modarabas and resource mobilisation remains weak and costly.
In January, 2004, the Security and Exchange Commission of Pakistan revised prudential regulations to provide Modarabas an impetus and a level playing field in the financial sector.
The capabilities of risk management, promoting corporate governance, have been aimed at. The four segments revised are a comprehensive set of definitions covering all activities, guidelines of Risk Management Operation Activities and Know Your Customer (KYC) to cover anti-money laundering issues.
State Bank, earlier in January 2003, provided strategic guidelines for the promotion of Islamic Banking.
It allowed a full-fledged Islamic bank in the private sector, setting-up of subsidiaries of Islamic Banking by existing banks and allowed stand-alone branches for Islamic Bank in existing commercial banks.
In the Gazette of Pakistan, dated November 4, 2002, in terms of the Banking Companies Ordinance 2002, a new clause has now been inserted in the Banking Companies Ordinance which reads:
"(aa) The carrying on of banking business strictly in conformity with the injunctions of Islam, as laid down in the Holy Quran and Sunnah"
The very origin of Modarabas comes from the Islamic social system. An interest free finance system has been one of the many aspirations of all and in an Islamic Society. It is a partnership, where one partner gives money to other for investing in a commercial enterprise.
Funds provision is the soul responsibility of "Rabbul Mal." Management and work is carried out by the other partner "Mudarib," working with due diligence by Mudarib, the liability is limited to investment.
The government is committed to promote the Shariat mode of financing and a financially strong Modaraba sector will lend a helping hand to the cause. Having set the house in order, the Modarabas will be well poised to play proactive role as part of the financial sector, contributing for the growth of national economy.
In the words of the Governor State Bank, Modarabas have the unique advantage of having tested the Islamic mode of financing and experienced business strategies and transactions.
That the research and development of new products have not been undertaken by Modarabas, may be due to their low capital base and fragmentation of sector.
The association may develop capabilities and issues of collective concern which can be taken as a collective strategy.
The conventional financial system makes it difficult to mobilise resources. But when the government takes up the issue of changes in the infrastructure, the Modarabas will have a level field as indicated by the Security Exchange Commission's new regulations.
The Modarabas have an untapped market for their input taking the agriculture sector into their fold, as the financial sector is running out of products.
One of the challenges for Modarabas is cost funding. If relied on financial institutions for the supply of funds, they would be at a disadvantage, of competing with an advanced financial sector.
They can develop their borrowing through short term and long term certificates from the private sector who are looking for investment markets.
Modarabas can offer incremental returns, since the spread will be better in lending in the rural sector.
Sharing knowledge and reducing risk will enlarge opportunities and expand the horizon of an asset portfolio with adequate returns.
Modaraba's efficiency will contribute for balance sheet indicators, the confidence of potential investors will be increased with an improved rating.
So far the financial managers have concentrated on the urban sector and the market potential, with 60% of the population in the rural areas, has been ignored.
Ibne Khaldoon, a 14th century thinker and philosopher has commented on the urban and rural divide, by saying that the activities of the rural areas are dependent on their basic needs, close to nature and away from the luxuries of life as compared to the urban or city areas.
The present products offered by major banks and development at financial institutions originate in a culture of laxity in city life and the products must facilitate city life's norm.
Modarabas must undertake project financing in the rural areas, by mobilising resources from partners in a commercial enterprise as the system permits.
They may attract the interest of investors, due to a higher yield and profit sharing system.
Their fear of going into the interior, not having much experience and an unbearable establishment cost, will be out-lived by reaching an arrangement with a network of Post Offices and Saving Centres.
Post office branch can serve as a point of contact, with maintenance of account and provide an advantage of KYC. It will be creating employment in the interior, education for farmers, personal advisory services by the staff at post offices and statistics for the state.
On-line banking network link, post office opening of agri-desk in the remote areas will not be as difficult compared to the opening of new offices or branches by banks/Modarabas, just as banks have opened desks at car dealers' showroom.
AGRI-PRODUCT LOANS AND THEIR SECURITISATION CAN BE DIVIDED INTO FOUR CATEGORIES:
A) Loan secured by crops
B) Loan secured by livestock
C) Loan secured by farm equipment's
D) Consumer purpose loans-to farmers Ranches.
The crops category belongs to goods produced in farming operations or crops in their un-manufactured state; grains, cotton, wool, such goods must be in possession of the debtor engaged in raising, grazing or other farming operations if the goods are farm products, they are neither equipment nor inventory.
When they are harvested and moved into storage, warehouses, they become inventory.
They must be in possession of the farmer. If they are in possession of someone selling them, they are considered as inventory.
The standard has to be followed in the ordinary course of business inventory procedures.
Loans against inventory (raw material, work in process, finished goods) can be allocated. The inventory advances are usually converted to the receivable portion of the line, once goods are sold then the receivable portion of the line should be reduced accordingly.
The borrowing base is adjusted up and down, in accordance with the amount of inventory constantly in the pipeline and the existing receivables category.
A maximum limit of Rs ten million per customer can be fixed as the upper limit for risk management and the higher limit to meet peak seasonal needs or before the price increase for goods occur, and would be a prudent approach.
Loan disbursement, through post office account, will help to develop fund flow in post office channels. It may cover sectors of retail banking and personal banking.
The system can be started from adjacent cities-, Lahore, Karachi, Peshawar and Quetta. Agency arrangement with Post Offices and Saving Centres link in rural areas may provide a public-private sector partnership.
Insurance of these loans can be arranged with insurance companies and may provide incentive for them.
Modaraba association can reach an agreement with the postal authority's network for providing space with shared cost and facilitate post office banking services with limited man-power.
It is in line with the present concept of Central Processing Unit (CPU) banking in which branches are reduced to skeleton staff for offering only counter services and customer contact point.
Ten percent of Rs eight billion paid up capital of Modarabas comes to eight hundred million for initial investment. It will create a sizeable goods and services market.
The flow of funds will facilitate village improvement education and with diversification of funds, add colour to the investment landscape.
Building inroad for Modarabas in the agri-sector is food for thought and could be a step forward to provide food for all.
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