May 6 Pakistan regulators will introduce risk
management guidelines for modarabas later this year, part of
efforts to jump-start the equity-like financing format that
remains a tiny part of the country's Islamic finance sector.
Modarabas are a form of Islamic investment partnership where
assets are managed on behalf of clients, with income and
expenses shared under a pre-agreed ratio, regarded as one of the
purest forms of Islamic finance.
Pakistan's modaraba concept dates back to the 1980's as the
first Islamic business model setup with a statutory framework
and dedicated regulations, yet it has found limited interest
while debt-based products have thrived in recent years.
Regulators are keen to change this: The Securities and
Exchange Commission of Pakistan (SECP) has finalised risk
management guidelines which will be circulated soon, Imran
Hussain Minhas, joint registrar of the modaraba unit at the
SECP, told Reuters.
"I cannot give the exact date of its official promulgation
but hope to circulate it soon for implementation. It broadly
covers all the business risks including the risk of sharia
non-compliance, in addition we have also addressed the
product-wise risks and their mitigation techniques."
He did not give specific details, but the guidelines would
cover risks associated with common sharia-compliant contracts
such as mudaraba, musharaka, murabaha, salam and istisna.
Last year, the SECP introduced sharia compliance and sharia
audit mechanisms to strengthen the sector, and the new rules are
expected to attract new firms.
"We have some applications for registration as MMC (modaraba
management company) and expect one of them would be able to
manage its IPO before June," Minhas said.
As of December, the sector included 26 firms operating 50
branches with total assets of 30.7 billion rupees ($310.6
million), SECP data showed, almost unchanged from a year ago.
The move comes at a time when authorities are stepping up
efforts to develop Islamic finance, encouraging lenders to
expand their operations in the world's second most populous
Modarabas remain closely regulated. In Pakistan they hold
the status of a corporate entity and must be listed on an
exchange, which has further disclosure requirements.
But they are also quite flexible investment vehicles that
can cater to almost any purpose, something the market should to
capitalise on, said Muhammad Shoaib Ibrahim, chief executive of
First Habib Modaraba.
Pakistani law allows modarabas to conduct multiple financing
activities, trading of commodities, project financing, equity
investments, as well as act as a special purpose vehicle and a
venture capital company.
Modarabas can also be setup to offer a dependable source of
medium-term financing, and the new rules would further help the
sector become more uniform, Ibrahim said.
Further reforms to the non-bank financial sector are also
underway which could spur further expansion, said Ibrahim.
Despite this, some modarabas haven't keep up with growth in
the country's financial sector and some are even winding down.
In January, First Habib Bank Modaraba, a unit of
Pakistan's largest lender HBL Bank, said it would
liquidate its business. It did not give a reason but analysts
pointed to a lack of scale of the business, with paid up capital
of 397.1 million rupees at the end of September.
To an extent, their own equity-like nature makes modarabas
vulnerable to market price swings, meaning some have been unable
to remain consistently profitable.
For instance, First IBL Modaraba posted a profit
of 9.3 million rupees for the year ending June 2013, a reversal
from a loss of 41.5 million rupees a year earlier.
KASB Modaraba did the opposite, posting a loss of
46.1 million rupees in the year ending June 2013, compared to
the 40.6 million rupees in profits a year earlier.
First Punjab Modaraba and Modaraba Al-Mali
posted profits in two of the last six years.
This prompted the SECP to issue rules in 2012 that allow
smoothing of profits using a profit-equalisation reserve.
But further reforms could be needed. Back in 2011, then
central bank governor Ishrat Husain called for modarabas to
diversify their products away from leasing business and for the
lifting of their minimum capital requirements.
At the time, assets held by modarabas accounted for 0.2
percent of total assets held by the financial institutions, a
figure which remains almost unchanged today.
($1 = 98.8250 Pakistani rupees)
(Editing by Kim Coghill)