FOR the first time since the global financial crisis of 2008, which impacted Pakistan’s financial sector as well, non-banking financial institutions and the modaraba sector produced their finest financial results, for the year ended June 30, 2013.

When modarabas first came on the country’s financial scene in the 1990s, the faithful put their trust and money in scores of modarabas that sprang up, so as to save and earn Shariah-complaint returns. But unfortunately, non-performance, and more seriously, unethical practices by a sizeable number of modaraba sponsors — who vanished with billions of rupees of investors’ money — brought the entire sector into disrepute.

Yet, quietly but clearly, the sector has managed to shake off its tarnished image, and has moved to the forefront of non-banking financial institutions (NBFIs). For the year ended June 30, 2013, the modaraba sector stole the spotlight as it raked in a profit of Rs2.035 billion — representing a strong growth of 55 per cent over net earnings of Rs1.311 billion in the earlier year.

While commercial banks and mutual funds operate independently, modarabas, leasing companies and investment banks, which are regulated by the Securities and Exchange Commission of Pakistan (SECP), stand together under the umbrella of the ‘Modaraba and NBFI Association of Pakistan’.

“It represents consolidation and progress in the financial sector,” Basheer Chowdry, a former chairman of the Leasing and Modaraba Association of Pakistan, told Dawn. He says, at the moment, there are 24 modarabas (the number was reduced after several mergers), 10 leasing companies and seven investment banks are operating in the country.

The strength of NBFIs, he says, was born out of adversity, as big commercial banks choked credit lines following the global financial debacle of 2008, which brought the NBFIs together to generate resources for their mutual survival.

He asserts that NBFIs and modarabas are contributing to the development of sectors that are usually not under the primary focus of commercial banks — mainly Small and Medium Enterprises (SMEs). With least competition offered by the mighty and more resourceful commercial banks, SMEs turned out to be the major field of operation in which each modaraba and NBFI has carved out a niche for itself.

For the year ended June 30, 2013 (the latest year for which the accounts have been drawn), out of 24 modarabas in operation, 20 declared a profit; 17 announced cash dividends in the range of 1.25-100 per cent; while two modarabas declared bonus issues for their certificate holders.

The yearly payout to certificate holders increased to Rs1.007 billion, from Rs.924 million a year ago. The asset base of the modaraba sector grew by 7.5 per cent to Rs31.398 billion from Rs.29.196 billion, and total equity climbed to Rs.13.824 billion.

The performance of the leasing sector was equally impressive, as it emerged from the red of Rs401 million in FY12 to a record profit of Rs496 million in FY13. The asset base of the leasing sector now stands at Rs35 billion, while its equity has grown to Rs5.2 billion.

“The leasing sector represents almost 50 per cent of the asset base of the combined NBFI and modaraba sector, which amply demonstrates the enormous contribution it makes to the economy,” the CEO of a leading leasing company asserted.

Like the leasing sector, investment banks also converted their loss of Rs1.371 billion in FY12 to a profit of Rs262 million in the latest year. Their total equity also turned to a positive Rs908 million from a negative Rs630 million at the end of June 2012.

An executive of a large business conglomerate that floated two modarabas, a leasing company and a couple of mutual funds back in 1994, says that the NBFI sector does not only promote savings by offering different asset classes to investors and undertakes credit delivery to the SME sector, but it also provides alternative fund raising opportunities through private equity and venture capital funds to participants of the financial system.

He informs that recently, the Government of Sindh pledged to launch a leasing company and a modaraba on the model of the ‘Sindh Bank,’ which, he believes, should add value to the sector.

“It is a recognised fact that co-existence of a vibrant and progressive NBFI sector along with the banking industry is essential for comprehensive and widespread development of any economy,” says Mr Basheer Chowdry.

But he also laments that leasing companies, investment banks and modarabas are facing a variety of challenges, like the absence of a level playing field, limited resource mobilisation, inability to tap debt and equity markets, high cost of borrowings, dearth of skilled human resource and limited branch network.