KARACHI, Oct 24: Three leading modarabas are likely to come up with Islamic term finance certificates by the end of this year if the regulators clear way for their introduction. Modaraba managers say they badly need TFCs to raise money because borrowing funds from banks is becoming unfeasible, particularly after the entrance of the banks in the leasing business.

The modarabas that are actively working on Islamic TFCs are: First Crescent, Al-Zamin and Modaraba Al-Mali. “We may launch Islamic TFCs by the year-end if the regulators clear the way for it,” said chief executive of Al-Zamin Leasing Modaraba, Basheer A. Chowdhry.

Before launching Islamic TFCs, the modarabas would have to seek clearance from the Securities & Exchange Commission of Pakistan and fulfil the formalities of the stock exchange. But even before that the modaraba sector as such needs approval of the concept of Islamic TFCs from the Registrar of Modarabas whose job is to ensure that modarabas are working in conformity with the Islamic law.

The Modaraba Association of Pakistan with the help of AMZ Securities has developed a concept paper for Islamic TFCs and has sent it to the Registrar of Modarabas. “We hope that the concept paper will be cleared soon by the Registrar office paving the way for individual modarabas to seek SECP approval for the launch of the TFCs,” Basheer Chowdhry told Dawn.

Sources in the modaraba sector say the Registrar of Modaraba is in agreement in principle with the concept of the Islamic TFCs that has been developed by improving upon an earlier module of Islamic Certificates of Investment or ICI. The module of ICI was drawn up by the above-named three modarabas more than a year ago but that could not get the regulators approval.

The sources say the Islamic TFCs that three leading modarabas are planning to launch would worth Rs100-250 million. They say that a number of other modarabas are also interested in launching TFCs but their specifics are not known.

The corporate debt market has evolved rapidly in Pakistan with Rs15.7 billion worth of TFCs launched in the last two years. The TFCs normally offer a floating rate tied with the State Bank discount rate or treasury bills rate with a cap and floor on the highest and the lowest possible return. Most of TFCs have been launched by the textile and chemicals makers as well as leasing companies.

The Islamic TFCs — if it hits the market — will be the first by modarabas.

The Islamic TFCs would not offer a pre-fixed rate of return. Nor would they offer a floating return tied with a fixed rate of return that is forbidden under Islamic law: Instead these would be a profit and loss sharing debt instrument. “Profit sharing will be based on an agreed profit sharing ratio and will be decided at the inception of the TFC transaction,” reads the concept paper developed by Modarabas Association of Pakistan and AMZ Securities Ltd.

“The terms and conditions of (profit) sharing will be clearly and properly disclosed in the offering document (information memorandum and prospectus) and will also be incorporated in the relevant legal documents,” says the paper.

The profit (loss) sharing ratio will be applicable on a pool of leased or other assets of a given modaraba and will be subject to the adjustments of operating expenses.

PROFIT PAYMENT: The profit on the Islamic TFCs will be paid on six-monthly basis and this shall be a provisional or on-account payment, irrespective of profit or loss. The final payment will be determined after the finalization of annual audited accounts. “If the final profit payment determined on the basis of the annual audited accounts is in excess of provisional profit payments then the excess amount will be paid along with the next six-monthly provisional profit.”

TAKAFUL RESERVE: The modaraba that launches an Islamic TFC will maintain a Takaful Reserve against which the share of the loss of the TFC investors will be adjusted. The modaraba will contribute a certain amount to set it up.

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