Al-Zamin Modaraba to issue Rs 250 million Islamic bonds

KARACHI (July 16 2003) : Al-Zamin Leasing Modaraba is to sell next month bonds worth 250 million rupees, being first-ever to be issued by Modaraba Sector on Islamic principles.

The bonds will have maturity of five years, said Al-Zamin Leasing Modaraba Chief Executive Basheer A Chaudhry on Tuesday.

While the module and modalities of the instrument have been vetted by religious scholars and approved by Securities and Exchange Commission of Pakistan (SECP), Al-Zamin is in the final stage of completing all regulatory and operational technicalities to sell the bonds commonly known as term finance certificates (TFCs) worth one billion rupees, Basheer said in an interview.

“We will sell these bonds in three or four tranches and plan to list them at Karachi Stock Exchange by next month,” he added.

Out of Rs 250 million, Rs 200 million bonds will be for banks, mutual funds, financial institutions and corporates and Rs 50 million bonds for public subscription with green-shoe option for another Rs 50 million.

An overwhelming demand already has been registered for the private placement far in excess of Rs 200 million from financial and corporate sector which, according to Basheer Chaudhry, reflects the confidence of investors in the quality of the instrument and the issuer, and confirms that public floatation would also be substantially oversubscribed.

The investors will get six-monthly profits on the proposed five-year Islamic bond.

An interim profit will be paid irrespective of the actual profit or loss made by the Modaraba.

If the final profit payment, determined on the basis of annual audited accounts, would be in excess of provisional profit payments then the excess amount would be paid along with next six-monthly profit.

A salient feature of the Musharaka-based TFC would be the 'Takafful Reserve', to which Al-Zamin Modaraba would contribute an initial amount and also allocate a percentage of subsequent profits to build a pool.

This pool of fund would remain available during the tenure of the bond to take care of profit distribution on due dates and to insulate the investors from any operational losses during the life of the bonds.

The concept of Musharaka-based bond was designed late last year by Modaraba Association of Pakistan with technical assistance of AMZ Securities, a local brokerage house in Karachi.

Profit-sharing under a Musharaka-based TFC will be based on an agreed profit sharing ratio and will be decided at the inception of the bond transaction.

It is expected to be around 8.75 percent.

Al-Zamin Modaraba is engaged mainly in the leasing business and has earned a respectable image of being prudent and progressive entity managed by experienced bankers and professionals.

Commencing its operations in 1992 it has achieved a record of consistent growth and profitability.

Being a multi-functional modaraba in nature, Al-Zamin also participates in short-term investments on profit and loss basis, equity participation, financial advisory services, project handling and portfolio management.

The Modaraba has also been undertaking mergers and acquisitions, which have increased in its equity base to over Rs 320 million and assets base to over Rs 1,200 million.

The floatation of the Musharaka-based TFCs will resolve a long outstanding problem of the modaraba sector for resource mobilisation.

It will not only provide direct access to Al-Zamin and other Modarabas to individual and corporate investors, it would also reduce their funding cost which would help their marketing efforts and eventual profitability.

The issuance of TFCs also establishes the fact that the concept of Islamic financial system can be effectively implemented in contemporary investment environment without compromising on the fundamentals of Islamic ideology.

JCR-VIS Credit Rating has assigned a preliminary instrument rating of 'A-' (Single A Minus) to the proposed term finance certificates (TFCs) issue of Rs 250 million of Al-Zamin Modaraba.

The rating will be finalised after examination of all legal documents.

This TFC issue should help in significantly improving the resource mobilisation ability of the Modaraba sector as a whole and therefore, solve a major constraint on the performance of this sector.

Al-Zamin's medium to long term entity rating has been upgraded to 'BBB+' (Triple B Plus) from 'BBB' (Triple B) while the short-term rating has been maintained at 'A-3' (A Three).

These ratings are on 'rating watch' in view of the proposed merger of First Professionals Modaraba with Al-Zamin.

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