LONG-TERM PERSPECTIVE VERY OPTIMISTIC
Excerpts from an exclusive interview with Humayun Murad, Chairman, Leasing Association of Pakistan
By SHABBIR H. KAZMI
Dec 10 - 16, 2001
During the year 2000-2001 leasing business was good, mainly driven by textile and automobile sector. However, provisioning was relatively higher as a large number of financial institutions, including leasing companies, were hit due to a few corporates. Immediate business perspective is uncertain but I am very optimistic about medium term outlook.
Financial year 2000-2001 was a difficult year for Pakistan's economy. GDP growth rate was low and per capita income remained stagnant. Drought like condition, higher oil prices and weak demand for Pakistan's major export products were the reasons responsible for lower GDP growth rate. However, performance of large scale manufacturing was commendable and the sector recorded an impressive growth of over 7 per cent. In this backdrop, performance of leasing companies must be applauded.
Leasing companies have been striving hard to beat the competition fuelled by entry of other financial institutions in the leasing business. During the first half of 2000-2001 leasing companies did not peruse business actively due to the withdrawal of initial depreciation/first year allowance. However, Securities and Exchange Commission of Pakistan (SECP) was fully cognizant of this as well as some other issues. Restoration of this facility has once again provided the impetus. This is evident by the amount of fresh leases written by a large number of companies. The Leasing Association of Pakistan (LAP) is thankful to Finance Minister and the Chairman, SECP and expects that they would continue to support the leasing sector, which is the only source of medium term funds for adding new productive facilities, particularly for small and medium size sector.
As regards enhancement of paid-up capital, LAP believes that the SECP's stand is justified but market realities are very different. The SECP has been very helpful in approving plans submitted by individual companies and allowing issue of right shares at discount. However, it must also be taken into account that majority shareholding of a leasing company changed when the underwriter had to take up the shares. I would also say that so far only a few companies have decided to exercise such an option. Therefore, we may see some mergers and acquisitions in leasing sector.
During the year there was a substantial increase in vehicle leasing business. Some analysts term this not a healthy trend. However, I will say that vehicle lease is not confined to passenger cars. A very large chunk consist of commercial vehicles. Therefore, this is a very healthy trend. First, because it will improve the transport industry and a large percentage of population will benefit from this. Second, the increase in automobile sales will make the vendor industry stronger as well as competitive. The vendor industry employs a large number of people and its growth and consolidation will also help in adhering to deletion programme.
After the September 11 incident both the lenders and borrowers became very cautious. While the fundamentals have not become adverse, apprehensions about fallout were high. However, the perception has changed and investors' confidence has improved significantly. The demand for funds is expected to be high in the coming months. Two sectors are expected to undertake major expansion and BMR. These are textiles and construction. Some of the textile companies have already initiated expansion and BMR programmes and others are getting ready. This is only because that the textile industry has realized that its survival depends on higher value addition. As the dust has started settling in Afghanistan, large scale rehabilitation work, with the help of international agencies, is expected to commence soon. Pakistan's cement plants are the nearest source of supply. In addition steel, ceramic and tiles and sanitaryware should also do well. They must get ready to exploit the opportunity.
To conclude I would say that leasing companies are ready to meet the enhanced demand for funds. More and more companies are floating term finance certificates (TFCs). On the one hand, leasing companies will be able to mobilize funds at competitive rates. On the other hand, investors will be able to invest in an instrument which offers guaranteed and attractive return. The success of most of the leasing companies over the years has been due to their prudent business approach. They should remain selective in writing leases to avoid provisioning. It is good to be contented with lower business rather than ending up with heavy provisioning.