The dilemma the leasing companies now face is bridging the expanded resource gap

By A.B. SHAHID, Managing Director, 
Pak-Gulf Leasing Company Limited

Nov 25 - Dec 01, 2002

Experience of the Pacific-rim economies indicates that small and medium-size enterprises play the pivotal role in economic growth and containing poverty. This highlights the importance of financial institutions that support this strategically important sector, and ensure its continued expansion. Leasing is the institutional arrangement that channels resources to this sector to bridge the resource gap, and funds the acquisition of plant and equipment by operators in this sector.

In Pakistan, however, insolvency and subsequent closure of some DFIs has stretched this gap too wide because the shrinking role of DFIs is forcing the industrial sector to look to leasing companies for financing its high-ticket plant and equipment needs a void the leasing sector may be able to fill only partially given its present equity and resource base, besides meeting the demands of consumers, and smal1 to medium-size industrial units. The permission allowing banks to undertake consumer financing will shift a chunk of this market to the banking sector allowing the leasing sector to take a bigger slice of the equipment financing business.

However, the dilemma the leasing companies now face is bridging the expanded resource gap. With commercial banks now perceiving them as their rivals, the only option left for leasing companies to raise medium-term funds is Pakistan's narrow debt securities market. This market has not expanded much largely due to the lack of a secondary market for bond trading that could assure ready liquidity to the bondholders. Increased equities of leasing companies (eagerly sought by SECP) alone cannot sustain growth; they must be supplemented by a much larger quantum of market funds, which continue to remain with commercial banks that have extensive infrastructure for resource mobilization.

If leasing companies are to fill the resource gap in expanding the country's industrial base, institutional arrangements to increase market access will have to be put in place very quickly. Secondly, leasing companies will need enhanced fiscal incentives to pass these on to the industrial sector to promote industrialization. Unfortunately, that is not happening. Even those (e.g. initial depreciation allowance on leasing used machinery) available to them earlier, have been withdrawn by the CBR instead of expanding them further to achieve the ultimate goal of enhancing tax revenue from an expanded industrial base.

Leasing companies do not want the government to loose out. By all means, it should be ensured that the fiscal incentives given to this sector translate themselves into higher industrial productivity and result in a more than compensatory increase in tax revenue collection from the industrial sector. This support, whose results should be credibly verified, must be expanded rather than curtailed otherwise leasing may gradually descend into the same state as Pakistan's banking.

Speedy implementation of these measures is crucial to reviving Pakistan's dwindling economic growth. Privatization of DFIs will take time while the government contemplates its options. Rendering them saleable by ridding them of the burden of delinquent loans will be a tough proposition. In this scenario, the leasing sector needs encouragement to play a larger role. The sector now faces an un-even playing field because of the unhealthy inroads made by commercial banks into the leasing sector a case of loss of focus that should be address by the regulators. Unhealthy competition could cause systemic distress in the leasing sector.