Leasing sector has become the main source for medium term funds
By SHABBIR H. KAZMI
May 08 - 21, 2000
The year 1998-99 was a challenging year for Pakistan. In the post
nuclear-test era, while there was an overall economic slow down, the leasing sector could
not remain immune. While the lower volume of business was a problem, the real issue was
declining repayment ability of the borrowers. The competition has intensified due to
presence of a large number of players and dearth of quality borrowers has caused unhealthy
The companies which made prudent and conservative decisions, during
this lean period, were able to maintain their cashflow as well as underwrite new leases.
The companies which were a little reckless in picking up clients has got visible scars.
Such companies will continue to suffer, in the near future.
With the start of process of recovery the industrial sector needs
medium-term funds. DFIs and commercial banks cannot meet this demand and borrowers will be
looking towards leasing companies to meet their requirement for funds. Leasing companies
have realized the changing trend and are trying to quantify the future borrowings. This is
evident from flotation of Term Finance Certificates (TFCs) by a number of leasing
companies to overcome mismatch of funds and lock their future cost of funds. The current
excessive liquidity in the financial system is a temporary phenomena and interest rates
are bound to go up even within the year 2000.
There was hardly any BMR in the manufacturing sector during last 3 to 5
years. While the need for funds is urgent, the declining interest rates offer attractive
opportunity. Many leasing companies have already redefined their marketing strategy. This
include extending the facility to small and medium enterprises rather than totally
depending on the corporate sector.
Another area, consumer leasing, ignored in the past is being actively
explored. Since this involves a large number of clients and small monthly rentals not too
many companies were interested in undertaking this type of business. Some of the companies
have been able to capitalize this opportunity by underwriting consumer leases to the
employees of the corporate sector.
Initially leasing companies could start business with a paid-up capital
of Rs 50 million. This limit was raised to Rs 100 million in 1992 and further enhanced to
Rs 200 million. Companies were required to increase the capital to this level by November
1999. However, a large number of companies failed to meet the deadline. At present 32
leasing and 8 modaraba companies are members of Leasing Association of Pakistan. According
to the information available from the Karachi Stock Exchange, 29 leasing companies posted
profit for the year 1998-99 and 3 posted loss. Out of the profit making companies 9
companies did not declare profit.
While the sector continues to operate under intense competition, the
new interpretation of old laws, particularly with regard to taxation, has become a serious
concern for the companies. It is true that the country needs additional revenues to
minimize budget deficit, but tax collectors must refrain from issuing unrealistic demand
Nine months of the current fiscal year have passed by. There are clear
signs of commencement of process of recovery. The spread has improved with the declining
interest rates and higher liquidity in the financial system. Some of the leasing
companies, expecting larger business in the near future have floated TFCs to overcome
mismatch of funds as well as locked their financial cost for a specified period.
The direction of economic growth cannot be predicted with certainty
because across the board recovery is not visible. However, signs of sporadic investment in
BMR as well as fresh investment are very much there. The movement of KSE-100 index also
indicates revival of investors' confidence in the capital market. However, this interest
will be confined to less than a dozen listed companies. The current euphoria is not
supported by economic fundamentals. The country still suffers from adverse balance of
payments. Revenue collection is inadequate to support development programmes. The exchange
rate was maintained mainly through capital controls.
Inflation rate is expected to go up once again due to cost-pushed
phenomena and interest rates are also expected to surge upwards. The increase in POL
prices will also result in increase in electricity and gas tariff.
A large number of leasing companies have failed to increase their
paid-up capital, the Securities and Exchange Commission of Pakistan has two options
available, extend the deadline for another 2 to 3 years or these companies should go for
mergers and acquisitions. Apparently, the first option seems more practical due to
existing laws governing mergers and acquisitions. However, the players have to decide
themselves the ways to reduce the number of companies to weed out unhealthy