. .

New opportunities and threats

  1. Capital Markets
  2. External debt profile
  3. Foreign Direct Investment
  4. Commercial Banks
  5. Privatization
  6. Leasing sector
  7. NetSol International
  8. Insurance

Leasing sector has become the main source for medium term funds

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 competition.

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 notices.


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 competition.