Growth and profitability depend on the pace of economic revival

Dec 18 - 24, 2000

Leasing companies have emerged as an important source of medium and long term funds over the years in Pakistan. They make a significant contribution towards industrial development of the country. The present economic managers have chalked out a revival plan which is significantly different from previous policy packages announced in the past. The efforts for revival of the economy and accelerating the GDP growth rate demands from the financial sector to play its pivotal role in meeting the capital requirement. Leasing companies have the largest potential to play the required role. However, the sector also faces some real issues which need immediate redressal.

One such issue is meeting the enhanced paid-up capital requirement of Rs 200 million by June 30, 2001 as stipulated by the Securities and Exchange Commission of Pakistan (SECP). 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 meet the bench mark by November 1999. However, a large number of companies failed to meet the requirement and the SECP has extended the deadline. While some analysts still believe that the SECP would provide the relief, the others warn that the Commission is serious this time.

Their conviction is based on the recent circular of State Bank of Pakistan (SBP) asking the commercial banks to meet the enhanced paid-up capital requirement of one billion rupee by June 30, 2003. They say that while the minimum capital for commercial banks was Rs 500 million, the requirement for leasing companies was Rs 200 million. If the same ratio has to be maintained, the new requirement for leasing companies works out to Rs 400 million. Therefore, the prospects for further extension are very low and the SECP may be obliged to raise this requirement further. They say the SECP may enhance the amount to at least Rs 300 million and set the deadline for June 30, 2003.

Some sector analysts believe that while it may be true that despite having a smaller capital base many companies were able to post profit, a situation has arisen where business mainly flows to large capital base companies. At present bulk of the business go to five big companies. The enhanced funds requirement of the clients could only be met by 'big ticket' leasing companies. On top of every thing, a more than desired number of players has resulted in 'cut throat' competition among the companies. Analysts say that the rate being charged by some companies is even lower than the rate at which they mobilize funds.

The situation has been further aggravated by the entry of other financial institutions, particularly commercial banks, in leasing business. Commercial banks are able to underwrite lease at lower interest simply because their average cost of funds is less than 10 per cent. Therefore, there is an urgent need to weed out inefficient players. One of the ways to reduce the number of players by forced mergers and acquisitions. It may be a very bitter pill but the sponsors have to swallow it one day the sooner they do so the better it will be for strengthening the financial sector.

These analysts also have serious reservations about entry of other financial institutions in leasing business. They say, "As a rule, an institution should remain confined to the mandate for which it was created." It may be true that commercial banks are suffering from 'surplus liquidity crisis', but venturing into an activity where the skills are not available adequately can only lead to problems. Two commercial banks have ventured into leasing business in the past have incurred huge losses.

There was a suggestion that if commercial banks have surplus liquidity they should extend credit lines to leasing companies. Alternatively, they can form a strategic alliance with leasing companies. This practice would yield two benefits, funds for leasing companies and modest return for commercial banks with lower risk exposure. Still, some other analysts believe that while there are efforts to reduce number of commercial banks and leasing companies, authorities should also abstain from granting additional mandate for undertaking leasing business to commercial banks and other NBFIs.

According to an analyst, "Executives of commercial banks and leasing companies have not only different type of background but have also entirely different mind set. Lending by commercial banks is usually for less than a year, whereas lease period range from three to five years, at an average. Some of local banks were made responsible for lending under IDA credit scheme. Apparently the experience is disappointing. There is a need to examine the fate of loans disbursed under the scheme first and only then allow them to undertake leasing business.

According to Etrat Rizvi, Managing Director, National Development Leasing Corporation, the step by the SECP is in the right direction. The SECP had made the announcement, for enhancing paid-up capital, as back as in 1996 and had also provided sufficient time. Therefore the Commission may not be sympathetic after June 30, 2001. In his opinion, the resistance against mergers and acquisitions is a psychological obstacle rather than due to any adverse financial consequence.

However, another analyst suggests, "Looking at the present paid-up structure of leasing companies, sentiments engulfing capital market, the SECP may not extend the deadline but may choose to reduce the per party exposure limit to half of the existing limit. This may not be a very prudent approach, but in a business environment where sponsors pay no attention to the instructions of regulators, curtailing the limit may force the sponsors to rethink, redefine their strategy and take steps to avoid going out of business."

Over the years, leasing sector has become an important source of fund. While leasing is very popular in a majority of developed as well as developing countries, its share in capital formation in Pakistan is still very low as compared to other countries. The contribution being made by the leasing sector towards the development of small and medium sized enterprises is commendable. At present 32 leasing companies and 8 modarabas are members of Leasing Association of Pakistan.

Leasing companies, since 1985, were mostly involved in financial leases. In 1997, Orix Leasing Pakistan (OLP) made a great break through by venturing into operating lease business. The concept has been well received by the business enterprises. At present the total portfolio of OLP, under operating lease, exceeds Rs 250 million. The current inventory of OLP's asset portfolio consists of power generation equipment, compressors, commercial vehicles, data networking and satellite equipment, motor cars and office equipment. OLP has achieved this without undertaking any advertising campaign.

Leasing companies have been doing consumer leasing for some time. However, the beneficiary of this programme has been mostly the employees of multinational companies and blue chips. Although, there has been tremendous growth in this area, it cannot meet the shortfall being caused by economic slow down in the country. The life line for the companies remains the leasing of industrial plant and machinery.


Leasing sector face three key issues, meeting the enhanced paid-up capital requirement, overcoming the shrinking spread and containing the provisions against doubtful lease. Almost all of these are the outcome of low level of economic activities resulting in lower demand for funds and the ever increasing number of players. The players themselves have to find the ways and then convince the regulators to take appropriate measures.

There are clear signs that lending rates are bound to go up in the future. Those leasing companies, who had deferred flotation of their term finance certificates (TFCs) in the past, must review their decision. In the near future they may have to offer rate around 17 per cent per annum to be able to attract substantial amounts. This forecast is based on the conditionalities incorporated in funding agreement with the IMF.

While the signs of overall improvement in economic fundamentals may not be there, pragmatic entrepreneurs have already started revamping their manufacturing facilities to survive under the new economic order being led by the World Trade Organization (WTO). The others must also take a fact into account that overseas buyers would like to identify their sources of supply and then place the orders much earlier than the sun set on December 31, 2004.

There are still some legal lacunas in the rules governing the leasing sector. While Leasing Association of Pakistan is making efforts, the regulators must also realize that a strong financial system is a prerequisite for a vibrant economy. A sheer lip service by the economic managers and regulators just cannot bring an economic revolution.

A major achievement made by the Leasing Association of Pakistan (LAP) in the recent past is the finalizing of the 'Technical Assistance Agreement' with the Swiss Agency for Development and Cooperation (SDC) for the micro and small enterprise (MSE) lease programme in NWFP province. SDC is a multilateral development agency representing the Swiss government in Pakistan. SDC has provided a technical assistance grant to LAP for performing the following activities:

* To work in collaboration with SDC and leasing companies to ensure effective use of the funds,

* Increasing the awareness regarding the use and benefits of leasing amongst the MSE sector by conducting seminars for leasee orientation and through promotional campaigns,

* Strengthening the capacity of member companies with respect to leasing to MSE by conducting regular training workshops,

* Establishing contacts with concerned government agencies and departments in order to obtain a more favourable policy framework towards MSE.