Growth and profitability depend on the pace of
By SHABBIR H. KAZMI
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
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
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
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
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
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
* 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
* Establishing contacts with concerned
government agencies and departments in order to obtain a more
favourable policy framework towards MSE.