Excerpts from an exclusive interview with Nasim Khan of Sigma Leasing

Dec 18 - 24, 2000

Sigma Leasing Corporation commenced its operations in January 1997. The remarkable exhibition of management's prudence is that as on June 30, 2000, its recovery was 100 per cent with no over dues, defaults or rescheduling. Besides, the Company has shown consistent growth in terms of lease portfolio. The success is because of strict compliance to the standards for risk evaluation. DCR-VIS Credit rating had upgraded medium to long-term entity rating of Sigma to BBB and short-term entity rating to D-2.

According to Nasim Khan, "The fundamentals for the financial sector in general and working environment for leasing companies in particular is still not fully conducive. It is true that capacity utilization in large scale manufacturing sector has improved but quantum of fresh investment is still low. Some of the units which have gone for BMR/expansion are those who have successful track record and would have made the investment to meet enhanced demand of their products. However, the real concern is that repayment ability of borrowers is further eroding due to cost pushed inflation and slow pace of economic activities."

Other impediments facing leasing sector are: deadline to meet the requirement of minimum paid-up capital of Rs 200 million, upward trend of interest rates and enhanced competition due to entry of commercial banks in leasing business. Yet another issue which has not received the fullest attention of financial institutions is compliance of the Supreme Court judgment regarding abolishing of Riba from the economy.

While mergers and acquisitions is being prescribed by many as a solution to meet the paid-up capital requirement, many analysts do not expect any merger or acquisition. Khan is also skeptical about the move. He strongly believes that unless there is complete segregation of ownership from management one should not expect any move. He said, "Since the sponsors play a very active role due to their presence on board of directors, they would hardly let their business go to others. It is more due to sentimental attachment rather than any other reason."

It may be true that leasing companies were not able to meet the deadline of November 1999. The Securities and Exchange Commission of Pakistan (SECP) has extended the last date to June 30, 2001. Still, compliance to this requirement remains a remote possibility. Khan has his own explanation. He said, "Inability to meet the new benchmark is not entirely due to the attitude of the sponsors. Since 1995 Pakistan's economy has been facing recessionary trend and bearish sentiments engulf the capital market. Therefore, the option of issuing bonus shares and/or right shares could not be fully availed. The problem continues and it may not be possible for small capital companies to comply with the requirement. Therefore, it is necessary for leasing companies to come-up with a proposal which is acceptable to the SECP. Those companies which have less than Rs 100 million paid-up capital face the real crisis."

While mergers and acquisitions seems to be the right solution, the option has not been exercised as yet and future prospects are also very low. One of the reasons for not exercising the option is that sponsors are also the working directors. There is a sentimental attachment with the name and sponsors do not wish to let their company to go to some other group. Khan says, "The seperation of ownership from management will take some more time in Pakistan when professionals will be allowed to decide the fate."

He also has the suggestion for the SECP. He says, "The SECP must also consider allowing the companies to retain whatever amount is collected from the right issue. Issuing the right shares may be the right solution, even if the lesser amount is collected to the extent of sponsors share. It would indicates faith of sponsors in their own companies. The effort by the sponsors to make their own contribution first and clearly laid down programme for utilizing the amount, to be collected from right issue, can attract the attention of investors."

Referring to the Supreme Court decision about Riba, Khan said, "Abolishing of Riba should be our collective effort. As the deadline is approaching fast, all of us must make the best use of knowledge and expertise. There is need to hold brain storming sessions with the aim of achieving the objective. Such discussions must be held with open minds and hearts.