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Improved performance

Dec 10 - 16, 2001

One should not undermine the importance of strong financial institutions if we wish to make Pakistan a vibrant economy. Leasing companies and Modarabas, doing leasing as core business, have been a catalyst as well as an important source of capital formation. The present economic managers have chalked out an ambitious economic growth plan. Therefore, leasing companies have an significant role as the only provider of medium term funds. Though, the regulators have been fully cognizant of problems faced by the sector, some of the minor irritant should have not arisen at all.

Financial results for the year 2001-2002 are being announced indicating mixed performance. Keeping in view the global as well as local conditions, it may be said that the performance of leasing companies and Modarabas has been commendable. While there has been increase in total leases written compared to previous year, provisioning was also high, to some extent. However, this was due to any other reason except that some of the corporates became delinquent. This affected the performance of financial sector, of which leasing companies were an integral and important part.

Securities and Exchange Commission of Pakistan (SECP) did not accept the demand of leasing companies to extend the deadline for increasing paid-up capital. However, it approved plans of individual companies. The current prevailing conditions are not conducive for issue of right shares. Contrary to market sentiments, a leasing company decided to float right shares. Since the issue was under subscribed underwriter became the majority shareholder in the leasing company. Therefore, it may be said that flotation of right shares at this juncture was not the right solution.

Contrary to the outstanding demand of leasing companies, the regulators have not imposed any restriction on other financial institutions to undertake leasing business. According to some sector analysts, this must be stopped immediately. because: 1) this fuels unhealthy competition among the players and 2) adversely affects the earnings of commercial banks in particular. It is true that commercial banks enjoy the benefit of very low cost funds, but are also liable for higher corporate tax. While applicable tax rate on leasing companies is 33 per cent, the tax rate for commercial banks is as high as 50 per cent. Therefore, as a prudent approach, commercial banks should concentrate on their core activity only and extend credit lines to leasing companies.

It is also observed that a significantly large percentage of leased assets of companies comprise of vehicles. Some analysts term it a point of concern and others consider it good for the growth of automotive assembly industry of Pakistan. They also say that with higher sales of vehicles, vendor industry which falls in unorganized sector is being consolidated. This will help the assemblers to implement deletion programme more rigorously. Therefore, the GoP must ensure that assemblers follow their deletion programme.

Though, some financial analysts foresee a gradual decline in average lending rates, others do not agree. Despite the best efforts by the central bank, many banks will not be able to cut average lending rates without curtailing the return being paid to depositors. This clearly hints that unless commercial banks cut their operational costs, one should not expect any significant cut in interest rates. They also say that efforts to bring down interest, in the past, did not yield positive results. Rates came down to some extent but as the demand for funds increased, interest rates went up. The same cannot be ruled out completely in near future.


Many factors indicate that the GoP's efforts to review the economy have started yielding results and borrowing by the private sector is increasing. Analysts also hint towards major expansion programmes in textile, cement and engineering sectors. Agriculture sector growth is also expected to be higher due to higher production of cotton, sugarcane, wheat and rice.

Higher production both in agriculture and manufacturing sectors will boost the per capita income and in turn result in larger spending. Higher disposable income will encourage individuals to spend more on durable consumer products. Therefore, consumer leasing business offers enormous growth potential.

Analysts, also hint towards some mergers and acquisitions in the leasing sector. So far mergers and acquisitions, in the leasing sector, could not become a reality only due to mind set of sponsors. However, due to the firm stand taken by the SECP, sponsors will be forced to either go for a right issue or resort to merger. Analysts believe that there are only a few 'problem' companies. If their sponsors cannot find a way out, they must opt for liquidation proceeding.