During the financial year 2001-2002, despite the
persistent slow down in the economic activity and frequent reduction in
the interest rates, the leasing sector has registered a significant
The Specialized Companies Division (SCD) of the
Securities and Exchange Commission of Pakistan (SEC), which is entrusted
with the responsibility to regulate and monitor the activities of
leasing companies, has released an overview of the performance of the
leasing sector during 2001-2002 based on accounts received todate.
According to this report, the leasing sector growth is evident from an
8% increase in aggregate assets to Rs. 47.78 billion. The aggregate
equity base also improved by 8.2% to Rs. 8.95 billion, as on June 30,
2002. Investment in leases increased to Rs. 37.5 billion during the year
and a major portion of this amount was invested in vehicle financing. A
significant factor that contributed towards this growth was the
availability of First Year Allowance at the rate of 30% to the leasing
companies and increase in ceiling on cost of vehicles for depreciation
allowance to Rs. 750,000 that was accorded to the leasing sector in the
Finance Ordinance, 2001.
In the Finance Ordinance 2002, the initial
depreciation allowance permissible in respect of leased assets has been
enhanced to 50% and ceiling on cost of vehicles for depreciation
allowance has been revised upwards to Rs. 1,000,000. This is expected to
further boost the performance of the leasing sector. Under the Leasing
Companies (Establishment and Regulation) Rules, 2000, leasing companies
are required to invest at least 70% of their assets in the principal
line of business, while the rest may be invested in government
securities, short term financing, and equity investments. At FYE2002,
nearly 78% of the assets of leasing companies were deployed in leasing.
The leasing companies have made a significant
contribution towards development of the financial sector, the country as
financial intermediaries providing medium and long-term financing.
However, in Pakistan the share of leasing in the private fixed capital
expenditure remains substantially lower compared to the industrialized
and developing countries. The potential for growth, therefore, remains
high. Since the last two decades, leasing sector has played an
appreciable role in the development of small and medium scale
enterprises and at present, leasing companies remain significant players
in the vehicle financing business.
By and large, most of leases written are finance
leases, while a few companies are into operating leases as well. The
expansion in operating lease business remains limited mainly due to the
absence of a secondary market for used lease equipment, limited
management expertise, and the lack of adequate opportunities for
long-term arrangements with equipment suppliers.
After its inception in 1984, the leasing sector
demonstrated a mushroom growth in the late eighties and early nineties.
The main factors responsible for this rapid expansion in the sector
were: buoyant demand for corporate credit, tax advantages in the shape
of accelerated depreciation allowances, and easy access to multilateral
and local funding. Most of the leasing companies were established by
industrial groups and financial institutions, while a few were set up by
professionals having experience of the financial sector. Due to this
reason, majority of the leasing companies are run by professional
managements. However, the setting up of a number of small companies
resulted in a fragmented sector. Concentration in the sector also
remains high as depicted by the fact that six large companies continue
to account for nearly 70% of the total assets of the sector.
During the last few years, decline in industrial
investment due to economic slowdown had resulted in diminishing the
growth in the leasing sector, leading to increasing competition amongst
the leasing companies. Meanwhile, with the initiation of leasing
operations by commercial banks, investment banks and development finance
institutions (DFIs), the competition became even more intense as these
institutions have access to low cost funding that is not available to
leasing companies. The spreads of the leasing companies, therefore, came
under tremendous pressure leading to a decline in the overall
profitability of the sector. Especially, survival and growth of the
smaller and under-capitalized leasing companies was becoming
increasingly difficult under these circumstances. Therefore, the SEC
encouraged these companies to go for mergers and takeovers, in order for
them to evolve into larger and financially stronger entities.
During FY2002, the number of leasing companies
decreased to 30 from 33 two years ago, as a result of consolidation
through mergers and amalgamations. At present, the leasing sector
comprises 30 listed companies, of which one is in liquidation. Going
forward, consolidation in the sector is expected to continue as a few
more mergers are in the pipeline while some are at an advanced stage of
negotiations. These include not only intra-sector mergers but also
cross-sector mergers involving modarabas and investment banks. It is
anticipated that this encouraging trend of mergers and consolidation in
the sector would result in improving resource mobilization potential and
operational efficiency due to strengthening of the capital base and
economies of scale, respectively.