The performance of leasing companies and Modarabas
during the last financial year must be considered above the satisfactory
level, keeping in view the September 11 incident and subsequent events.
This was possible only because of the resilience of Pakistan economy.
While the economies of most of the developed countries faced enormous
problems in the post September 11 era, Pakistan was able to achieve 3.6
per cent GDP growth rate. The growth was driven by agriculture sector
and well supported by other key sectors.
One may wonder why should the economy of Pakistan
perform better in the years to come? Some of the indicators pointing
towards improved performance of the economy are growing foreign exchange
reserves and large scale investment in the manufacturing sector. Foreign
exchange reserves now exceeding US$ 8.7 billion has improved the
sovereign rating of Pakistan. This is expected to improve inflow of
direct foreign investment as well as portfolio investment.
According to a report from Invest Capital &
Securities, leasing companies have once again failed to post any decent
improvement in their earnings in fiscal year 2001-2002. Earlier it was
expected that declining interest rates may improve the bottom line but
this did not materialize if one looks at their operating performance.
According to this report, based on 23 out of 29
listed leasing companies, nineteen have posted positive bottom line.
However only 8 companies announced dividend payment. During the year 13
companies managed to improve their profitability but 10 could not. Due
to weak profitability and poor dividend record shares of only two
companies are being traded above par. Whereas the shares of rest of the
29 listed companies are being quoted below their face value.
According to some sector analysts, the main reason
for the poor profitability of leasing companies is intense competition.
Size of the pie has remained almost the same over the last several
years. However, during this period many other financial institutions
have ventured into leasing business, particularly commercial banks
enjoying the advantage of low cost funds.
Some analysts express serious apprehensions about the
way other financial institutions are undertaking leasing business. The
analysts fear that these financial institutions have not acquired
permission under Schedule-III. If this is true then the lesses would not
be able to avail the tax advantage by classifying rental as expense.
This apprehension seems to have some roots as most of
the banks have entered the auto finance/lease business. Bulk of the
business is being generated from the individuals who in any case are
least affected. However, corporates acquiring equipment may have to face
the consequence, if the leasor has not obtained permission under the
above mentioned schedule.
According to the new rules of the game, commercial
banks will be required to establish separate entities to undertake
leasing business. However, the independent entities established by
commercial banks would still have the advantage of low cost funds. This
reason behind commercial banks entering into leasing business was that
they are suffering from surplus liquidity syndrome. It is yet to be seen
if the new entities would be able to compete effectively and efficiently
with the existing leasing companies.
According to some analysts, leasing companies have
not started, in any significant manner, catering to the needs of
individuals. The consumer leasing is mostly confined to corporate
employees. However, the growing consensus is that some mediators should
be developed to deal with the individuals. One such mediator could be
Home Alliance and/or entities offering consumer durable on installments
to individuals. Under this proposed system, the mediators may be
provided credit lines and disbursement and collection remain the
responsibility of mediators. The system will enable the leasing
companies to deal with only a few clients.
The performance and growth of Modaraba sector has
remained subdued due to limited resources. The initiative to issue
Musharika Certificates, equivalent to term finance certificates (TFCs)
floated by other business entities, is expected to resolve the issue. It
is also expected that some good performing Modarabas may also succeed in
signing Income Notes with International Finance Corporation (IFC). In
the past IFC entered into such arrangement with three Modarabas and
disbursed US$ 32 million. The last tranche was paid by these Modarabas
in September 2002.
In order to increase the pie size leasing companies
must take new initiatives. Orix Leasing Pakistan has taken an initiative
to develop infrastructure to facilitate e-commerce. The e-Business
Division of Orix has established this infrastructure, whereby financial
institutions, without making any investment, can commence extra revenue
simply by using the prevailing facility.