THE FUTURE OF LEASING SECTOR IN PAKISTAN

 

The Leasing Sector in general has experienced commendable growth over the years

By Shahid HaMeed
Nov 06 - 12, 2000

The concept of Leasing: The concept of leasing originated as far back as in Sumeria, Southern Babylon, over five thousand years ago where ploughs, oxen and ships were originally leased. Later, in the 11th century AD, battleships with crew and equipment were also taken on lease for the Norwegian and Norman invasions of England. In the 1850's, some of the earliest joint stock companies were established in England to lease railway wagons. Birmingham Wagon Company was the world's first registered leasing company, which was established in March 1855 primarily for leasing railway wagons for supply of coal and other minerals. A few decades later in the US, the Bell Telephone Company started renting out its telephones to its customers. In May 1952, United States Leasing Corporation Inc. was established as the first registered leasing company in the US.

During the last few decades, the concept of leasing has re-emerged as an increasingly innovative and dynamic mode of financing encompassing a wide range of assets from a small consumer items to large ships and airplanes. Particularly during the 1970's, leasing business grew rapidly increasing by over 800% in both Europe and Japan during 1970-79. During the first half of the 1980's, the leasing business continued to grow in the United States as the economy surged forward. A number of innovative lease products were also introduced in the 1980's encompassing a wide and diversified variety of assets. Over the years, leasing has become a primary source of asset financing in the US. A major feature of leasing in the developed economies is the role played by the leasing industry in facilitating the dramatic progress in data processing in addition to financing assets like industrial machinery, ships, aircraft, automobiles and commercial buildings.

In the developing countries, leasing is slowly but gradually becoming popular and is at various stages of growth in different countries. As a result of various initiatives made by the IFC, a number of leasing companies have been established in developing countries like Jordan, Peru, Sri Lanka, and Thailand. In Pakistan, IFC participated in the formation of National Development Leasing Corporation and has also provided credit lines to a number of other leasing companies. The Asian Development (Bank) (ADB) has also provided credit lines to various leasing companies.

Evolution of Leasing in Pakistan: The evolution of leasing in Pakistan particularly in the formal sector dates back to June 1980 when, according to a Report of the Council of Islamic Ideology, the concept of leasing was recognized as one of the financial services under the Islamic financial system, which was later introduced in the country in 1985. Accordingly, the Government issued two notifications effective January 1, 1985 namely "Banking and Financial Services Ordinance, 1984" and " Banking Companies Tribunal Ordinance, 1984" under which banks and financial institutions were required to provide banking and financial services in accordance with the tenets of Islam.

In June 1984, the Government directed the National Development Finance Corporation (NDFC), a leading financial institution in public sector, to promote the first leasing company in Pakistan. As such, National Development Leasing Corporation (NDLC) was established as the first leasing company in the private sector as a joint venture between NDFC, the Habib Group and the International Finance Corporation (IFC). The Asian Development Bank (ADB) joined later on. The growth of the leasing industry in Pakistan initially lacked momentum due mainly to a general lack of awareness regarding its nature and benefits. During the next five years, only five leasing companies entered the leasing business. As a result of the Economic Reforms Package introduced by the Government in early 1990's, a number of leasing companies came on stream. With its distinctive tax advantage and efficient approval process, leasing became an attractive source of financing. Accordingly, from a single leasing company in 1985, the total number of leasing companies presently stands at 33 companies and 8 leasing modarabas.

Advantages of Leasing: Lease is basically a contract for the exclusive possession of property for a fixed tenor or at will in exchange for payment called a "rent". The person making the grant or financier is called a "Lessor" and the person receiving the grant is called a "Lessee". The rationale and advantages of leasing both to the lessor and lessee are enumerated as follows:

• Provides up to 100% of the cost of the equipment.
• Does not tie up working capital or credit lines.
• Offers cash flow benefits.
• Provides certainty.
• May avoid loan covenants or capital investment restraints.
• Avoids dilution of share ownership.
• Tax efficient.
• Sound hedge against inflation.
• May be off balance sheet.

From the lessor's point of view, the advantages of leasing are as under:

• Additional financial product.
• May reduce risk.
• May increase profitability.
• Introduces equipment suppliers.
• Simple to document.
• Leasing contract may be terminated easily.

Types of Leases: Basically, there are two main types of leases namely "Finance Lease" and "Operating Lease", which may be broadly defined as under:

Finance Lease: As defined in the International Accounting Standard 17, a lease can be termed as a finance lease if it transfers substantially all the risks and rewards incident to ownership of an asset save for the title, which may or may not eventually be transferred. A finance lease is normally non-cancelable and secures for the lessor the recovery of his capital outlay together with a return on invested.

An asset held under the finance lease should be recorded in the balance sheet not as property, plant or equipment but as a receivable at an amount equal to the net investment in a lease. In a finance lease, a leasing company acts as a financial institution or lessor and is interested in the equipment as a legally owned asset to which it has a recourse in case the lessee fails to pay his rental. The lessor raises the money, accepts the invoice from the supplier and pays accordingly. Over the primary term, the rental covers the entire cost of equipment in addition to the interest factor and the lessor's profit. Some of the main characteristics of the finance lease are as follows:

• Ownership of the property is transferred to the lessee at the end of the lease term.

• The lease contains a bargain purchase option that at the inception of the lease, it is reasonably certain that the option will be exercised.

• The term of the lease is for the major part of the assets' useful life while its title may or may not be eventually transferred.

• The present value at the inception of the lease of minimum lease payments is greater than or substantially equal to the assets' fair value at the inception of lease.

Operating Lease: An operating lease is basically an open-ended lease arrangement wherein the leasing company purchases the equipment and leases it out to the lessee but at a rate and term, which does not cover the cost, interest and profit of the lessor. In order to fully amortize and write down the equipment, further lease terms have to be written depending upon the useful life of the equipment not necessarily for one secondary term. Aircrafts and computers are frequently leased under operating leases. Under the operating lease arrangements, the leasing company relies on its expertise to remarket the assets after the primary term. It is also called a service normally involving equipment for which a contract is written for considerably less than the life of the equipment and the lessor handles the maintenance and servicing. Most of the leases are cancelable whereby the lessee can return the equipment if it becomes obsolete or is no longer needed. Common examples of operating leases are office copiers, computers, automobiles, etc.

In addition to the above mentioned main categories of leases, there are other kinds of leases which may are also be explained briefly as under:

Capital Lease: Under a capital lease, the lessee acquires essentially all the economic benefits and risks of the leased property under the Financial Standards Boards, which is not applicable in Pakistan. Under a capital lease, a company is obliged to reflect on its balance sheet, the leased item as an asset and a corresponding liability simultaneously.

Sale and Lease back: In a sale and lease back arrangement; a company sells an asset to a financial institution/leasing company in exchange for cash and contracts to lease the asset for a specified term. The asset is sold at its market value enabling the lessee to acquire capital that would otherwise have been tied up in a long-term asset. Being an off balance sheet financing, the arrangement particularly benefits those companies, which do not want to show more debt on their balance sheet.

Leveraged Lease: A leveraged lease involves three entities namely a lender, a lessor and a lessee. The lender is usually a bank/financial institution, which puts up a percentage of cash, usually more than half, for purchasing the asset. The lessor, who is both the equity participant and the borrower, contributes the balance. With the total cash, the lessor acquires the asset to be given to the lessee together an assignment of lease rentals and specific charge on leased assets to the lender. The lessee makes periodic payments to the lessor, who in turn pays to the lender. As an owner of the asset, the lessor is entitled to tax deductions for depreciation on the assets and interest on the loan.

Cross border Leasing: Cross border leasing is generally not in vogue in developing countries like Pakistan as it involves cumbersome issues like incidence of taxes, withholding taxes, rental payment in foreign exchange, royalties, relevant agreements on avoidance of double taxation, etc. At times, the developing countries do not have a favourable exchange reserve position to pay rentals in foreign exchange. Besides, the accounting treatment is also entirely different in different countries.

Leasing sector in Pakistan

An overview:

As stated earlier, lease-financing activity in Pakistan was started in 1985 primarily as a result of Islamization of the economy. In addition to being one of the permissible Islamic modes of financing, lease financing also became popular as an alternate source of financing. With its distinct advantages over conventional sources of finance inclusive of tax advantage, efficient approval process, cash flow benefits, etc., lease financing has over the years become a major source of financing. Some of the main assets being increasingly leased financed in Pakistan these days include industrial machinery and equipment, automobiles, computer hardware, etc.

Leasing sector in Pakistan presently comprises of 33 leasing companies and 8 leasing Modarabas involved in the leasing business of around 36 billion. As per Pakistan Leasing Yearbook (1999), total investments made by the leasing sector in lease finance up to June 30, 1999 amounted to Rs. 29 billion as compared to Rs. 28 billion during 1998, showing an aggregate growth rate of 21% per annum. The share of the leasing sector in the total private fixed capital expenditure in Pakistan's economy is estimated at 8 % as compared to other developed countries where its share is 40 %.

Despite their encouraging growth and potential, the leasing companies and modarabas are basically secondary lenders, as these do not have adequate leverage and earning potential of banks. Despite their impressive growth particularly over the last 5 years, the leasing sector in general is expected to experience a recessionary trend due to a number of factors. These include liquidity constraints, unfavourable investment climate, competition, lack of innovative products, etc. Even in these adverse circumstances, some of the leasing companies have performed well and have regularly been giving handsome dividends. However, their performances have not been reflected in the market value of their shares, most of which are much below their par and even break-up value. This is not only due to reflection of the overall economic scenario but also due to a general perception of the leasing and modaraba sector as a whole by the individual investor.

With the implementation of the Supreme Court's historic decision on elimination of "Riba" from the banking system from fiscal year 2001 -2002, leasing as an alternate source of financing is likely to attain a pivotal position as it is one of the few modes of financing, which in its modified form (asset based and having a risk element) is admissible under the tenets of Islam. However, great care and careful research needs to be conducted in bringing it in conformity with Shariah.

Regulatory framework: In Pakistan, leasing companies and modarabas have separate regulatory framework. However, certain common ground rules apply to both including the following:

• Companies Ordinance, 1984.
• Income Tax Ordinance, 1979.
• State Bank of Pakistan's Prudential Regulations, which are applicable to all NBFI's.
• Modaraba Companies and Modaraba (Floatation and Control) Ordinance, 1980.
• The Leasing Companies (Establishment and Regulation) Rules, 1996.

Some of the major regulations that apply to the leasing companies are enumerated as follows:

• Commencement of business and operations subject to registration and issuance of a license.
• To be registered as a public limited company.
• Tenor not to be less than three years.
• Maintenance of accounts according to the International Accounting Standard-17.
• Maximum exposure of a leasing company to its directors, affiliated companies and companies in which any of the directors or his family members hold controlling interest shall not exceed 10 % of the overall leasing portfolio.
• A leasing company shall invest 70 % of its funds in the leasing business.
• Appointments of Chief Executives and Directors of leasing companies require specific approval of the Corporate Law Authority.
• The business of real estate or financing of individuals or companies involved in real estate is not permitted except in case of leasing of machinery, equipment and vehicles to construction companies.
• Leasing of land and buildings is also not permitted save for factory buildings.

Capital base: Initially, leasing companies were allowed to commence their business with a capital base of Rs. 50 million which was later revised to Rs. 100 million in 1992. Only recently, the limit has been enhanced to Rs. 200 million and the existing leasing companies were required to enhance their capital base by November 1999. Presently, only 5 leasing companies out of a total of 33 are eligible under the new regulation. Under the present scenario, no leasing company is in a position to enhance its capital base by the stipulated date. In order to comply with the captioned regulation, a number of companies would need to merge with each other to survive or face extinction.

Trends of macro economic indicators of Leasing Companies

With a view to analyzing the overall performance of the leasing sector, trends of aggregate indicators of the Leasing Sector, in particular, for the last 5 years are given as below:

(Rs. in Million)

Indicators

1995

1996

1997

1998

1999

No. of Companies

27

30

33

33

32

Paid-up Capital

2,766

3,898

4,234

4,352

4,566

Retained Earnings

1,904

2,746

3,234

3,359

3,305

Investment in Lease

9,404

21,892

25,164

28,111

29,039

Finance

         

Investments

1,484

1,768

2,590

2,724

2,664

Borrowings

7,780

18,432

21,603

23,173

23,765

Revenues

2,522

4,090

5,046

5,315

5,528

Net Profit

517

922

906

610

451

Financial Charges

1,058

2,758

3,006

3,293

3,634

Operating

390

926

959

1,198

1,294

Expenditure

         

Taxation

92

165

155

293

149

Cash Dividend

60

537

399

340

371

Source: Pakistan Leasing Year Book 1999

According to the above statement, most of the balance sheet items vis-a-vis revenues are experiencing an increasing trend while profitability margins are showing a declining trend due to higher cost of inputs.

Trends of key ratios of Leasing Companies

The performance of the Leasing Sector can also be analyzed from their aggregate trends of key ratios given in the following table:

(Rs. in Million)

Key ratios

1995

1996

1997

1998

1999

Earning per Share (Rs.)

1.47

2.13

1.67

1.40

0.79

Return on Investment (%)

3.07

3.33

2.81

1.79

1.25

Net Profit Margin (%)

20.51

22.56

17.69

11.48

8.16

Revenue per Share (Rs.)

7.15

9.46

9.41

12.21

9.70

Time Interest Earned (X)

1.47

1.47

1.35

1.25

1.17

Financial Charges /

         

Total Expenses (%)

67.78

71.44

72.76

69.99

71.57

Debt Leverage (X)

2.61

3.20

3.23

3.42

3.60

Leasing & Financing /

         

Net Worth (X)

2.84

3.40

3.43

3.59

3.57

Total Assets / Net Worth (X)

3.61

4.20

4.23

4.42

4.60

Current Ratio (X)

1.23

1.07

1.25

1.17

1.24

Source: Pakistan Leasing Year Book 1999

The key ratios of the leasing sector over the past five years depict an alarming state of affairs of the financial sector in general and the leasing sector in particular. These ratios particularly signify declining trend in earnings per share, profit margins, revenues per share, time interest earned, etc. together with a corresponding increasing trend in financial charges / total expenses, debt leverage, etc.

Performance of Leasing Companies

Performance of Ten leading leasing companies can be compared taking into consideration various performance indicators as enumerated below:

A. Top Ten Leasing Companies by Total Revenues (1999)

A comparative statement of Top Ten Leasing Companies ranked by total revenues generated during 1999 is enumerated as follows:

(Rs. in Million)

Ranking

Leasing Companies

Revenues

1.

ORIX Leasing Pakistan Limited

905.12

2.

Askari Leasing Limited

798.00

3.

National Development Leasing Corporation Ltd.

698.00

4.

Pakistan Industrial Leasing Corporation Limited

653.36

5.

Saudi Pak Leasing Company Limited

370.44

6.

Atlas Lease Limited

341.09

7.

First Leasing Corporation Limited

182.80

8.

Crescent Leasing Corporation Limited

172.10

9

Dawood Leasing Company Limited

163.21

10.

Pakistan Industrial & Commercial Leasing Ltd.

138.23

Source: Pakistan Leasing Year Book 1999

According to the above table, ORIX Leasing Pakistan Limited tops the ranking by revenues generated during 1999 followed by Askari Leasing Limited, National Development Leasing Corporation Ltd. and Pakistan Industrial Leasing Corporation Ltd.

B. Top Ten Leasing Companies by Profitability (1999)

A comparative statement of Top Ten Leasing Companies ranked by net profits generated during 1999 is enumerated as follows:

(Rs. In Million)

Ranking

Leasing Companies

Net Profit

1.

ORIX Leasing Pakistan Limited

130.46

2.

National Development Leasing Corporation Ltd.

90.05

3.

Askari Leasing Limited

62.00

4.

InterAsia Leasing Company Limited

56 49

5.

Paramount Leasing Limited

35.27

6.

Saudi Pak Leasing Company Limited

35.00

7.

Crescent Leasing Corporation Limited

29 47

8.

Atlas Lease Limited

25.31

9.

Pakistan Industrial Leasing Corporation Limited

22 17

10.

Grays Leasing Limited

20.40

Source: Pakistan Leasing Year Book 1999

C. Top Ten Leasing Companies by Total Assets/Net Worth (X)

Ranking

Leasing Companies

Total Assets /
Net Worth (X)

1.

Askari Leasing Limited

10.63

2.

Atlas Lease Limited

9.07

3.

Pakistan Industrial Leasing Corporation Limited

6.91

4.

Saudi Pak Leasing Company Limited

6.80

5.

ORIX Leasing Pakistan Limited

6.00

6.

Dawood Leasing Company Limited

4.98

7.

Lease Pak Limited

4.82

8.

InterAsia Leasing Company Limited

4 51

8.

Pakistan Industrial & Commercial Leasing Ltd.

4.51

9

First Leasing Corporation Limited

3.90

10.

Ghandhara Leasing Company Limited

3.68

Source: Pakistan Leasing Year Book 1999

D. Top Ten Leasing Companies by Total Financing / Net Worth

Ranking

Leasing Companies

Total Financing
 /Net Worth (X)

1.

Atlas Lease Limited

7.63

2.

Askari Leasing Limited

7.42

3.

Saudi Pak Leasing Company Limited

5 43

4.

ORIX Leasing Pakistan Limited

5.04

5.

Pakistan Industrial Leasing Corporation Limited

4.80

6.

Pakistan Industrial & Commercial Leasing Ltd.

3.80

7.

InterAsia Leasing Company Limited

3.78

8.

Lease Pak Limited

3.70

9.

Dawood Leasing Company Limited

3.27

10.

Ghandhara Leasing Company Limited

3.22

Source: Pakistan Leasing Year Book 1999

E. Top Ten Leasing Companies by Net Profit Margin

Ranking

Leasing Companies

Net Profit Margin

1.

Pak-Apex Leasing Company Limited

54.96

2.

Pak-Gulf Leasing Company Limited

49.78

3.

Mercantile Leasing Company Limited

44.59

4.

Grays Leasing Limited

43 47

5.

Sigma Leasing Corporation Limited

42.32

6.

Ibrahim Leasing Limited

38.49

7.

International Multi Leasing Corporation Limited

29.40

8.

Paramount Leasing Limited

29.10

9.

English Leasing Limited

28.51

10.

Crescent Leasing Corporation Limited

17.12

Source: Pakistan Leasing Year Book 1999

F. Top Ten Leasing Companies by Return on Investment

Ranking

Leasing Companies

Return on
Investment (%)

1.

Askari Leasing Limited

16 14

2.

Grays Leasing Limited

10.71

3.

Pak-Apex Leasing Company Limited

9.97

4.

Sigma Leasing Corporation Limited

9.72

5.

Pak-Gulf Leasing Company Limited

7.71

6.

International Multi Leasing

7.35

 

Corporation Limited

 

7.

Ibrahim Leasing Limited

5.76

8.

Pacific Leasing Company Limited

4.76

9.

Paramount Leasing Limited

4.72

10.

Mercantile Leasing Company Limited

4.45

Source: Pakistan Leasing Year Book 1999

G. Top Ten Leasing Companies by Return on Equity

Ranking

Leasing Companies

Return on
Equity (%)

1.

Sigma Leasing Corporation Limited

16.91

2

Grays Leasing Limited

16.30

3.

Pak-Apex Leasing Company Limited

16.19

4

ORIX Leasing Pakistan Limited

15.42

5.

Ibrahim Leasing Limited

14.46

6.

Pacific Leasing Company Limited

12.35

7.

Paramount Leasing Limited

12.22

8.

Askari Leasing Limited

11.70

9

English Leasing Limited

11.19

10.

Atlas Lease Limited

10.41

Source: Pakistan Leasing Year Book 1999

H. Top Ten Leasing Companies by Break-up Value

Ranking

Leasing Companies

Break-up
Value (Rs.)

1.

ORIX Leasing Pakistan Limited

43.24

2.

Pakistan Industrial Leasing Corporation Limited

26.44

3.

Atlas Lease Limited

23.10

4.

Askari Leasing Limited

22.00

5.

Trust Leasing Corporation Limited

21.63

6.

Crescent Leasing Corporation Limited

17.84

7.

Pakistan Industrial & Commercial Leasing Ltd.

16.52

8.

National Development Leasing Corporation Limited

16.34

9.

English Leasing Limited

16.31

10.

Saudi Pak Leasing Company Limited

15.65

Source: Pakistan Leasing Year Book 1999

I. Top Ten Leasing Companies by Earning per Share (1999)

Ranking

Leasing Companies

Earning per
Share (Rs.)

1.

ORIX Leasing Pakistan Limited

6.48

2

Askari Leasing Limited

2.60

3.

Paramount Leasing Limited

2.04

4.

Atlas Lease Limited

2.41

5.

Sigma Leasing Corporation Limited

1.98

6.

Pak-Apex Leasing Company Limited

1.88

7.

Pacific Leasing Company Limited

1.64

8.

Saudi Pak Leasing Company Limited

1.59

9.

Pakistan Industrial & Commercial Leasing Ltd.

1.55

10.

Paramount Leasing Limited

1.41

Source: Pakistan Leasing Year Book 1999

Major issues pertaining to the Leasing Sector

In Pakistan, the financial sector in general and the leasing sector in particular are currently beset with a number of issues adversely affecting their performance. A number of such issues, both general and specific in nature, are enumerated as follows:

General issues: The general issues pertain mainly to the macro economic scenario particularly including current economic trends, which have a great bearing on the performance of various sectors of the economy.

Economic slowdown: A general recessionary trend has been prevalent in the national economy particularly since the second half of the last decade. The economic slowdown has been further aggravated by other disturbing factors like economic fallout of South Asian economic crisis, imposition of economic sanctions by the world community at large as a consequence of Pakistan joining the 'Nuclear Club', the IPP issue, freezing of foreign currency accounts, ever increasing debt burden, devaluation, decreased flow of Foreign Direct Investment (FDI), political uncertainty etc. As a result of the economic slowdown, there was a sharp decline in total and fixed investment rates to 17.1% and 15.3% of GDP in the second half of 1990's culminating in a steep fall in 1999-2000 to 15% and 13.4% respectively. Declining investment rates have in effect contributed to the overall economic slow down.

The economic slow down has particularly affected the financial sector as long-term investments have almost dried-up. Despite a number of confidence building measures taken by the present Government, the overall aura of uncertainty and gloom is still hovering around. Taking due cognizance of the multiplicity of social, economic and political problems being confronted by the present Government, collective efforts need to be taken by various sectors to pull the economy out of the quagmire of economic slow down. Long-term economic policies need to be implemented both in letter and spirit instead of "Quick Solutions" or ad hoc measures on the part of the Government. On its part, the Private Sector, in particular, needs to tangibly respond to the confidence building measures of the Government by way of investing in priority sectors of the economy on the one hand and enhancing exports on the other. As a first step, a rapport needs to be established between the Government and the Private Sector to effectively revive the economy.

All that is needed is a little confidence in our own abilities, the destiny of this great nation and above all on the 'Almighty Allah' and seek his forgiveness.

Interest rate scenario: Interest rates scenario in Pakistan has also undergone substantial oscillating transformation over the last two years. Conscious efforts were taken by the previous Government in lowering the interest or mark-up rates by way of lowering the return on Government's savings schemes primarily to improve the investment climate in the country. Whether the move has achieved its desired objective or not is still to be seen, but it has certainly effected the already low saving rate together with disturbing the overall interest rate scenario both in the short and long-term perspective. The Money Market has become so volatile these days that financial institutions find it impossible to mobilize resources for more than six months and are constrained to miss-match their investments even for shorter periods. The inter-bank and repo-rates have also become so volatile that during the last month, these have officially been increased by two percentage points. Rates of T-Bills also undergo fluctuating trends based on current developments on the economic front. The underlying uncertainty both in general terms and in terms of interest rates scenario, adversely affect long-term perspective from the point of view of an investor together with that of the financial institution.

Specific Issues

• Resource Constraints

One of the major problems being currently faced by the Non Bank Financial Institutions (NBFIs) in general and Leasing Companies in particular includes fund mobilization constraints relating mainly to the currently volatile interest rate scenario, squeezing of margins, non-availability of long-term funds, non-availability of multi-lateral credit lines, etc. In order to ease the prevailing situation, a number of leasing companies like PILCORP, Paramount Leasing Ltd. Network Leasing Company Ltd., ORIX Leasing Pak. Ltd. Askari Leasing Company Ltd., Sigma Leasing Company Ltd., Saudi Pak Leasing Company Ltd., Atlas Lease Limited, etc. have already issued or are in the process of issuing their TFC's. In addition, a number of leasing companies are also issuing COI's to generate funds for their laesing operations.

• Non-availability of Level Playing Field

The leasing companies are also experiencing adverse competition from Investment Banks and DFIs due mainly to non-availability of level playing field as a number of these institutions have allowed to pursue leasing business. The competition is particularly severe in respect of mark-up rates vis-a-vis their cost of funds, which are much lower than rates offered by leasing companies because of their in-built margins. The issue has time and again been taken-up by the Leasing Association of Pakistan (LAP) with the SECP for making available a level playing field for the Leasing Sector to ensure its continued growth process.

• Lack of Innovative Products

Being in a relatively nascent stage of growth, the leasing sector lacks innovative products and confines mostly to small and medium ticket leasing particularly involving vehicles and machinery. Leasing of machinery and other industrial equipment has however, slowed down due to recession. Some of the smaller leasing companies are also involved in micro leasing but are facing difficulties in recoveries. Presently, most of the larger and medium sized leasing companies are mostly involved in leasing of vehicles, which has led to increased competition among them. Though the near future demand perception for vehicle leasing seems to be positive with adequate share for everyone but long-term demand perspective for innovative products is imperative for continued growth of the Leasing Sector. For the moment, leasing of machinery and equipment particularly relating to priority sectors of the economy including Energy (CNG), IT (Computers and other hardware), textiles (looms & auto coners) need to be encouraged subject to their intrinsic value.

• Tax Issues

A number of tax related issues are presently affecting the overall performance of the Leasing Sector which include the following:

o Provisions made as per Prudential Regulations are not treated as tax admissible expense.

•Tax depreciation on vehicles is only to the extent of Rs. 600,000 whereas the price of popular vehicles is over and above of the admissible limit.

•Leasing companies are not allowed to charge initial depreciation on leased machinery under sale and leaseback arrangement because of being treated as second users.

•Other Issues

Other important issues relating to the Leasing Sector include the following:

•In addition to imposition of Professional Tax (on the basis of paid-up capital) in the Province of their registration, Companies are also required to pay Professional Tax on their branches in other Provinces, which further increases their administrative cost.

•Imposition of 1 % Stamp Duty on all financing documents in the Sindh Province has further increased the cost of funding on account of the following:

_ for lessees on hypothecation

_ for lessors on acquiring credit lines

Future prospects

The Leasing Sector in general has experienced commendable growth over the years and has adequately proved to be an alternate source of finance. However, its near future prospects do not seem to be too bright unless its various areas of concern including the prevailing economic scenario, dried-up foreign funding lines, lack of resource mobilization, non-availability of level playing field, lack of innovative financial products, tax and other issues, etc are seriously investigated and mitigated. In case of an expected economic revival, the overall Leasing Sector is likely to regain its initial momentum particularly in the backdrop of Islamization of the economy effective fiscal year 2001 -2002 due to its inherent potential of being in close conformity to one of the permissible modes of financing under Shariah. However, in order to improve the near future demand prospects of Leasing Sector in particular, the leasing companies need to develop innovative products along with encouraging leasing of plant and equipment relating to priority sectors of the economy including energy (CNG), IT (computers and other hardware), textiles (air jet looms and auto coners), etc subject to their intrinsic value.