PAKISTAN'S EXPERIENCE WITH LEASING

 

Leasing companies contribute around 8 % of total private fixed capital expenditure towards economic development of the country

By SHAHID HAMEED
Dec 18 - 24, 2000

Pakistan's experience with the leasing business spans a little less than two decades during which the Leasing Sector has seen its highs and lows. From the establishment of the National Development Leasing Company (NDLC) in June 1984 as the first leasing company to be established in Pakistan, the figure went up to 33 leasing companies and 8 leasing Modarabas as of to date with a cumulative capital of over Rs. 4.5 billion and Rs. 2.3 billion respectively. Investment in lease finance experienced a healthy growth rate of over 10% from Rs. 9 billion in l993 to Rs. 29 billion in 1999. The total revenues have also attained an impressive growth over the years from Rs. 2.5 billion in 1994 to Rs. 5.5 billion in 1999. However, due to a relatively depressed overall economic environment prevailing in the country, a number of other output parameters have experienced mixed trends over the years. Cumulative net profits of leasing companies have fluctuated from Rs. 517 million in 1995 to Rs. 922 million in 1996 but have since stabilized to over Rs. 600 million. Total cash dividends hare oscillated over the years from as low as Rs 60 million in 1995 to Rs. 537 million in the very next year and have since stabilized to over Rs. 350 million. The years from 1995 to 1998 have particularly been difficult for the Leasing Sector due to a number of reasons ranging from political uncertainty, low level of investment activity, general economic depression, liquidity constraints, recovery of infected portfolio, intense competition, etc. Even in such trying circumstances, some leasing companies have outperformed others in all areas of activities due mainly to their large capital base, greater access to liquidity and better management. Judging the relative performance of the leasing companies on the Stock Market, it may be witnessed that out of the total currently listed leasing companies, just four are above par while respectable level of trading activity is currently occurring in three companies only.

Leasing companies contribute around 8 % of total private fixed capital expenditure towards economic development of the country. Although investment in lease finance has been gradually enhancing over the years, the composition of lease portfolio has changed substantially. Until recently, industrial machinery used to form a substantial part of the lease portfolio of a leasing company but these days majority of larger leasing companies have confined their leasing operations to vehicle leasing only. The major reasons for this change of composition of lease portfolio includes a slowdown of industrial investment activities in the country, a general improvement in the standard of living of people and above all relative security of repossession of leased asset. Some of the smaller leasing companies are still pursuing small ticket or micro leasing, which has its own risk element of default and relative impediments in repossession of leased assets. At the moment, there seems to be enough demand for vehicle lease business but relying entirely on it for a longer-term perspective may be risky. Besides, the intense competition among the larger leasing companies and commercial banks in trying to get a larger share of vehicle leasing business may lead to accumulation of weaker collaterals posing recovery problems for these companies. Besides pursuing industrial leasing, the leasing companies need to devise and introduce new and innovative products including household goods attracting different segments of the society at large to avail benefits of leasing.

Another major problem confronting the Leasing Sector includes liquidity constraints mainly due to lack of fund mobilization particularly in the wake of the currently volatile interest rate scenario leading to shrinking of profit margins. The worst part of the scenario is that these margins are inversely related to good clientele and secure leases. Consequently, leases that offer higher margins have higher risk perception. The situation has further aggravated due to driving-up of credit lines from multilateral agencies. The situation has further worsened due to adverse competition from commercial banks particularly foreign banks with large capital bases and much lower financial intermediation costs. Fund mobilization can be achieved by the leasing companies through issuance of Term Finance Certificates (TFCs) at currently lower coupon rates together with issuance of Certificates of Investment (COI's) of different maturities. However, in order to survive in this highly competitive field, the leasing companies need to be provided a level playing field. The tax related and other issues also need to be redressed.

In order to be able to attain its due position in the financial spectrum, the Leasing Sector needs to explore its full potential. In the backdrop of elimination of "Riba" from the banking system from July l, 2001, the leasing option, with its inherent potential of being in close conformity with Shariah permissible modes of financing, has a tremendous opportunity to play a leading role in industrial financing. All the Leasing Industry needs is to bring its operations in complete unison with Shariah based principals.

Despite its present unfavourable slate of affairs, the Leasing Sector has an inherent potential to become a powerful medium for financing industrial development in Pakistan. All it needs is a little encouragement from the Government and bold initiatives from the Leasing Sector itself to face the challenges and opportunities of the new Millennium.