The leasing companies have made a significant contribution towards development of the financial sector

Aug 12 - 18, 2002

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 growth.

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.