LEASING AND MODARABA
Strong economic fundamentals to further improve the performance
By SHABBIR H. KAZMI
Nov 25 - Dec 01, 2002
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.