LEASING COMPANIES TO FACE COMPETITION FROM NEW ENTRANTS
Excerpts from an exclusive interview with Muhammad Nasim Khan, CEO Sigma Leasing Corporation
By SHABBIR H. KAZMI
Nov 25 - Dec 01, 2002
With excess liquidity in commercial banks and other financial institutions, thereby entered into the leasing sector and made aiming to earn better revenues in the declining interest rate scenario, the competition among the players tougher. Though, the leasing companies are better equipped to beat the competition on account of their being tax efficient the enhanced competition may cause reduction in profit. Saying this much, I would like to caution that they must remain within their expertise and professionalism and try to avoid ending up the fate met by some other financial institutions who ventured into commercial banking activity in the past. The financial institutions must abide by the prime mandate and should not enter those areas which does not fall in the core activity. The past experience tells us that they do cause some problems for the existing players but ultimately emerged the biggest losers.
The declining interest scenario is very positive for the borrowers, but growing competition and shrinking spread force the players to compromise on the quality of assets, which in turn may lead to higher provisioning and lower return to investors. As such the size of pie has remained more or less the same over the last couple of years. Leasing companies have found new vistas in the shape of consumer leasing but that has resulted in higher operating expenses. Suffice to say, I am confident, if the new government is able to purse investment friendly policies, the demand for capital investment by the private sector is expected to improve further.
In the recent past the largest percentage of the credit demand has come from textiles and garment sector. Due to the past experience, financial institutions do not feel comfortable in enhancing their exposure in the textile sector. One of the factors causing concerns is the ability of Pakistan's textile sector to meet the challenge after textile quota is completely phased out by December 31, 2004. As opposed to this, credit demand by other sectors has not increased. However, there are indications that capacity utilization in many sectors has improved and shortly they will have to undertake BMR and expansion. If this becomes reality, companies undertaking leasing as core business, will be better positioned to meet the growing demand for medium-term funds.
Enhanced paid-up capital and flotation of term finance certificates (TFCs) has enabled the leasing companies to overcome mismatch of funds to a large extent. I have been saying repeatedly that leasing companies are the only source of medium-term financing. With the shift from labour intensive to capital intensive manufacturing units and growing demand of funds by the SMEs, leasing companies have been forced to change their marketing strategy. There has been a slow but gradual shift from financial lease to operating lease. Consumer leasing is also growing at substantial rate.
Since most of the leasing companies have been catering to the corporate clients, they do not have sufficient infrastructure to undertake consumer leasing at a massive scale. To overcome this weakness some strategy has to be developed. One such alternate is that some mediators/special purpose vehicles are developed. These mediators may facilitate the prospective leasees through the leasing companies and also share the responsibility of disbursement and collection. The experience of leasing to corporate employees, in my opinion, was the first step in this direction. The success provides an incentive to include others — employed and/or self-employed — who have stable monthly income.
I am confident that if leasing sector managed to perform better, despite adverse external factors affecting the economy, the outlook for year 2003 looks even more promising. The commitment and vision of economic managers has helped in improving economic fundamentals. Many entrepreneurs who were seeking migration to other countries are now forced to find comfort in Pakistan after September 11, 2001 and intend to participate in investing in Pakistan. There are visible signs of revival of the economy.
To conclude, I will repeat the often repeated saying that the country has enormous potential. It is also recognized by the international financial institutions. However, the prevailing perception about Pakistan is contrary to the realities. My belief is also supported by the 3.6% GDP growth rate achieved for the year 2001-2002. Pakistan has been able to overcome most of the negative factors, foreign exchange reserves being at the top. Now it is the time to work even harder to ensure trickle down of the benefits to masses.