A review and outlook

Jan 02 - 08, 2006

Pakistan's growing economy needs funds to create new production facilities and upgrade the existing facilities to meet the growing demand for goods and services. There are various types of financial institutions operating in the country i.e. commercial banks and NBFCs. However, leasing companies emerge to be the key providers of medium-term funds. The number of DFIs is on the decline and commercial banks are a little shy in extending funds beyond one year, simply because they are not able to solicit deposits of longer tenor.

The credit being disbursed by the financial institutions can be divided into the categories: 1) funding of capital goods, 2) financing of consumer durables and 3) mortgage financing. Leasing companies mainly undertake leasing of plant and machinery, automobiles (including tractors), consumer durables and office equipment. While plant and machinery was the largest business segment in the past, the largest percentage of assets being leased now comprises automobiles. Similarly, in the past corporate sector was the biggest beneficiary but bulk of the business is now generated from small and medium enterprises and individuals.

Automobile leasing has also undergone major changes because of shift of focus from financial lease to operating lease. According to some sector experts leasing of vehicles for public transport had initiated a change. However, some of the critics are of the view that the new arrangement may have helped in overcoming shortage of public transport but certainly failed in improving the quality. Buses and mini buses plying on roads are still overloaded. It is also true that some of the buses or coasters, which initiated operation with air-conditioned facility, do not offer the same. However, the blame should not go to the financial institutions because of various reasons.

Leasing as well as auto financing has pushed up sale of cars. Till few years back average sale of cars was less than 50,000 per annum. The number touched about 125,000 during year ended 30th June 2005. It is estimated that more than 60% of total cars sold are under lease finance arrangements. The surge in demand has led to expansion in assembling capacity, which in turn has resulted in expansion of parts manufacturing capacities. The point worth noting is that the parts manufacturers have been fully supporting the assemblers, by providing parts in required quantity as well as in time deliveries.

As the State Bank of Pakistan decided to follow policy of gradual increase in interest rate, the general impression was that car sales would go down. However, the data shows that car sales have been on the rise despite hike in interest rates. Many analysts are of the opinion that further rise in interest rates may not be there. A closer look at the recent T-Bills auctions show that yield curve has almost flattened. Therefore, in the coming months the probability of interest rates going down is very high. As such many economists are of the view that policy of raising interest rates to curb inflation has failed to yield result. They also say that while the interest rate hike has failed in containing inflation, it has also adversely affected fresh investment for the creation of new production facilities in the country.

Rising number of cars, buses and motorcycles has added to congestions and traffic jams on the roads as well as pollution. With the increase in number of automobiles, fuel consumption is also on the rise. However, an interesting observation is that petrol consumption in the country is on the decline.

This trend can be attributed to growing consumption of CNG in the transport sector. While most of the cars rolling out of automotive plants have factory-fitted CNG kits, more and more vehicles previously running on petrol are being converted to CNG use. The obsession has become so intense that one can see even rickshaws and motorcycles being run on LPG, in an attempt to bring down cost per kilometer.

Till a few years back, leasing companies and modarabas (undertaking leasing as core business) were in the hire-purchase business. However, now most of the financial institutions are in the leasing business. This has resulted in uneven playing field. It is no secret that cost of fund of commercial banks is far lower compared to leasing companies. Another factor, which gives banks an edge over leasing companies, is their outreach. Most of the banks, particularly the five big ones, have elaborate network. However, many analysts are of the view that despite this handicap leasing companies have survived mainly due to people having specialized knowledge about leasing and their ability to operate efficiently and effectively with limited expenditures. The expertise allows them to carve a deal, which is mutually beneficial.

The stronghold of leasing companies is their stringent credit appraisal. This helps them in minimizing provisioning against delinquent transactions. It is on record that whenever any leasing company was a little careless in due diligence it had to make higher provisioning. Another achievement of the Leasing Association of Pakistan has been establishment of 'Lease Register'. In this register each and every lease underwritten is recorded. This practice, on the one hand helps in avoiding cross-leases and on the other hand, keep pressure on the borrowers that their names would be made public in case of any default.

Another major achievement of the Association is arrangements with the international lenders for ensuring availability of this facility to the most neglected sectors, SMEs and women entrepreneurs. This arrangement is helping the country to achieve the twin objectives of creating new job opportunities and according women belonging to rural sector an opportunity to earn. The success of this arrangement has encouraged the donors to commence the second phase with enhanced funding.

One of the factors providing new impetus to the leasing sector has been enhancement of the minimum paid-up capital requirement. Initially, there was some resistance against the move but the SECP put its foot down. While it refused to extend the deadline, it was considerate enough to approve plans of individual companies. The increase in paid-up capital has improved their financial health as well as borrowing ability. To meet their growing demand for funds, leasing companies have also issued the largest number of term finance certificates.

It is also important to highlight the efforts of the SECP to come up with sector specific Prudential Regulations. This time the regulators have come up with regulations after proper and thorough consultations with all the players. As the Regulations have been framed after consultations there are fewer complaints. It was often said that rules and laws should be prepared in full consultation with all the stakeholders. Initially, there was perception that if laws and rules are developed after consultation, the stance would always be mild. However, the experience has shown that consultative procedure being followed has helped in avoiding legal battles, which is good for the regulators as well as the players.

A brief mention about Orix Leasing Pakistan (OLP) is of prime importance, which started operations in 1986. Its mention is necessary because of two reasons 1) the expertise it has brought to Pakistan and 2) its investment in companies outside Pakistan. OLP is listed at Karachi, Lahore and Islamabad stock exchanges. It specializes in providing lease financing to small and medium-sized enterprises, but its customer base also includes large corporations, public and private limited companies, micro enterprises and individuals. Financing is primarily provided for industrial machinery, commercial vehicles, cars, computers and office equipment. OLP's Consumer Finance Division provides financing for consumer durables to corporate employees. OLP has built up a diverse portfolio of products and services including financing and operating leases, auto-financing, consumer financing, factoring, working capital financing, agricultural loans as well as micro-enterprise financing.

The e-Business Division provides and operates infrastructure facilities for issuers of credit, debit, smart and loyalty cards. This has paved the way for a card culture in Pakistan by establishing the latest processing facilities for card-based transactions. Till lately a total of 16 commercial banks and five other corporate entities had joined the network, which covers more than 150 cities. OLP is the regional head office for ORIX Group companies in the Middle East, North African and Central Asia regions. OLP has set up companies in Oman, Egypt, Saudi Arabia and UAE by participating in leasing joint ventures and provides these companies with management and technical support. OLP has a net worth of Rs. 1.96 billion as at June 30, 2005. Based on the results for the year ended June 30, 2004 the Pakistan Credit Rating Agency (PACRA) upgraded the Company's entity ratings to AA+ from AA for long term senior unsecured creditors and maintained the highest rating A1+ for short term senior unsecured creditors.


Leasing companies, including modarabas undertaking leasing as core business, have an enormous role to play in the development of Pakistan's economy. In the absence of DFIs they will have to continue to play the role of provider of medium term financing. Their survival, growth and consolidation would depend a lot on the regulatory environment. There is no objection on banks undertaking leasing business. However, it would be more appropriate to ask the banks to establish separate subsidiaries to undertake leasing business.

One may say that banks have ample liquidity, which prompts them to undertake diversified business. However, many analysts are of the opinion that banks should confine themselves to their original mandate. Keeping in view the huge deposits they should provide funds to leasing companies, modarabas and investment banks to undertake a variety of services.

The disparity in the size of leasing, modaraba and banking sectors can be gauged by the size of these sectors. The aggregate paid-up capital of modarabas is about Rs 8,371 million, leasing Rs 5,404 million and commercial banks Rs 59,089 million. The enormous size of banking sector allows it to play more dominating role. Commercial banks have stake in leasing companies, modarabas, mutual funds and insurance companies. As stated earlier there should not be any restrictions on banks to acquire substantial stake in any business. However, it would be most appropriate that such businesses are undertaken by separate subsidiary companies.

As the central bank has decided to enhance minimum paid-up capital requirement for commercial banks to Rs 9 billion, it may also be appropriate to fix minimum paid-up capital requirement for leasing companies at Rs 300 million. A large number of leasing companies have not met even Rs 200 million requirement. Therefore, the first effort should be to bring at par all the companies and then ask them to meet the enhanced requirement. However, it is debatable and the best way would be to decide the fate in consultation with all the stakeholders.