LEASING - PLAYING A KEY ROLE IN PROJECT FINANCING IN THE ABSENCE OF DFIS

The secret of robust growth in the leasing business is its swiftness in handling the cases as compared to procedural delays in the case of banks

By AMANULLAH BASHAR
Jan 02 - 08, 2006

Leasing sector has emerged as a key player in the non-banking financial sector especially in the absence of Development Financial Institutions to cater to the financial needs of some major economic players like textiles, automobiles and the engineering sector.

The growing volume of disbursement by the leasing sector, which is about to reach Rs75 billion as compared to Rs62 billion disbursed during previous year, indicates the magnitude of the leasing business in Pakistan.

Muhammad Nasim Khan, Managing Director & CEO Sigma Leasing Corporation, while outlining an overview of the leasing sector told PAGE that the secret of the robust growth in the leasing business was its swiftness in handling the cases as compared to procedural delays usually experienced while dealing with the banks. That is the reason that the corporate clientele prefer to deal with the leasing companies which operate to get the job done hardly with a span of a week in general.

Muhammad Nasim Khan is originally a banker. He did his Masters in Economics in 1959. He carries a banking experience spanning over 30 years to his professional credit. He remained associated with a number of Pakistani and Multinational banks in Pakistan as well as abroad. Starting his career as a Bank Officer in 1962, Nasim worked as Manager, Zonal Chief, and Head of Operations, Country Manager, Director General Adjoint and Member Board during the course of his banking services. In 1995 he left a local bank, where he was one of the founder members and working as Regional General Manager with the ranks of Senior Executive Vice President prior to joining Sigma Leasing.

Nasim Khan, avoiding from using the word of interest, pointed out that pricing of the leasing business that has increased sharply during the current financial year from 8 to the level of 15 percent is a worrisome factor in the backdrop of the business deals at fixed rates. An increase of 5 to 6 percent just in one year is something abnormal, he remarked

The leasing companies have no option but to absorb the escalated interest rates to honor their earlier commitment at the low fixed rates to its clients.

Leasing companies are engaged in business with almost all the major textile units operating on captive power plants for acquiring costly power generators. In a way, the leasing sector is providing fuel to the textile industry which is the mainstay of the national economy, yet its role is not in the limelight.

The jump in the interest rate, however, casts its direct bearing on some key economic players such as knitwear industry which is usually comprising medium entrepreneurs, while increase in export financing is another factor causing liquidity crunch to small investors in garment and knitwear industries.

Regarding the credit line for the leasing companies, Nasim observed that currently it is being made from local banking system. The credit facility from external resources is being avoided mainly due to unpredictable rupee-dollar parity.

Asian Development Bank, it may be recalled, had approved a credit-line for $60 million as the Second Private Sector Facility Project which had benefited approximately 400 small and medium scale export-oriented enterprises in Pakistan.

Under that arrangement, a $10 million loan to Atlas BOT Lease Company Ltd.; $15 million each to National Development Leasing Corporation, Ltd. and Pakistan Industrial Leasing Corporation Ltd.; and a $20 million loan to ORIX Leasing Pakistan LTD was extended last year

Each loan, without a government guarantee had a term of eight years including a grace period of three years. At each borrower's option, the interest rate was determined either floating or fixed, as provided under the newly established market-based loan facility.

The main objective of the Project was to provide foreign exchange resources to the four leasing companies for financing investment activities of export-oriented small and medium scale enterprises.

The expansion of the leasing business in Pakistan in the past 10 years has been rapid. Annual lease amounts have grown at an average rate of 70 per cent per annum for the last six years. The financial record of the members of the Leasing Association of Pakistan indicates high profitability; gross return on assets of over five per cent and net return on equity of over 26 per cent, in aggregate terms, for FY 1994.

SIGMA

Timely access to competitively priced funding is a key to success for any company in leasing business as any discomforting squeeze on the spread between the pricing and the cost of borrowing may effect cost-efficiency of disbursements.

Sigma is maintaining a substantial capital base when compared to the size of its leasing exposure. It has enhanced paid up capital to Rs200 million order to comply with the requirement of SECP. Subsequent induction of Rs50 million is also made to further strengthen its equity base. It is said that SIGMA always intended to maintain an equity base, adequate to absorb pressures of macro economy fluctuations.

BACKGROUND

In fact, leasing sector has come to a level of its maturity and growth where some important strategic decisions need to be carefully planned and executed.

With the entry of commercial banks in the leasing business some time back, leasing sector had to go through a tough period of realignment of its policies and operations. There is no doubt that the banks' lower cost of funds, well-spread branch network and capacity to promote their products forced the leasing companies to create their own niche market through their resilience and determination.

The leasing sector has however shown its grit to face the challenge with professional capability. The overall growth of the leasing business achieved through diversification of products, aggressive marketing, reaching out to the smaller towns and redefining niche markets. The focus on the SME Sector is certainly a reflection of the professionalism that exists in the leasing sector.

On the back of the economic turnaround in Pakistan, the leasing sector is eyeing for further growth with its vision, competence, innovation and good corporate governance.

In this particular direction for achieving new heights, the efforts made by Leasing Association of Pakistan (LAP) to set up National Register and Credit Bureau for the small lessees are indeed commendable.

This helped safeguarding the sector from being misused through multiple leasing and defaults. At the same time, there is need for improving the internal governance and monitoring infrastructure of the leasing companies particularly when they are moving fast towards the risks linked with unorganized sectors.