LEASING BUSINESS LENDING STRONG SUPPORT TO FINANCIAL SECTOR

Its largest contribution is that it has been playing very significant role in the development of micro and small enterprises.

SHABIR H. KAZMI
Jan 01 - 14, 2007

An in-depth analysis of leasing sector creates a typical situation glass is half filled or it is half empty. However, the fact is that the leasing sector has not only been playing its due role in economic progress of the country but also strengthening its role as an integral part of the financial sector. The presence of big players in the leasing sector, particularly commercial banks enjoying, among other facilities, low cost funds, huge balance-sheet size and extensive branch network, which is good but also leads to uneven playing field.

According to the leading players performance of the leasing sector is indeed commendable. The leasing companies over the years have made enormous contribution to the financial sector. In particular they have been providing an alternate mode of financing in the business entities. Its largest contribution is that it has been playing very significant role in the development of micro and small enterprises. They are also playing a lead role in the development of automobile industry of the country by providing auto financing. Lately, the players have also ventured into agriculture leasing. This has not only enabled the sector to diversify its products but also enter into high return business segment.

Being the only provider of medium-term financing the leasing sector has achieved phenomenal growth in terms of profitability and investment in leases, during the last many years. It has also widened its reach by opening branches in small towns and cities, which has also improved its operational capacity. The single largest contribution of the sector is introduction of community based lending to micro enterprises. This has yielded exceptional results because these enterprises never enjoyed access to the formal financial sector despite having enormous requirement for funds. Grant of facilities to small and medium enterprises (SMEs) and micro enterprises by various leasing companies has not only diversified their leasing portfolio but will also facilitate in achieving socio-economic development of the country.

Most of the sector experts are of the opinion that the overall performance of the leasing sector has been in line with the growth of the economy. The growth indicators seem impressive by any standard. However, two factors make the performance even more impressive 1) growth has been achieved without the entry of any new leasing company or modaraba and 2) intense competition faced from banks in consumer financing. The growth in profitability is because the leasing companies have been introducing innovative products and better leasing packages. On top of this operating leases and stretching market reach has proved good omen.

In the recent past leasing sector has performed because there has been steady shift towards financing industrial plants, machinery, office equipment and transport equipment. Investors find leasing sector's response appropriate and purpose-oriented in spite of the fact that this business grows more complex with the passage of time and changing technology, rendering equipment obsolete faster than many may find affordable.

Rising interest rates poses new challenge for the leasing companies, particularly after the entry of commercial banking in the leasing business. For a long term leasing sector has been demanding from the State Bank of Pakistan to instruct commercial banks to float separate leasing companies rather than undertaking the business through commercial banks. There may not be wrong with banks undertaking leasing business but the competition becomes unnatural because of availability of funds to banks at virtually no cost and availing the branch network.

The data available in Pakistan Leasing Year Book for 2005 indicates that the number of member companies has remained constant at 24 since 2003 but paid-up capital improved from Rs 7,424 million to slightly more than Rs 9,000 million. Assets have grown from Rs 62,637 million to Rs 97,791 million. However, a closer look at the members indicates that the number of leasing companies is on the decline and number of investment banks/DFIs is on the rise. Leasing companies have mainly survived because of auto lease. As such they could not compete commercial banks in medium and long-term funding of the projects.

In the past leasing companies have survived and flourished due to their ability to provide prompt funding at competitive rates. However, now the corporates prefer to float bonds/TFCs to meet their funds requirement. On top of this economic deceleration or slower pace of fresh investment is bound to keep appetite for low or marginal fund. Lately, some of the banks and leasing companies ventured into leasing of commercial vehicles but the experience was horrendous and it seems most probable that they would abstain from financing commercial vehicles.