TESTING THE HEALTH OF STOCK MARKET

Listed leasing companies

PROF. DR. KHAWAJA AMJAD SAEED*
EMAIL: KAMJADSAEED@YAHOO.COM
Aug 06 - 12, 2007

Earlier two articles were contributed and published in PAGE. This third article will focus on the performance of Leasing Sector Listed on Karachi Stock Exchange. The data relates to November 30, 2006 and has been taken from Daily Quotations Sheets of the Karachi Stock Exchange (Guarantee) Ltd.

EFFICIENCY TEST MODEL

The following nine point has been used to test the performance of listed Leasing Companies in Pakistan:

1. Market Share
2. Paid up Capital
3. Par Value
4. Historical Growth
5. Turnover
6. Market Capitalization
7. Share in GDP
8. Market Value Compared to Par Value
9. Distribution as Return

MARKET SHARE

Total number of companies listed on KSE was 652 against 19 number of leasing companies listed on KSE. This represents 3%. If leasing is to be popularized as one of the Islamic Instruments of Finance, it is advisable to increase its share through strategic move.

PAID UP CAPITAL

Listed paid up capital of KSE was Rs. 518 billion. Out of this, a sum of Rs. 5 billion related to listed leasing sector. Based on this, its share in the KSE total paid up capital was 0.96%. Concerted efforts are needed to increase paid up capital by establishing more and more leasing companies in Pakistan.

PAR VALUE

Par value of each listed leasing company was Rs. 10. This, in today's time is too small. In future, par value may be raised to at least Rs. 100.

HISTORICAL GROWTH

The following box captures the position relating to historical growth of leasing companies in Pakistan:

BOX NO. 1

YEAR

NUMBER

%

1988-1993

09

47

1994-1999

08

42

 

17

89

2000-2005

02

11

Total

19

100

From the above box, it would appear that the development of leasing sector has been very show-around 1% per annum.

TURNOVER

During January-October, 2006 (10 months) KSE had a total turnover of Rs. 56 billion. Against this, share of listed leasing companies was only 0.063. This represents 0.11%. This shows extremely low volume of turnover.

MARKET CAPITALIZATION

KSE market capitalization was Rs. 2,952 billion. Against this, total market capitalization of leasing companies was Rs. 8 billion-representing only a share of 0.27%. This is too small.

SHARE IN GDP

Total GDP of Pakistan was U.S $ 128 billion. Share of KSE listed companies was 38% and the share of leasing companies was only 0.10%.

MARKET PRICE COMPARED TO PAR VALUE

One of the Acid Test for checking the financial health of a company is to compare the par value with the ruling market value. Based on this, 47% leasing companies were below their par value. Accordingly, these represent sickness which needs to be properly diagnosed, reasons ascertained and treatment to turn these into healthy ones be initiated. If a leasing company is quoted below 25% of its par value, the spirit of section 295 of the Companies Ordinance, 1984 be carefully examined for a positive step under section 296 of the above ordinance. This will be a right step for paving the way for an institutionalized approach for corrective action.

DISTRIBUTION AS RETURN

Distribution to shareholders is another important indicator. Based on our analysis, Box No. 2 presents the position:

Box No. 2

ANALYSIS OF DISTRIBUTION AS RETURN

PARTICULARS

2006

%

No Distribution

08

42

Distribution as Return

11

58

Total

19

100

All leasing companies were not in a position for full distribution as 42% of these did not announce any return to shareholders.

CONCLUSIONS & RECOMMENDATIONS

Based on foregoing analysis, the following conclusions emerge alongwith recommendations for consideration by stakeholders:

A Policy Statement is needed whether we wish to promote leasing as an Islamic financial instrument or not. If the answer is in the positive, then, under the Leasing Association of Pakistan, a workshop be held to help develop a strategy to introduce leasing on wider scale.

Sickness in 47% of existing leasing companies be diagnosed and corrective action be initiated to turn sick units into healthy ones.

Some suggestions have been offered during the review of the performance of leasing in this article. These may be considered by stakeholders.