TARIQ AHMED SAEEDI (tariqsaeedi@hotmail.com)
Feb 04 - 10, 2008

In a recent unfolding regulation, Security & Exchange Commission of Pakistan (SECP) has approbated leasing companies spreading its service provision spectrum to commercial properties that may be in favour of their market expansion strategy. Also, thirty days denominated certificate of deposits is considered in an optimistic limelight by stakeholders of leasing industry, which, they believe would somehow help gaining access to funds to parsimonious leasing companies. Capital scarcity has rendered their operation ineffective and inefficient in addition to pathetically uncompetitive. Apart from this, leasing companies have to borrow amount from financial institutions on KIBOR plus interest rate. That means rate of current market KIBOR plus 2 to 3 percent interest levy variable in accordance with principal amount scales up their cost of credit collectively. Subsequently, the rate of financing becomes comparatively expensive. Linking to KIBOR signifies variable interest rate that increases their cost of funding and results into considerable credit price differential. While commercial banks incur insignificant cost in generating funds leasing companies ought to sustain considerable costs in course of fund generation. The opponents of disparity in access to funds said leasing companies are operating in a protectionism regime where only extreme favouritism is bestowed upon competitors.

Cash Outlay: The regulation is aimed at to support enterprises in pursuing cash outlay for establishing and acquiring fixed assets for business industries. For many of business ventures, purchasing location of organizational functions implies non development funds; and return on investment in commercial properties is painfully sluggish. Added by increasing needs of development capital by organizations recently regulations were loosened. Since, cash budgeted to set up point of production or sale initially incurs extra expenditure the size of it exceeds sometimes more than actual investment. By virtue of two modes of financing: operating and finance leases leasing companies have been expanding its asset based financing to mostly informal sector. Because of the capital shortage does not permit leasing companies to fund expensive equipments and machineries for example. Lease financing concept came into being in Pakistan to assist financing small and medium sized companies. SME sector has, undoubtedly, marvellous potentials to be explored and requires small investment per se. Thereby, leasing industry caters the need of cottage industry, home-grown production, and small scale manufacturing. Or, it is financially capable of meeting only small credit requirements. The outreach of asset based financing to informal sectors needs to be outstretched. As, according to an estimate there is still 80 percent market untapped, which mostly composes of leads relevant to lease financing. Hence, the nascent regulation would be prospecting growth of SME sector. Experts term this a positive development in the backdrop of stiff competition stemmed out of commercial banks.

While talking to the scribe, Tizoon Kisat, Chairman, Leasing Association of Pakistan and DMD ORIX Leasing Pakistan Limited (OLP) said numerous issues are confronted to leasing companies in Pakistan. On one hand it is not easy for us to generate funds and cost of funding puts us in a great disadvantage on the other. LAP was incorporated in 1995. All the leasing companies operating in Pakistan and other financial institutions authorized by SECP to undertake leasing business are required to become its members. There are currently 17 leasing companies while numbers of Modarbas, investment banks, and investment companies are 6, 4, and 2 respectively. Major objectives of LAP are to coordinate the activities of member companies; to solve the problems of members; to adopt a unified approach in dealings with the government and regulatory agencies; to develop healthy corporate culture; to provide a forum to its members to jointly discuss various issues facing the industry with the regulatory bodies; to organize seminars and training workshops for the staff of its member companies. LAP has been organizing international workshops and seminars. LAP is the only association in Pakistan having a partnership with multilateral agency such as Swiss Agency for Development and Cooperation for creating awareness. LAP has developed a mature and productive role in identifying the key issues such as assimilation of global and regional developments in the leasing industry for the benefits of its members, maintaining a close liaison and interaction with SECP to promote a congenial and effective regulatory framework in addition to developing healthy and dynamic corporate culture amongst its constituents.

Decline in Lending: Chairman LAP said competition in the financial market has become too intense. The cost of funding compels leasing companies to opt credit risk in order to get market share. Equity is the major issue which should be resolved at once so that we can expand outreach of our financing to promote small and medium sized sector of the nation. And, for it equity should be increased. Lending assets of commercial banks recently have been declined, he said, paving way for leasing companies to revive. As of June 2007 assets of leasing companies surged to Rs. 128 billion, which registered four percent rise as compared to corresponding period of 2006. He said it is a favourable initiative by SECP thereby now commercial properties may be leased by leasing companies.

"I am confident that SECP would always consult members of LAP prior to chalk out any policy." He expected such cooperative practices would continue in future as well. Chairman LAP expressed his satisfaction over the present coverage of leasing industry to small and medium sized sector. "In spite of major market has yet to be explored I believe we are putting our best efforts in conformity with the available resources." He said our target customers are basically companies related to small industry and "or say we can not meet the credit demand of large scale manufacturing companies." In fact lack of awareness about leasing thwarts market penetration. As soon as people get to know benefits of lease, leasing companies will start flourishing, he said. But, unless level playing field is provided to leasing companies this would not be possible. Leasing companies have to take credit risk due to financing on informal sector, which often beholds non performing loans. Eighty percent of the market is still untapped and over a certain period of time we have potential to explore it, he added.