Feb 04 - 10, 2008

Till recently the leasing sector was playing an important role in the financial sector being the provider of medium term financing. With the entry of commercial banks in the leasing business, the companies undertaking lease as core business are facing fierce competition. The number of leasing companies has been on the decline due to mergers and acquisitions but assets of leasing companies are on the rise.

One of the reasons for declining margins of leasing companies is the cost of funds. However, they have been able to face the challenge by offering quality service and still maintaining a large share in auto financing. It must be kept in mind that most of the financial institutions are not involved in leasing, they are in auto finance.

Leasing companies had started as provider of medium size funds but later on became "big ticket" companies through syndication. However, now they are reverting back to small and medium enterprises, which should have remained their target market. The initial success of leasing company was because at that time almost all the commercial banks were operating in the public sector. As the banking business shifted from public to private sector the new entrants and privatized banks started eroding their market share.

One of the reasons for the successful operations of the leasing companies, despite higher financial cost was their stringent credit evaluation. This helped in keeping the delinquent loans at the lowest. Some of the companies, which were a little adventurous, met the fate as percentage of non-performing loans started ballooning. Most of these companies faced the twin problem, eroding financial resources and growing provisions.

When the competing among the banks and leasing companies was growing some of the financial experts raised the alarm. They tried to convince the regulators that extending medium term loans was the mandate of commercial banks. The argument was simple but convincing that this would lead to mismatch in the funds available with the banks and the lending period. Most of the deposits of commercial banks fall in the category of short-term funds and therefore, could not be utilized for extending medium term credit.

It was also argued that entry of commercial banks in the leasing business would result in uneven playing field because of a number of reasons including low cost of funds and greater outreach of banks. To overcome this it was also suggested that bank should be asked to create separate entities for undertaking leasing business. However, the regulators did not pay attention and the result is constant decline in the number of leasing companies.

According to Pakistan Leasing Year Book 2006, total members of Leasing Association of Pakistan was 31 out of this 17 were leasing companies, 6 Modarabas, 4 Investment banks and 3 Investment Companies. The collective assets of the members as of 30 June 2006 were more than Rs 123 billion compared to Rs 110 billion for the preceding year. During this period investment in lease finance also increased to Rs 75 billion from Rs 65 billion.

It may also be pointed out that most of the leasing companies having adjusted their business models with the changing industry dynamics have emerged successful. In the leasing sector, Orix Leasing Pakistan can be rightly termed the industry leader. It was among the first few companies undertaking leasing business in Pakistan. Over the years it has also diversified its business. Interestingly Orix Japan has been so impressed by the management and the policies of Orix Pakistan that, instead of putting its own equity in some of Middle Eastern entities, it encouraged Orix Pakistan to take equity stake.

Mentioning Orix Pakistan as the industry leader is in no way aimed at undermining the other players. One may recall that when the question of raising minimum capital requirement for leasing companies was discussed, some of the players pleaded they did not need larger capital base. At that time regulators were upset due to substantial disparity in the paid up capital of leasing companies. However, the time has proved that the bigger ones have emerged stronger.

Another interesting case study is transformation of National Development Leasing Corporation (NDLC) into NIB Bank. The company was established under public-private investment. Later on the entity was turned into a bank, which has lately been merged with PICIC, which also had major stake in PICIC Commercial Bank.

Analysts fear that the number of leasing companies may go down further due to fierce competition posed by the commercial banks, enjoying the advantage of low cost fund and greater outreach. It is also worth noting that some of the Modarabas, which are also the member of the Leasing Association, have come up with new business model. These entities are moving away from core leasing business to other areas.

Some of the analysts are of the view that leasing companies should concentrate on small and medium enterprises in the interim period but must come up with a more dynamic business model. However, finding a credit worthy borrowers in the SME sector may not be easy. These entities mostly suffer from lack of credible track record and improper documentation.

The analysts are also of the view that lately some of the leasing companies entered into financing of the public transport system on the pressure of the government but the experience proved disastrous. Most of the financial institutions (operating in the public sector) had burnt their fingers by financing "yellow cab" and now the victims are private sector financial institutions.

Both regulators and players are advised in their own best interest to come up with appropriate business models for their sustained development. Since all the leasing companies are listed at the stock exchanges, investors could also explore them for the potential takeover. May be the country does not need a long list of leasing companies but they should not be allowed to go bankrupt because some bad decisions were made in the past.