Research Analyst, PAGE
July 20 - 26, 2009
Leasing sector of Pakistan consists of 27 companies. These include 16 leasing companies, 4 investment banks, 2 investment companies, and 5 modarabas. In 1997, 32 leasing companies were operational in the country. This number has been decreasing since then, especially after 2000, when the minimum paid-up capital requirement for leasing companies was raised to Rs 200 million, which led to mergers and acquisitions. The recent performance of the leasing sector was affected by strong competition from commercial banks, which are increasingly offering products and services similar to that of NBFC's, including leasing companies.
OVERVIEW OF LEASING SECTOR
INDICATORS 2006 2007 2008 No. of Companies 29 27 25 Paid up Capital 12,185 13,182 17,448 Reserves 8,599 7,877 8,477 Total Equity 20,784 21,059 25,925 Investment in Lease Finance 75,151 72,908 71,597 Investments 21,687 22,817 29,896 Borrowings 78,882 83,196 90,792 Revenues 14,665 15,028 16,907 Operating Expenditure 5,009 5,822 5,779 Financial Charges 7,419 8,467 8,954 Taxation 193 91 411 Net Profit 2,044 636 2,094 Cash Dividend 900 961 884 Total Assets 123,501 128,315 136,569 Various sources
The recent performance of the leasing sector was affected by strong competition from commercial banks, which are increasingly offering products and services similar to that of NBFCs, including leasing companies. This, along with the slowdown in private sector credit off-take, decreased new business volume of members by 14% to Rs 36 billion in 2007, compared to Rs 41 billion in 2006. The total assets of the leasing sector increased to Rs 128 billion in 2007, a 4% rise from Rs 123 billion in the year before that. During the same period, investments in lease finance decreased to Rs 73.6 billion in FY07 from Rs 75 billion in FY06, while the revenues increased marginally by 2% to Rs 15 billion from Rs 14.7 billion.
Increasing interest rate resulted in sharp upsurge in borrowing costs, which were higher by 14% at Rs 8.5 billion from Rs 7.4 billion. The average spread, which is described as the difference between the average rate of cost of funds and lending rates, decreased to below 2% jeopardizing the profitability of the sector, which reached to Rs 635 million in 2007 from Rs 2.06 billion in 2006.
GOVT POLICIES AND ITS EFFECTS
Pakistan's economy has been going through very testing times. This is true for the financial sector as well of which leasing companies are an integral part. The constantly rising interest rates in the economy and breakneck inflation have proven as deterrents for potential lease customers. Even industrial customers would be less willing to lease machinery or equipment from leasing companies as the cost of lease would be too high keeping in mind how poorly the industrial sector is expected to perform in the future.
Another challenge that leasing companies will have to continue to face is competition from commercial banks. They are increasingly offering products similar to that of leasing companies and also have greater penetration in the market. Looking at the distribution of assets financed by lease, leasing companies have been heavily engaged in leasing vehicles, while plant and machinery have been leased too.
Unfortunately, with the high cost of financing due to increased interest rates and inflation premiums, the demand for vehicles and their leasing has been dropping. In addition, the cost of automobiles has risen due to increased steel prices (until a few months back), rising energy costs and a major depreciation in the rupee value. All these factors combine to discourage demand for leasing vehicles.
Therefore, it is expected that leasing companies will be hit hard in the future. Nearly 70% of the leasing activities are in the form of consumer facilities, which will also be negatively affected by high interest rates, inflationary pressures and the resulting lack of purchasing power of the potential customers. Although the leasing sector has historical focus to provide its services to the SME sector, there still is unmet demand of the SMEs.
Political and economic uncertainties pose threat to future of leasing companies creating hurdles in its operations and hurting the interests of the industry. Unfortunately, with the high cost of financing due to increased interest rates and inflation premiums, the demand for vehicles and their leasing is dropping. It is expected that leasing companies will be hit hard in the future.