SHAMSUL GHANI shams_ghani@hotmail.com
Dec 14 - 20, 2009

The leasing business in Pakistan, after witnessing an early boom period, has gone into recessionary mode with a shrinking operator base and an almost unmanageable liquidity crisis ensuing from the lack of unhindered investment funds inflow.

The exceptionally high policy rate regime extending over the CY 2008 and 2009 also took a heavy toll on the leasing sector. Adding fuel to fire was the 2008 global financial crisis that drained the Pakistani banks and the money market of liquidity so vital for the survival of leasing business.

Presently, the leasing industry is struggling to ensure its survival threatened by the perennial resource mobilization problem. Unlike banks, it has no access to the low cost customer deposits and has to procure business funds from open money market that, besides charging higher rates, also takes into consideration the credit rating of a particular leasing company.


YEAR 30-06-2008 30-06-2007 30-06-200
Number of companies 25 27 29
Paid up capital 17,448 13,182 12,185
Reserves 8,477 7,877 8,599
Total Equity 25,925 21,059 20,784
Investment in lease finance 71,597 72,908 75,151
Other investments 29,896 22,817 21,687
Borrowings 90,792 83,196 78,882
Revenue 16,907 15,028 14,665
Operating Expenses 5,779 5,822 5,009
Financial Charges 8,954 8,467 7,419
Taxation 411 91 193
Net Profit 2,094 636 2,044
Cash dividend 884 961 900
Total Assets 136,569 128315 123,501

During the falling interest rate regime too, the leasing companies could not enjoy a sustained flow of low cost business funds. In the rising rate era that followed subsequently, the problem was compounded. Though the banks never assumed an explicitly competitive posture against the leasing companies, yet the fact remains that in the absence of an even playing field, the leasing companies persistently find themselves in a state of implicit competition.

The floating rate borrowing and lending also pose serious maturity-matching problems for the leasing companies.

With the phasing out of country's high profile, Development Financial Institutions (DFIs), the leasing and modaraba sectors stepped in with a mandate to act as financial sector intermediaries. With the advent of leasing sector, the business and industry circles were introduced to a new financial culture with a sharp focus on country's capital formation needs and a will to act as swiftly as possible.

This was in sharp contrast to banks' traditionally slow and overcautious approach to customers' financing requests. Blessed with an enormous business network and numerous business options, the banks allowed the leasing and modaraba sectors to develop without subjecting them to any serious competitive pressures.

Some of the modarabas were also allowed to do leasing business, albeit strictly in line with the rules based on Shariah. They could write operating leases only under which the leased asset is reported on the balance sheet of the lessor that is the modaraba.

The leasing sector took birth in mid eighties and used its dynamics to broaden the country's industrial fixed asset base.

In order for them to survive, the leasing companies took to certain risk management policies warranting a shift in focus from large-ticket industrial leases to small size consumer lease financing.

Large-ticket industrial leases, besides posing risk concentration threat also entail leased asset repossession and disposal problems in case of a default. An erected industrial plant at borrower's site is not only cumbersome to remove in case of repossession but also difficult to dispose off at a price that ensures hundred per cent loan recovery.

On the other hand, the moveable assets like vehicles, power generating sets, electronic equipments and appliances etc. are not only easy to repossess but are almost certain to fetch an amount equivalent of the net loan liability.

The leasing companies somehow managed to ensure short-term survival but the role they were supposed to play in the country's industrial development was greatly undermined. Global financial crisis gave rise to non-performing leases which in turn warranted incremental loan provisioning.

This put dual pressure - on liquidity as well as profitability - on leasing companies. Presently 18 full fledged leasing companies and 9 leasing modarabas are in operation. Only two companies out of 18 are trading at above-par value, while only 6 of them have paid cash or bonus dividends during the CY-2008.

The comparative figures released by the Leasing Association of Pakistan in its yearbook 2008 give an overview of leasing sector operations.

Negative expansion of the sector based on number of operating companies has taken place during the three-year period. In the face of dire survival threats for weaker companies, a few mergers and acquisitions have taken place during the period under review. Investment in lease finance has been on the decline whereas borrowings show a constant rising trend. In 2008, the debt to equity ratio was 78 and 22, which is on a much higher side. This situation not only threatens the viability of the sector but also puts strain on its profitability, which continues to decline.

The paucity of funds syndrome has enveloped the entire leasing industry, which is in need of an immediate bailout. Its basic role of a powerful engine to provide financing steam to the industry, especially the SME sector, needs to be rewritten. Consumer financing should lie within the ambit of banks only which, by virtue of their various economies, operate at a much lower administrative cost.

Only leasing companies should be allowed to undertake leasing business. The existing fund raising instruments namely COIs and TFCs, being expensive and time-consuming, are a less viable proposition. A level playing field that ensures sustained flow of cheap business funds for the leasing sector is needed.