TARIQ AHMED SAEEDI (feedback@pgeconomist.com)
Feb 15 - 21, 2010

People ask about reasons of leasing companies now in presence of commercial banks. Banks have access to large population and low cost deposit-base and thus they can offer lending at low rate while leasing companies need funds from financial institutions to meet the needs of their customers and thus they have lending rate doubled or tripled.

The specialty however that distinguishes leasing companies from commercial banks is its provision of financing on condition of reimbursement based on usage instead of ownership of financed goods. The asset based financing makes leasing companies to cater to financial needs of largely unorganized sector of the economy.

Leasing is a sturdy sector in international market with a total volume of no less than $500 billion per annum. USA and Japan are the leading markets of leasing with an aggregate volume of near $300 billion.

Leasing sector is under immense pressure because of margin eroding competition put up by banks. Two contenders are not equal in weight in this competition. Banks have access to deposits at 6 to seven percent while leasing companies generate funds at much higher market rate. Both are governed by different set of rules and regulations; one by state bank of Pakistan and other by security and exchange commission of Pakistan as nonbanking finance company. A leasing company runner expresses discontent about this arrangement. He says banks have more avenues to create funds. Leasing expert was of the view of bringing banks' leasing business under nonbanking regulations.

In this situation when exuberance of banks in building up advances portfolio is resting and they are preferring muscles in treasury bills and government securities, leasing companies can restore market share in private sector's leasing. However, cost of funds is rising every quarter with policy rate upward revision. And, for leasing companies the cost is much high.

The deferment of minimum paid-up capital requirement by security and exchange commission of Pakistan last year oxygenated leasing companies gasping for liquidity. Leasing companies had to jack up capital to Rs500 million by June 30, 2010. The reason for postponement was obviously liquidity crisis in the financial sector.

Commercial banks entered in leasing business to the chagrin of leasing companies that do not like banks eating into their market shares. Easily commercial banks can win over customers of leasing due to their relatively large branch network as compared to leasing companies. Leasing companies find commercial banks indomitable competitors, which are big in terms of funds and branches. Banks have strong infrastructure and access to low cost funds. Leasing companies in Pakistan were the pioneer of financing consumer and small and medium enterprises markets. Before starting of leasing by commercial banks, leasing companies had flourished and they racked up historical profits as sole source of financing. Advent of banks not only posed a tough competition to funds-strapped leasing companies but also it swallowed the huge financing business, reducing the margin for leasing companies. The banks are in safe liquidity position since they mobilize directly funds from the market on low cost. An advantage leasing companies cannot avail, and thus they have to sustain high cost funds.

Pakistan's leasing industry is one of the most overpowered subsectors of financial sector. Although, size of financial sector is broadening month on month with emergence of new banks, numbers of leasing companies are on decline showing a resolve of stakeholders to depart from the highly consolidated financial operation dominated by super mart concept of financial intermediation. Leasing experts often criticize the permission given to banks of involving in leasing business, saying leasing is a specialized business and the diversification in financial sector is inhibited because of nonchalantly delivery of financial services from single window. The concept is more popular in grocery dealings but it is precision and tailor-made products that you are talking about in financial sector and a minor miscalculation ratchets up infection of assets, and raises the likelihood of bad debts, says an executive of a leasing company.

The cutthroat competition in the market brought down the number of leasing companies to 25 in 2008 from 29 in 2006. Total assets of the leasing sector are also not significant. The asset base is even weak not over Rs140 billion as compared to Islamic banks that are experiencing a remarkable annual growth rate in their assets as well as in their branches. Net profit of leasing companies stood at Rs2.09 billion and borrowings at Rs90.79 billion in 2008. The assets of Islamic banks crossed Rs323 billion by last yearend.

Legal and regulatory supports are propelling the growth of Islamic financial services in Pakistan. Islamic financing is meeting the financial needs of people who are restrained in choosing conventional financial intermediation. Modaraba is an alternative to conventional financing and it is based on Shariah compliances and is an operating lease. The business friendly regulations allow modarabas to expand their basket of products and attract customers towards Islamic financing. The number of modarabas has increased to 27.

Financing by leasing companies is a much relief to small and medium enterprises that are unqualified borrowers for other financial institutions. Certainly, the lending rate is high. Leasing companies require no collateral from borrowers except keeping financed goods under lien. South East Asian countries had promoted leasing sector for financing small and medium companies before financial crisis of 1997.

Small and medium companies are the pivotal force of the Pakistan's economy. According to a survey, small and medium enterprises form the backbone of private sector in the country since private sector's 90 percent comprises of small and medium businesses that contribute 25 percent to manufacturing value addition and employs 80 percent of non-agriculture workforce. According to various estimates, SMEs can generate employment of no parallel in numbers. Lease financing is a viable source of medium term financing for SMEs.

Leasing companies cannot compete with commercial banks until there is flow of funds at equal rate. Since this is not possible, regulations should be relaxed for leasing companies to generate funds. A suggestion was of restricting leasing by banks to 30 percent of their assets. However, the areas of leasing should be outlined in details. Many need financial assistances to expand or open new business. Lending at suitable rate and without security can capitalize on entrepreneurship potential in the country.