May 2 - 15, 2011

Leasing companies can play an important role in the development of small and medium enterprises (SMEs) in Pakistan because of their ability to serve borrowers without collaterals. Small and medium companies are not eligible for business loans from banks without collaterals. High interest rate and weak link of financers and potential borrowers are two of the main obstacles in the development of private sector. Since nonbanking financial institutions including leasing companies have no sources of capital other than mainly banks, the cost of capital become highly prohibitive for the borrowers.

Until 1980s, leasing companies were the main source of capital to SMEs in Pakistan. From 27 in 2003, numbers of leasing companies came down to nine in 2010.

All developed and developing countries are encouraging growth of small and medium sized businesses. Leasing volumes are as much as $500 billion world over, led by the USA and Japan.

Leasing in Pakistan embraces as low as 14 or 15 per cent share in new investments. Rather, the share must have dwindled below 10 per cent given the prohibitive interest rate.

SMEs, employing up to 90 workers, form 90 per cent of all private companies in Pakistan, according to the federal bureau of statistics. There are 3.2 million economic establishments operational in the country, it said.

SME sector is to be developed not only for the creation of jobs but also for the poverty alleviation. Promotion of SMEs is also important because of the country's burgeoning population of youngsters accounting for more than 50 per cent of the total population. Out of approximately 180 million population, 80 million is said to belong to the age group of 17 or below. The wide base of youngsters can be harnessed by engaging them in economic activities. In fact, SME sector can share the inductions of large-scale organizations of employable youths. Unemployment is a dangerous threat to the country's existence in this critical situation when mindsets are extremely vulnerable to the pulpits promoting terrorism.

Financial constraints are repressing the real progress entrepreneurship can make to spur the sluggish economic growth. Small and medium enterprises have proved a major driver of employment opportunities. SMEs are not growing as much as they can because of the funds scarcity. Small shops and roadside restaurants prefer to rely on self-financing and informal fleecing loans purveyors, but they rarely go to the formal lending channel to meet their business expansion needs.

State bank has agreed to the constricted money supply from the formal financial sector to the development of SMEs. SME bank has, despite the government support, could not expand the financial outreach to a wide array of small and medium companies. As of December 2010, SME sector outstanding credit stood at Rs334 billion, merely 9.6 per cent of total banking portfolio.

Islamic financing and leasing share a striking similarity that they both are asset-based financing in contrast to conventional financing where the assets may be financed without the knowledge of their formations. A lessor, on the other hand, has complete knowledge of assets such as machineries, vehicles, factory equipments, and others and owns them until the credit reaches the maturity. Growth of Islamic banking is eating market shares of leasing companies. A white paper released by the International Finance Corporation concludes the difference between leasing and bank financing: "Leasing companies are more sales and service oriented-they are using their specialized knowledge to bridge the gap between suppliers and purchasers, and the specialized knowledge of leasing companies may also give them an advantage in disposing of the repossessed leased assets. Suppliers are generally not specialists in finance or credit decisions, while lessees are not specialists in finance or equipment acquisition; leasing companies specialize in finance, credit and equipment acquisition and disposal (equipment dealing). In effect, both the supplier and the lessee are outsourcing certain portions of their business to a service provider that also happens to have a certain capacity to borrow and lend money."

SME sector of Pakistan includes manufacturers of industrial materials, special alloys, carbon fibres, pharmaceutical chemicals, dyes, light engineering, electronics and sensors as well as service providers such as food preservation, industrial material certifications, call centres, and graphic designing. The last few vocations are becoming popular rapidly. The commercial values of IT and enabled services are marvellous. Software houses lack the fund supports to develop technologies or solutions, applications, for the newfound technology.

The software, sometimes very expensive and inoperable without integration of pricey hardware, turns the foreign projects commercially nonviable due to the initial capital costs required to embark on the enterprise. Extension of loans from specially specialised platforms will enable the entrepreneurs to bank on projects that not only give good profits but also help them introduce their local flairs at the international level.

Leasing sector should expand its horizon to cater to the potential laden economic sectors as well. IT sector can become a good leasing assets holder, if for example lending policies for software houses are relaxed. Venture capital investments are criticised for their confined operations by the IT entrepreneurs. Leasing companies are hit hard because of the high cost of capital acquisitions from upward supply line. For years, they have been pleading that the government should limit the role of development and SME financing to leasing companies and NBFCs by making it a no-go zone for banks. Security and exchange commission of Pakistan is the regulator of leasing companies while the State bank regulates banks and development finance institutions. The split in regulations over almost the similar operations causes the conflict of interests.

In past, specialised units in the financial sector of Pakistan could not come up with the imitable models rather some of them turned up examples of dismal failures. Micro, SME, and agriculture financing are case studies worth studying. SME sector's contribution in gross domestic products can ramp up only when it is to receive proper and affordable funding.