Research Analyst
8 - 14, 2011

Leasing institutions or companies play major role in the financial system. An efficient financial system can be an effective tool of funds mobilization from institutions, investors, and savers.

Securities and Exchange Commission of Pakistan (SECP) and State Bank of Pakistan (SBP) are responsible for betterment of the country's financial system. Financial institutions are the part of financial system and they play crucial role in economic development.

Since 1947, many structural measures have been taken for the establishment and growth of an efficient financial system.

With the advent of leasing sector, the business and industry circles were introduced to a new financial culture that had a sharp focus on the country's capital formation needs.

At present, leasing sector is underperforming due to competition with banks, lack of required capital, increase in interest rate and volatile security conditions. Most visible are structural changes in the leasing sector on account of mergers and amalgamations.

During July-December, 2009, Al-Zamin Leasing Corporation Ltd. was merged with and into Invest Capital Investment bank Ltd. and ORIX Investment bank Ltd was merged with and into ORIX Leasing Pakistan ltd.

During July, 2009 to March 2010, one housing company was acquired by another group and three leasing companies were merged with other entities. Despite consolidations /mergers, there are still significant challenges for the leasing sector.

SECP has enhanced the validity of licenses issued to non-banking financial companies from one year to three years for providing operational flexibility to them. The timeline for meeting prescribed minimum equity requirement was also extended to June 2011.

On March 31, 2011, the total assets of the sector stood at Rs34.5 billion as compared to Rs35 billion as of December 31, 2010, showing marginal decline of 1.5 per cent.

However, the equity showed a slight improvement of 0.7 per cent as it increased from Rs4.8 billion on December 31, 2010 to Rs4.8 billion on March 31, 2011.

Further, deposits of the leasing companies showed improvement of 1.4 per cent as they increased from Rs3.9 billion to Rs4.5 billion.

Presently, the leasing sector 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.

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 the country's high profile, development finance institutions, the leasing and modaraba sectors stepped in with a mandate to act as financial sector intermediaries.

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.


Total Assets 34,528 25,745 25,797
Total Liabilities 29,603 20,867 13,668
Total Equity 4,821 4,794 12,128
Total Deposits 4,477 6,108 2,697

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.

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. The World Bank and International Finance Corporation have reduced financing to leasing companies.


The government should announce a bailout package for the leasing sector. Leasing has great potential but it is fraught with unhealthy environment, lack of qualified staff, tax issues, delayed payments, bad debts and premature credit decisions.