18 December 2004	Saturday	05 Ziqa'ad 1425

LAHORE, Dec 17: The country's leasing industry is facing the possibility of "further shrinkage", if not extinction, due to tough competition from commercial banks which enjoy several advantages over their competitors in the leasing business.

The number of leasing companies has already dropped to 19 from about 32 in 1999 as a consequence of merger and acquisition of 10 companies and cancellation of licences of three firms. One firm is said to have surrendered its licence and a new one established in the same period.

"Only few of the existing companies are doing well due to their size, others are struggling to survive in an environment of extreme competition from the commercial banks.

I doubt ability of most of the leasing firms to survive in the highly competitive environment. They would have either to merge or wind up sooner or later," says Leasing Association of Pakistan (LAP) former chairman Rashid Ahmed.

Only five firms are doing well in terms of business. "The rest are barely surviving," says Mr Ahmed. "The commercial banks enjoy many fantastic advantages over the leasing companies due to which the latter's profitability has dwindled over the recent years."

He said the "major factor behind the current weak state of the leasing firms was the high cost of funds available to them". "The leasing firms act as a mediatory between banks and borrowers.

Due to high cost of lease, the people prefer to borrow from the banks which are offering credit at a very low price. In fact, the large corporate sector has stopped borrowing from the leasing companies as used to be the case in past.

Only small and medium businesses, which are not entertained by the banks, or do not have any assets to mortgage with banks, or want to avoid lengthy processing time, obtain lease finance for their machinery or office equipment from the leasing companies," Mr Ahmed says. He says there is a big gap between the cost of finance advanced by banks and leasing firms.

Besides the low cost of finance, he says, the banks also enjoy the advantage of "geographical spread" over the leasing companies which are confined to just major cities.

"It is easier to reach a bank than a leasing company for credit in the remoter areas. It's because the leasing companies cannot expand geographical presence due to limited financial resources. The banks don't face any such problems."

Auto financing is the only "major sector which is allowing the leasing industry some breathing space" in the current competitive atmosphere. "The only way of survival for the leasing industry is to consolidate and enhance capital base so that the cost of funds could be reduced, and also expand into other services and line of products like investment advisory and brokerage," says Mr Ahmed.

Mr Ahmed says the environment in which the leasing industry is operating at present would become more competitive "if more banks decide to jump into leasing business". "The market for the leasing companies will further shrink, resulting in their extinction."

But some analysts say the leasing sector has shown "resilience to the stiff competition from the commercial banks". "Volumes and profitability has improved in the recent months with the increase in the demand for the lease finance because of greater industrial activity," they say.

They say the leasing firms are "expanding and developing their own niche markets, and the SME sector is likely to provide growth avenue. Other areas, which are expected to yield competitive edge over the competitors, are the reduction in the cost of funds, and enhancement in the quality and speed of the service".