THE entry of commercial banks in the leasing business over the last few years has upturned the market dynamics to the obvious disadvantage of the sector. The bank’s low cost of funds, colossal operational capability and extensive branch networks has created an environment in which companies had to make fundamental strategic changes in their business patterns. However, the sector withstood the challenges as is evident from the results shown by leasing companies. The sector has handled larger volume of business during the last year compared to the previous year and has shown a substantial increase in profits.
Leasing sector comprises 33 companies and 18 Modarabas. The share of sector in the total private fixed capital expenditure in the economy is estimated at eight per cent as compared to other developed countries where its share is 40 per cent.
Initially, leasing companies could start with a capital of Rs50 million. This limit has been gradually raised by the SBP over time. In June of 2000, the minimum paid-up capital limit was increased to Rs200 million. This led to mergers in some cases while others issued bonus shares and right shares to meet this requirement.
Major issues: The leasing sector is faced by a number of issues which act as impediments in its growth and can be summarized as follows:
*mushroom growth of leasing companies; lack of effective credit marketing; lack of effective human resource development for marketing personnel; concentration of leasing activities to major cities; lack of availability of appropriate credit culture; lack of appropriate legal cover; lack of level playing field for companies against commercial banks and DFIs, with lower costs of funds; increasing cost of funds; decreasing net margins; mismatch of long term and short term funds; lack of availability of foreign credit lines; lack of innovative products; increase in NPLs and a corresponding decrease in profits due to provisioning.
Prohibited activities: Leasing companies and other NBFIs are prohibited by the SBP from undertaking any of the following activities:
* acquisition of a controlling ownership or management interest in another enterprise, except where such control is necessary to protect the NBFI investment; real estate transactions, except the acquisition of real estate for operational use; purchase or sale of anything from or to any of its directors, employees or officers, without the prior written permission of the Controller of Capital Issues; provision of accommodation, fund based or otherwise, to any director, employee or officer and their immediate families; interest bearing transactions outside their core activities.
Diversification: For the leasing sector which is normally faced with a high risk, high reward situation, it is imperative to reduce the risks. To be able to achieve this, it has to diversify across sectors, across geographic areas, across size of the enterprises and bringing forth new products tailored to the growing needs of the economy.
The export development strategy has identified certain avenues for export development which are as follows:
The supply of lease financing to firms exporting these products will help reduce the market risk. The goods are going to be exported globally so this provides an avenue for companies to diversify across sub sectors(based on the type of products) and geographically (both locally and internationally).
The focus of the leasing corporations has been on large urban centres such as Lahore and Karachi. The moving away from the main centres would help develop new clientele base and help reduce credit risk, which otherwise is quite high (lack of diversification) portfolios is limited to a narrow client base within few cities. Not only would this provide corporations with an opportunity to reduce risk but it would serve as the basis for higher gains in terms of the chance to tap an untapped clientele.
The payment risk of companies can be reduced if the SMEs are included as the dominant borrowing class. The SMEs historically have a better record of debt repayment as compared to large borrowers. So, the focus of the leasing corporations should also be on SMEs as they provide an opportunity for diversification and reducing payment and market risk. Furthermore, the opportunity of an increased client base can be an avenue for increased returns.
The scope of the leasing sector has so far been limited mainly to industrial equipment and automobiles. There is a need to go beyond this and meet the emerging demands of the economy by focusing on other sectors of the economy and by developing new products and services in conjunction with the market. Such a move will provide an opportunity to diversify the portfolio of clients and reduce the market risk.
Future outlook: While analyzing the overall performance of leasing sector, particularly during 1999 and 2004, it may well be ascertained that despite economic and industry specific problems adversely affecting the performance of the leasing sector, it has experienced appreciable growth highlighted by various performance indicators. However, some companies have out-performed others based on better financial management, expertise and resources.
While majority of leasing companies are concentrating more on vehicle leasing, there is a need for diversification to other avenues like financing of warehouses, hospitals and educational institutions, which have recently been included in leasing sector’s domain by the SECP. Besides, alternative long-term fund mobilization activities need to be geared up by companies for reducing and eliminating mismatch of funds. Mergers and acquisitions also need to be undertaken by various leasing companies for meeting minimum paid-up capital requirement and effective synergy.
The sector in general has experienced good growth over the years and has adequately proved to be an alternative source of finance. In case of an expected economic revival, the overall leasing sector is likely to regain its initial momentum particularly in the backdrop of Islamization of the economy which the present government is working on , to its inherent potential of being in close conformity to one of the permissible modes of financing under Shariah.
However, in order to improve the near future demand prospects of leasing sector in particular, companies need to develop innovative products along with encouraging leasing of plant, machinery and equipment relating to priority sectors of the economy including cement industry, energy (CNG), IT (Computer hardware, software and accessories), textiles, engineering etc subject to their intrinsic value. Agriculture sector is one sector which the leasing firms must keep their focus on since it is one of those sectors which is receiving and will be receiving special attention by the government.
The GDP is expected to grow by over seven per cent this year, and analysts speculate a double digit growth in the years to come. This high growth environment provides the sector with tremendous amount of opportunities. As the economy base expands there will be more credit off-take and corporations in order to meet the growing demand will undergo major expansions. We are already witnessing this trend in textile, cement, engineering and auto-industry.
