Site icon Pakistan & Gulf Economist

Leasing sector of Pakistan: Level playing field need to be provided

Leasing sector of Pakistan: Level playing field need to be provided

The evolution of leasing in Pakistan particularly in the formal sector dates back to June 1980 when, according to a Report of the Council of Islamic Ideology, the concept of leasing was recognized as one of the financial services under the Islamic financial system, which was later introduced in the country in 1985. In June 1984, the government directed the National Development Finance Corporation (NDFC), a leading financial institution in public sector, to promote the first leasing company in Pakistan.

As such, National Development Leasing Corporation (NDLC) was established as the first leasing company in the private sector as a joint venture between NDFC, the Habib Group and the International Finance Corporation (IFC). The Asian Development Bank (ADB) joined later on. The growth of the leasing industry in Pakistan initially lacked momentum mainly due to a general lack of awareness regarding its nature and benefits. During the next five years, only five leasing companies entered the leasing business. As a result of the Economic Reforms Package introduced by the government in early 1990’s, a number of leasing companies came on stream. With its distinctive tax advantage and efficient approval process, leasing became an attractive source of financing.

Lease-financing activity in Pakistan was started in 1985 primarily as a result of Islamization of the economy. In addition to being one of the permissible Islamic modes of financing, lease financing also became popular as an alternate source of financing. With its distinct advantages over conventional sources of finance inclusive of tax advantage, efficient approval process, cash flow benefits, etc., lease financing has over the years become a major source of financing. Some of the main assets being increasingly leased financed in Pakistan these days include industrial machinery and equipment, automobiles, computer hardware, etc.

Despite their encouraging growth and potential, the leasing companies and Modarabas are basically secondary lenders, as these do not have adequate leverage and earning potential of banks. Despite their impressive growth particularly over the last 5 years, the leasing sector in general is expected to experience a recessionary trend due to a number of factors. These include liquidity constraints, unfavorable investment climate, competition, lack of innovative products, etc. Even in these adverse circumstances, some of the leasing companies have performed well and have regularly been giving handsome dividends. However, their performances have not been reflected in the market value of their shares, most of which are much below their par and even break-up value. This is not only due to reflection of the overall economic scenario but also due to a general perception of the leasing and Modaraba sector as a whole by the individual investor.

The leasing sector in general has experienced commendable growth over the years and has adequately proved to be an alternate source of finance. However, its near future prospects do not seem to be too bright unless its various areas of concern including the prevailing economic scenario, dried-up foreign funding lines, lack of resource mobilization, non-availability of level playing field, lack of innovative financial products, tax and other issues etc. are seriously investigated and mitigated. In case of an expected economic revival, the overall leasing sector is likely to regain its initial momentum particularly after the implementation of the Supreme Court’s historic decision on elimination of Riba from the banking system due 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, the leasing companies need to develop innovative products along with encouraging leasing of plant and equipment relating to priority sectors of the economy including energy (CNG), IT (computers and other hardware), textiles (air jet looms and auto coners), etc. subject to their intrinsic value.

Exit mobile version