Details

Technical Note

Lease Financing in Pakistan

Saad Haleem Khan, Naim Sipra

INDUSTRY : Leasing

AREA : Finance

ORGANIZATION : N/A

LENGTH : 12

LUMS No : 02-178-92-2

PUBLICATION YEAR : 1992

KEYWORDS:

Lease Financing, economic assets, debt, Islamic financial instrument, Modaraba

DESCRIPTION:

Till the early 1980s, the primary mode of financing industrial and economic assets in Pakistan was debt or equity. The debt was obtained through banks and development finance institutions (DFI's) with DFI's financing long term and banks financing short term assets. Equity financing was obtained by selling stock at the stock exchange or internally generated sources. Lease financing was introduced in response to a strongly felt demand for a quicker and more efficient financing alternative. By the end of 1990, the n tuber of leasing companies was over a dozen with the total volume of leases written at over Rs 4.5 billion. The top four lessors were First Grindlays Modaraba, National Development Leasing Corporation (NDLC), Orix Leasing and BRR Modaraba. The leased assets of each of the first two above mentioned lessors were over Rs 1.0 billion. A very important source of funds for the leasing industry was the credit lines provided by international agencies like Asian Development Bank (ADB), Commonwealth Development Corporation (CDC), etc. Lessors in Pakistan could be divided into two distinct categories - leasing companies incorporated under the Companies Ordinance, and Modarabas, incorporated under the Modaraba Companies and Modaraba (Floatation and Control) Ordinance 1980. The leasing companies were the same as in other parts of the world. The innovation in Pakistan was the Modaraba which was introduced in response to a growing public demand for an Islamic financial instrument. The basic concept was that of risk and profit-sharing based on effort rather than the usually fixed return in the form of interest which was earned without any real effort. Modaraba was an agreement between two or more parties, wherein one party provided management skills while the others provided equity. The profit or loss from the venture could then be shared amongst the partners. Modaraba companies mostly specialised in car leasing. This was mainly due to certain legal requirements that prohibited a leasing company from capitalising a vehicle over Rs 50,000, while there was no limit in the case of modarabas. This meant that leasing companies had a big disadvantage in leasing cars costing over Rs 250,000 since they could not avail depreciation tax shield for the full purchase price. This had resulted in a general trend of leasing companies moving out of car leasing, and the field was slowly being dominated by modaraba companies.

LEARNING OBJECTIVES:

N/A

SUBJECTS COVERED:

Finance