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Leasing Industry in Pakistan

A Theoretical overview

HAMDARD INSTITUTE OF MANAGEMENT SCIENCES

June 6, 2010

Submitted to: Mr Arif Malik

Submitted by: Yasir Ali


Muhammad Ali Shaukat

MBA (E)
Leasing Industry in Pakistan
A Theoretical overview

BACKGROUND OF LEASE FINANCING IN PAKISTAN:

The concept of leasing and hire purchase existed long before the first leasing company,
National Development Leasing Corporation Limited was established in 1985. During 1985-1991
periods, only six companies were established whereas during 1992-97, as many as, 27 leasing
companies entered the market. Some of the modaraba companies are involved in leasing as
their business. The leasing sector has registered consistent and double-digit growth — except
for the last few years. However, this was mainly due to recessionary trend of the economy. The
volume of leases underwritten over the years has increased mainly because leasing companies
have become the only source of medium-term financing.

Initially leasing companies could start business with a capital of Rs 50 million. This limit was
raised to Rs 100 million in 1992 and further enhanced to Rs 200 million. Companies were
required to increase the capital to this level by November 1999. However, a large number of
companies failed to meet the deadline. All such companies have requested the SECP to extend
the deadline. The SECP was also requested to consider shareholders' equity (capital and
reserves) as the capital for meeting this requirement.

At present 32 leasing and 8 modaraba companies are members of Leasing Association of


Pakistan. According to the information available from the Karachi Stock Exchange, 29 leasing
companies posted profit for the year 1998-99 and 3 posted loss. Out of the profit making
companies 9 companies did not declare profit.

As such leasing companies can be divided into three categories, large ticket, medium ticket and
Leasing Industry in Pakistan | 6/6/2010

small ticket companies. While the five large size companies manage to get the largest share of
the business, some of medium and small size companies have established their own niche
market. Such companies, despite being small post modest return on equity.

While the sector continues to operate under intense competition the new interpretation of old
laws, particularly with regard to taxation, has become a serious concern for the companies. It is
true that the country needs additional revenues to minimize budget deficit, but tax collectors
must refrain from issuing unrealistic demand notices. In this connection the tax regime must
read the explanatory note, regarding taxation, in the latest annual report of Orix Leasing
Pakistan.

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National Development Leasing Corporation was established in 1984 as a joint venture between
Asian Development Bank, International Finance Corporation, National Development Finance
Corporation and local sponsors with a paid-up capital of Rs 20 million. As at June 30, 1999
shareholders' equity was over Rs 1.2 billion.

Orix Leasing Pakistan is a subsidiary of Orix Corporation — Japan's largest leasing company. It
commenced business in January 1987. Orix Leasing Pakistan serves as the regional base for the
Orix Group's operations in the Middle East. It has strategic investment in and manages joint
venture leasing companies in Oman and Egypt. Orix Investment Bank Pakistan also has strategic
investment from Orix Leasing Pakistan.

First Habib Modaraba was floated in 1985 as a multipurpose and perpetual modaraba. It is
involved in leasing as core business. Ever since its inception, it has been regularly paying
dividend to its certificate holders. It paid the second-highest dividend for the year 1998-99
among the 52 listed modarabas.

Security Leasing Corporation commenced its operations in May 1995 and has a paid-up capital
of Rs 100 million. Foreign institutional investors are the majority shareholders in the Company.
In addition to the leasing operations, the Company's activities include money market/short-
term lending, capital market operations and project financing.

Sigma Leasing Corporation commenced its business in January 1997. It has been sponsored
mainly by Almurtaza Machinery Company — the leading supplier of apparel and textile made-
up machinery for the last 26 years. The main focus of the Company is to provide lease financing
to small and medium enterprises.

ROLE OF SECP IN LEASE FINANCING:

NON BANKING FINANCE COMPANIES DIVISION

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The specialized companies are responsible for regulation of leasing companies, Modarbas and
Modarba management companies, Mutual funds and other Specialized Companies (SC) except
Insurance.

FUNCTIONS OF SC DIVISION:

1. Licensing
2. Monitoring
3. Regulatory compliances

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4. Enforcement of all applicable Laws.

NBFC:
NBFC is a company duly licensed by the commission would be able to carry out any any one or
more of the following forms of business, subject to compliance with the prescribed criteria:

1. Investment finance services


2. Leasing
3. Housing finance services
4. Venture capital Company
5. Discounting services
6. Investment advisory services(as management company of close-ended mutual funds)
7. Asset management services (as management company of open-end mutual funds)

NON-BANKING FINANCE COMPANIES

Part VIII-A inserted in the Companies Ordinance, 1984 for establishment and regulation of
NBFCs (promulgated in November 200). The NBFC Rules were issued in April 2003.

 Salient Features of Part VIII-A of the Companies Ordinance, 1984 are as under;
 Only a NBFC duly licensed by the Commission to undertake specified activities
 Power to make rules for establishment and regulation of NBFCs
 Power to issue directions
 Power to remove any director/chief executive/chairman or any other officer and to
appoint another person in his place.
 Power to supersede Board of directors of a NBFC
 Special/Inquiry audit can be ordered for detailed scrutiny of the affairs of a NBFC.

ELIGIBILITY CRITERIA FOR ESTABLISHING A NBFC


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 To be a public limited company under the Companies Ordinance


 To comply with the minimum equity requirement
 To allot at least fifteen per cent of the paid-up share capital to the promoters
 Separate licensing requirements for each function of NBFC.
 Minimum equity requirement for each business activity;
o Investment Finance Services Rs. 300 million
o Leasing Rs. 200 million
o Housing Finance Rs. 100 million
o Venture Capital Co. Rs. 5 million

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o Discounting Services Rs. 200 million
o Investment Advisors asset Managers Rs. 30 million
 Maintenance of books of accounts
 Appointment of directors, chief executive and chief financial/accounting officer
 Bar on acquiring controlling interest in any company
 Issuance of COIs/CODs
 Exposure limits for different activities
 Rules for Venture Capital Fund, Open-end and Closed-end Schemes incorporated in
NBFC Rules

WHAT IS LEASE FINANCING?

Leasing is a super financing alternative if you are seeking funding to obtain business equipment.
Finance companies, banks, and many firms that sell high-priced equipment will lease to you.

When you lease an item, the lessor retains ownership of it. You use the equipment by virtue of
the monthly payments you will be required to make. You can often purchase the equipment at
the end of the lease term for its market value or less.

A great advantage to leasing is that it is being allowed to be "off the balance sheet." This means
that leases can be disclosed as balance sheet footnotes. They do not appear as debt even
though they represent an ongoing company liability.

Banks also tend to consider their total exposure when lending to small businesses. If you have
obtained lease financing through a third party, they are more likely to lend you funds than if all
of your borrowing needs have been met through them. This is very important if you have a
relatively small business, because most banks expect you to use them exclusively for traditional
lending but may not care if you use a nonbank source for lease financing. In any case, though,
do keep your bank informed regarding any significant lease commitments you are considering
prior to actually signing any agreements. Leasing Industry in Pakistan | 6/6/2010

Also, Leasing is a process by which a firm can obtain the use of a certain fixed assets for which it
must pay a series of contractual, periodic, tax deductible payments. The lessee is the receiver of
the services or the assets under the lease contract and the lessor is the owner of the assets. The
relationship between the tenant and the property owner is called a tenancy, and can be for a
fixed or an indefinite period (called the term of the lease). The consideration for the lease is
rent. A gross lease is when the tenant pays a flat rental amount and the property owner pays
for all property charges regularly incurred by the ownership

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Under normal circumstances, an owner of property is at liberty to do what they want with their
property, including destroy it or hand overpossession of the property to a tenant. However, if
the owner has surrendered possession to another (i.e. the tenant) then any interference with
the quiet enjoyment of the property by the tenant in lawful possession is unlawful.
Similar principles apply to real property as well as to personal property, though the terminology
would be different. Similar principles apply to sub-leasing, that is the leasing by a tenant in
possession to a sub-tenant. The right to sub-lease can be expressly prohibited by the main
lease.

SECTOR REVIEW

The concept of leasing and hire purchase existed long before the first leasing company,
National Development Leasing Corporation Limited was established in 1985. During 1985-1991
period only six companies were established whereas during 1992-97, as many as, 27 leasing
companies entered the market. Some of the modaraba companies are involved in leasing as
their business. The leasing sector has registered consistent and double digit growth — except
for the last few years. However, this was mainly due to recessionary trend of the economy. The
volume of leases underwritten over the years has increased mainly due to the fact that leasing
companies have become the only source of medium-term financing.

Initially leasing companies could start business with a capital of Rs 50 million. This limit was
raised to Rs 100 million in 1992 and further enhanced to Rs 200 million. Companies were
required to increase the capital to this level by November 1999. However, a large number of
companies failed to meet the deadline. All such companies have requested the SECP to extend
the deadline. The SECP was also requested to consider shareholders' equity (capital and
reserves) as the capital for meeting this requirement.

At present 32 leasing and 8 modaraba companies are members of Leasing Association of


Leasing Industry in Pakistan | 6/6/2010

Pakistan. According to the information available from the Karachi Stock Exchange, 29 leasing
companies posted profit for the year 1998-99 and 3 posted loss. Out of the profit making
companies 9 companies did not declare profit.

As such leasing companies can be divided into three categories, large ticket, medium ticket and
small ticket companies. While the five large size companies manage to get the largest share of
the business, some of medium and small size companies have established their own niche
market. Such companies, despite being small post modest return on equity.

While the sector continues to operate under intense competition the new interpretation of old
laws, particularly with regard to taxation, has become a serious concern for the companies. It is

5
true that the country needs additional revenues to minimize budget deficit, but tax collectors
must refrain from issuing unrealistic demand notices. In this connection the tax regime must
read the explanatory note, regarding taxation, in the latest annual report of Orix Leasing
Pakistan.

National Development Leasing Corporation was established in 1984 as a joint venture between
Asian Development Bank, International Finance Corporation, National Development Finance
Corporation and local sponsors with a paid-up capital of Rs 20 million. As at June 30, 1999
shareholders' equity was over Rs 1.2 billion.

Orix Leasing Pakistan is a subsidiary of Orix Corporation — Japan's largest leasing company. It
commenced business in January 1987. Orix Leasing Pakistan serves as the regional base for the
Orix Group's operations in the Middle East. It has strategic investment in and manages joint
venture leasing companies in Oman and Egypt. Orix Investment Bank Pakistan also has strategic
investment from Orix Leasing Pakistan.

First Habib Modaraba was floated in 1985 as a multipurpose and perpetual modaraba. It is
involved in leasing as core business. Ever since its inception, it has been regularly paying
dividend to its certificate holders. It paid the second-highest dividend for the year 1998-99
among the 52 listed modarabas.

Security Leasing Corporation commenced its operations in May 1995 and has a paid-up capital
of Rs 100 million. Foreign institutional investors are the majority shareholders in the Company.
In addition to the leasing operations, the Company's activities include money market/short-
term lending, capital market operations and project financing.

Sigma Leasing Corporation commenced its business in January 1997. It has been sponsored
mainly by Almurtaza Machinery Company — the leading supplier of apparel and textile made-
up machinery for the last 26 years. The main focus of the Company is to provide lease financing
Leasing Industry in Pakistan | 6/6/2010
to small and medium enterprises.

OUTLOOK

Almost nine months of the current fiscal year have passed by. There are clear indications that
the volume of business has increased. But more importantly, the spread has improved with the
declining interest rates and higher liquidity in the financial system. Some of the leasing
companies have floated TFCs which also indicates that the companies expect larger business in
the coming days and that they have overcome the problem of mismatch of funds as well as
locked their financial cost for a specified period.

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The direction of economic growth cannot be predicted with certainty. Some of the analysts,
having optimistic view, say that across the board recovery may not be there as most of the
sectors continue to suffer from over supply situation. However, signs of sporadic investment in
BMR as well as fresh investment are very much there. Dewan Salman has already commenced
commercial production of acrylic plant which will provide impetus for the broad-based of textile
sector. Ibrahim Fibres is in the process of expanding its production capacity from 70,000 tonnes
to 200,000 tonnes per annum. The expansion programme of Nishat Mills, estimated at Rs 1.5
billion is at a very advanced stage. Dewan Faroque Motors is expected to make public offer of
its shares shortly. Even some of the textile mills, enjoying strong cash flow and producing
superior quality products, have started BMR programmes.

The movement of KSE-100 index also indicates revival of investors' confidence in the capital
market. Purchase of 2.5 million shares, involving a sum of US$ 17 million, of Shell Pakistan by
the parent company also exhibits renewed interest of foreign investors in Pakistan. However,
this interest will be confined to less than a dozen listed companies.

The analysts, having pessimistic view, still believe that current euphoria is not supported by
economic fundamentals. The country still suffers from adverse balance of payments, tax
collection is inadequate to support development programme and exchange rate has been
maintained mainly through capital controls. The other point is that unrealistic exchange rates
and import tariff makes imports cheaper which encourages spending. Though the country
continues to suffer from precarious forex reserves, no effort has been made to curb import of
unnecessary items — either by imposing quantitative restrictions or complete ban on the
import of such items. Inflation rate is expected to go up once again due to cost-pushed
phenomena and interest rates are also expected to surge upwards. The increase in POL prices
seems unavoidable which will also result in increase in electricity and gas tariff.

A large number of leasing companies have failed to increase their paid-up capital as per
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instructions of the Securities and Exchange Commission of Pakistan. Now, two options are
available, either the deadline is extended for another 2-3 years or these companies opt for
mergers and acquisitions. Apparently, the first option is more practical due to existing laws
governing mergers and acquisitions. However, the players have to decide themselves the ways
to reduce the number of companies to weed out unhealthy competition.

FORMALITY OF LEASE:

A tenancy for years greater than 1 year must be in writing in order to satisfy the Statute of
Frauds

TERMS OF LEASE:

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i. The term of the lease may be fixed, periodic or of indefinite duration.
ii. If it is for a specified period of time, the term ends automatically when the period
expires, and no notice needs to be given, in the absence of legal requirements.
iii. The term's duration may be conditional, in which case it lasts until some specified event
occurs, such as the death of a specified individual.
iv. A periodic tenancy is one which is renewed automatically, usually on a monthly or
weekly basis.
v. A tenancy at will lasts only as long as the parties wish it to, and be terminated without
penalty by either party.
vi. It is common for a lease to be extended on a "holding over" basis, which normally
converts the tenancy to a periodic tenancy on a month by month basis.

FINANCE LEASE:

A finance lease or capital lease is a type of lease. It is a commercial arrangement where;

 The lessee (customer or borrower) will select an asset (equipment, vehicle, software);
 The lessor (finance company) will purchase that asset;
 The lessee will have use of that asset during the lease;
 The lessee will pay a series of rentals or installments for the use of that asset;
 The lessor will recover a large part or all of the cost of the asset plus earn interest from
the rentals paid by the lessee;
 The lessee has the option to acquire ownership of the asset (e.g. paying the last rental,
or bargain option purchase price);

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The finance company is the legal owner of the asset during duration of the lease. However the
lessee has control over the asset providing them the benefits and risks of (economic) ownership

COMPARISON WITH OPERATING LEASE:

A finance lease differs from an operating lease in that;

 In a finance lease, the lessee has use of the asset over most of its economic life and
beyond (generally by making small 'peppercorn' payments at the end of the lease term).

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In an operating lease the lessee only uses the asset for some of the asset's life.

 In a finance lease, the lessor will recover all or most of the cost of the equipment from
the rentals paid by the lessee.
In an operating lease the lessor will have a substantial investment or residual value on
completion of the lease.

 In a finance lease the lessee has the benefits and risks of economic ownership of the
asset (e.g. risk of obsolescence, paying for maintenance, claiming capital
allowances/depreciation).
In an operating lease the lessor has the benefits and risks of owning the asset.

The U.S. Financial Accounting Standards Board and the International Accounting Standards
Board announced in 2006 a joint project to comprehensively review lease accounting
standards. In July 2008, the boards decided to defer any changes to lessor accounting, while
continuing with the project for lessee accounting, with the stated intention to recognize an
asset and obligation for all lessee leases (in essence, making all leases finance leases). The
projected completion of the project is now 2011

INTERNATIONAL FINANCIAL REPORTING STANDARDS:

In the over 100 countries that govern accounting using International Financial Reporting
Standards, the controlling standard is IAS 17, "Leases". While similar in many respects to FAS
13, IAS 17 avoids the "bright line" tests (specifying an exact percentage as a limit) on the lease
term and present value of the rents. Instead, IAS 17 has the following five tests. If any of these
tests are met, the lease is considered a finance lease:

 ownership of the asset is transferred to the lessee at the end of the lease term;
Leasing Industry in Pakistan | 6/6/2010

 the lease contains a bargain purchase option to buy the equipment at less than fair
market value;
 the lease term is for the major part of the economic life of the asset even if title is not
transferred;
 at the inception of the lease the present value of the minimum lease payments amounts
to at least substantially all of the fair value of the leased asset.
 the leased assets are of a specialised nature such that only the lessee can use them
without major modifications being made
 Impact On Accounting:

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 Since a finance lease is capitalized, both assets and liabilities (current and long-term
ones) in the balance sheet increase. As a consequence, working capital decreases, but
the debt/equity ratio increases, creating additional leverage.
 Finance lease expenses are allocated between interest expense and principal value
much like a bond or loan; therefore, in a statement of cash flows, part of the lease
payments are reported under operating cash flow but part under financing cash flow.
Therefore, operating cash flow increases.
 Under operating lease conditions, lease obligations are not recognized; therefore,
leverage ratios are understated and ratios of return (ROEand ROA) are overstated.

TYPES OF LEASE:

FINANCE LEASE

Also called a financial sale, it allows for the benefits of flexibility as payments are spread out to
a period of several years, often the equivalent of the actual cost of the equipment or property.

A common misconception is that payments made for a finance lease equals to ownership, but
this is not always true. Nevertheless, the lessee does have the option to purchase the property
after the lease expires, for a significantly much lower percentage of the actual cost.

This kind of lease, however, is not suitable for individuals who wish to acquire rapid tax
benefits.

TRUE LEASE

Also referred to as a tax lease, this is the better choice when one wants to have rapid tax
benefits.

It is also advantageous to professional institutions, as the lessor still remains the owner of the Leasing Industry in Pakistan | 6/6/2010
equipment, thereby trimming down costly investments when it comes to computers and other
office-related gadgets that are prone to becoming technologically obsolete.

You will get the advantage of lower monthly payments as compared to that of a financial lease,
and in some instances, these could actually be tax-deductible. When the contract expires, the
lessee is given the option of purchasing the property for a very minimal amount.

OPERATING LEASE

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Also referred to as a tax lease, this is the better choice when one wants to have rapid tax
benefits.

This is considered, in general, as a short-term lease, usually three years or less. It is often
associated with high-tech equipment, or property that is prone to becoming technologically
obsolete.

In this type of lease, the lessor takes more of a risk in ownership, therefore allowing for much
lower monthly payments for the lessee. The lessee also has the advantage of the lease being
considered as neither an asset nor a liability when it comes to taxes.

The lessee also has the option of buying the property at fair market value after the contract
expires, similar to a tax lease.

An operating lease is a lease whose term is short compared to the useful life of the asset or
piece of equipment (an airliner, a ship etc.) being leased. An operating lease is commonly used
to acquire equipment on a relatively short-term basis. Thus, for example, an aircraft which has
an economic life of 25 years may be leased to an airline for 5 years on an operating lease.
The determination of whether a lease is a finance (also called capital) lease or an operating
lease is defined in the United States by Statement of Financial Accounting Standards No. 13
(FAS 13). In countries covered by International Financial Reporting Standards, the tests are
defined in IAS 17. In July 2006, the FASB and the International Accounting Standards Board
(IASB) announced the commencement of a joint project to comprehensively reconsider lease
accounting. In July 2008, the boards decided to defer any changes to lessor accounting, while
continuing with the project for lessee accounting, with the stated intention to recognize an
asset and obligation for all lessee leases (in essence, eliminating operating lease accounting).
The projected completion of the project is now 2011.
In the context of cars and other passenger vehicles, under an operating lease the lessor leases
Leasing Industry in Pakistan | 6/6/2010

the vehicle to the lessee for a fixed monthly amount, and also assumes the residual value risk of
the vehicle. This provides a way to lease a vehicle where the cost of the vehicle is known in
advance - however, operating leases can be an expensive option as there is a risk
premium priced into the monthly payments.

SKIP LEASE

Yet another flexible lease type, wherein lessee and lessor agree to a payment schedule where
some months, a set period of time, have no payment and penalty.

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This kind of lease is typical for business institutions and organizations whose operations rely on
a seasonal schedule. This is most common in school systems, and the agricultural and
recreational industries.

SIXTY OR NINETY-DAY DEFERRED LEASE

This type of lease allows businesses that rely on income-producing equipments that take
several months to generate revenue. A sixty or ninety-day deferred lease can be similarly
structured to a finance and true lease. Lessees are required to make an advance payment, to be
followed by the next ones after a sixty or ninety-day period.

PRE-PAID PURCHASE LEASE

This is an option often taken by new businesses which have no credit history. Lessees are
required to make a one-time advanced payment of ten to twenty percent of the property's
total amount, thus reducing the monthly payments significantly. When the contract expires, the
lessee is given the option of purchasing the property for a very minimal amount.

SUB-LEASE:

Often termed as "sub-let," this is a lease from one lessee to another.

LEVERAGED LEASE:

A leveraged lease is a lease in which the lessor puts up some of the money required to purchase
the asset and borrows the rest from alender. The lender is given a senior secured interest on
the asset and an assignment of the lease and lease payments. The lessee makes payments to
the lessor, who makes payments to the lender.
The term may also refer to a lease agreement wherein the lessor, by borrowing funds from a Leasing Industry in Pakistan | 6/6/2010
lending institution, finances the purchase of the asset being leased.
The lessor pays the lending institution back by way of the lease payments received from the
lessee. Under the loan agreement, the lender has rights to the asset and the lease payments if
the lessor defaults.
In this type of lease, the lessor provides an equity portion (often 20% to 50%) of the equipment
cost and lenders provide the balance on a nonrecourse debt basis. The lessor receives the tax
benefits of ownership.

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MAJOR LEASE FINANCING ACTIVITIES:

LEASING OF REAL PROPERTY:

here are different types of ownership for land but, in common law states, the most common
form is the fee simple absolute, where the legal term fee has the old meaning of real property,
i.e. real estate. An owner of the fee simple holds all the rights and privileges to that property
and, subject to the laws, codes, rules and regulations of the local law, can sell or by contract or
grant, permit another to have possession and control of the property through a lease or
tenancy agreement. For this purpose, the owner is called the lessor or landlord, and the other
person is called the lessee or tenant, and the rights to possess and control the land are
exchanged for some payment (called consideration in legal English), usually a monthly rent. The
acceptance of rent by the landowner from a tenant creates (or extends) most of the rights of
tenancy even without a written lease (or beyond the time limit of an expiring lease). Although
leases can be oral agreements that are periodic, i.e. extended indefinitely and automatically,
written leases should always define the period of time covered by the lease. In the 1930s, the
British government introduced infinite leases, only to remove the power to create these in the
early 1990s. A lease may be:

 a fixed-term agreement, in other words one of these two:


o for a specified period of time (the "term"), and end when the term expires;
o conditional, i.e. last until some specified event occurs, such as the death of a
specified individual; or
 a periodic agreement, in other words renewed automatically
 usually on a monthly or weekly basis at will, i.e. last only as long as the parties wish it to,
and be terminated without penalty by either party.
Because ownership is retained by the lessor, he or she always has the better right to enforce all
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the contractual terms and conditions affecting the use of the land. Normally, the contract will
be express (i.e. set out in full and, hopefully, plain language), but where a contract is silent or
ambiguous, terms can be implied by a court where this would make commercial sense of the
transaction between the parties. One important right that may or may not be allowed the
lessee, is the ability to create a sublease or to assign the lease, i.e. to transfer control to a third
party. Hence, the builder of an office block may create a lease of the whole in favour of a
management company that then finds tenants for the individual units and gives them control.
Under common law, a lease should have three essential characteristics:

1. A definite term (whether fixed or periodic)

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2. At a rent
3. confer exclusive possession

LEASE FINANCING OF TANGIBLE PERSONAL PROPERTY:

An owner can allow another the use of a vehicle (such as vehicle leasing of a car, a truck or
an airliner) or a computer either for a fixed period of time or at will. This can be a simple leasing
transaction, or it can be a transaction intended to allow the user the right to buy the item at
some future time.

 In a simple lease (rental) of a car, P pays O a rental for the use of the car during the
agreed period which may be a few days (e.g. for a holiday trip) or longer where it is
more economic to pay for use rather than pay for the ownership of an asset of
depreciating value. Normally, only P will be allowed to use the vehicle and, in such a
case, P has possession and control. But, P could be an employer who allows C the use of
the car to visit clients, and thereby gives C control.
 In a lease with the possibility of purchase, O could allow P to lease the car for a specified
period. If all the rental payments are made in full, P will then be allowed to buy the car
at the contractual purchase option price. In a consumer lease subject to the federal
Consumer Leasing Act and the Truth in Lending Act, the purchase option price cannot be
a "bargain" purchase, that is, it cannot be less than the originally estimated fair market
value. A "bargain" purchase creates an installment sale, to which the Truth in Lending
Act (TILA) applies including the standardized disclosures, most importantly the Annual
Percentage Rate (APR). Typically, the vehicle dealer or other personal property seller
offers the leasing terms and contract of a third party finance company. Hence, O leases
the vehicle to P, and upon execution of the contract simultaneously sells ownership of
the car to F and assigns the lease contract to F. It is standard for the contractual terms
to prohibit P from parting with possession or control of the car to another (if P does part
Leasing Industry in Pakistan | 6/6/2010
with possession, this can be a theft of the car from F).
There are two principal types of leasing, depending upon the party taking the risk of the value
of the vehicle (or other leased property) at lease end. In the U.S. this is called Closed-end
leasing. In other jurisdictions, it is called hire purchase, lease purchase, or finance leasing. These
transactions are complicated. The most common problem arises when O makes specific
representations as to the quality and reliability of the car to P during the initial negotiations. If
what is said induces P to buy the car from O, those representations would usually be
enforceable against O. However, in this transaction, O first sells the car to F who makes no
representations to P. The laws vary from state to state on the extent to which P might be
allowed a remedy if the car proves to be of poor quality.

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To clarify the concept, the owner of tangible movables has the power to keep possession and
only to transfer control. This may be for:

 short- or long-term storage (e.g. leaving a passport with hotel staff or depositing
valuable property in a bank vault — a hotel or bank holding property is a bailee); or
 for delivery purposes (e.g. using a carrier to transport goods to a specific destination); or
 It may be a form of mortgage — a pawnshop holds a pledge over the goods deposited
until the money lent is repaid.
Leasing is a common method by which airlines acquire their aircraft, usually from companies
specialized in the field of Commercial Aircraft Sales and Leasing. Aircraft leasing transactions
are typically divided into finance leasing and operating leasing.
Businesses often choose to lease rather than buy office equipment, including computers. Since
office equipment depreciates rapidly, leasing can be more cost-efficient than ownership.
In addition, more and more unconventional items are becoming available for lease, such as
handbags and luxury watches.

EQUIPMENT LEASE FINANCING

Cash-starved businesses may want to consider leasing, rather than buying, equipment. Leasing
affords you access to many types of equipment: computers, copy machines, fax machines,
trucks, and more. In addition, while leasing does not bring cash in the door, it does reduce the
amount of cash needed to raise for your business.

When you lease equipment, a manufacturer, dealer, or lender either buys or already owns the
equipment you want. In exchange, you make monthly payments to the owner (lessor). The
monthly payment structure allows you to treat the payments as tax-deductible business
expenses.
Leasing Industry in Pakistan | 6/6/2010

Leasing also makes it easier to keep pace with technology. This is especially important if your
business relies upon cutting-edge technology such as the latest computers, communication
devices, or other equipment. A series of short-term leases will cost you less than buying new
equipment every year or two. Some leases even have yearly computer upgrades built into them
and eliminating the difficult decision of whether you can afford to upgrade.

If you need equipment right away, leases are approved much more quickly than loans, and
involve less paperwork and more relaxed credit requirements. Many equipment vendors
provide lease financing, as do a number of banks. For early-stage businesses, equipment lease
financing is more easily obtained from a vendor than from a bank.

15
Ultimately, leasing equipment will likely prove more costly than buying, but if cash flow is an
important issue, then leasing is an attractive alternative.

Then leasing, be sure to consider the following points:


 Lease term. What is the lease term? The length of the lease will affect the amount
of your monthly payment, with a longer lease term meaning a lower monthly rent.
 Up-front payment. What is the size of any up-front payment? Can you reduce the
up-front payment and amortize it over the life of the lease?
 Monthly payments. Are the monthly payments reasonable? You can analyze the
amount of the payment by determining the interest factor associated with the
lease.
 Return rights. For vendor-leased equipment, under what circumstances can you
return the equipment if there are problems?
 Early termination. Do you have the right to terminate the lease early? Most lessors
will be reluctant to do this, but you may be able to negotiate an early termination
right in exchange for paying a fee.
 Option to purchase. Try to negotiate a right to buy the equipment. Equipment
lessors will often give you this right at the end of the lease term, usually for a fixed
price (e.g., 10 percent of the purchase price of the equipment) or at fair market
value.
 you do decide to lease equipment, keep the term short -- two years is ideal. Try to
negotiate a "modern equipment substitution clause" that lets you update or
exchange your equipment, so you don't end up paying for obsolete technology. And
insist on a cancellation clause that lets you pay a fee to cancel the lease. Be sure to
note the cost of any cancellation penalty.

ADVANTAGES AND DISADVANTAGES OF LEASE:


It has become increasingly more common in recent years for companies to lease equipment.

Leasing Industry in Pakistan | 6/6/2010


Each leasing agreement needs to be read through carefully to understand the terms and
conditions within said lease.

Typically a lease can run anywhere from one to five years. Most equipment necessary n
commercial businesses today, including technical equipment, can be leased. Some leases
provide an option to then purchase the equipment at substantially less money when at the end
of the term of the lease. By leasing equipment, if structured properly, you can maintain your
credit availability, as the lease debt does not have to be considered a direct liability on your
financial statements. This is advantageous, as it does not limit your ability to borrow from
lending sources.

16
ADVANTAGES OF LEASE FINANCING:

 It offers fixed rate financing; you pay at the same rate monthly.
 Leasing is inflation friendly. As the costs go up over five years, you still pay the same
rate as when you began the lease, therefore making your dollar stretch farther. (In
addition, the lease is not connected to the success of the business. Therefore, no
matter how well the business does, the lease rate never changes.)
 There is less upfront cash outlay; you do not need to make large cash payments for the
purchase of needed equipment.
 Leasing better utilizes equipment; you lease and pay for equipment only for the time
you need it.
 There is typically an option to buy equipment at end of lease term.
 You can keep upgrading; as new equipment becomes available you can upgrade to the
latest models each time your lease ends.
 Typically, it is easier to obtain lease financing than loans from commercial lenders.
 It offers potential tax benefits depending on how the lease is structured.
One of the reasons for the popularity of leasing is the steady stream of new and improved
technology. By the end of a calendar year, much of your technology will be deemed
"dinosaurs." The cost of continually buying new equipment to meet changing and growing
business needs can be difficult for most small businesses. For this reason leasing is very
advantageous.

Leasing can also help you enhance your status to the lending community by improving your
debt-to-equity and earnings-to-fixed assets ratios. There are a variety of ways in which a lease
can be structured. This provides greater flexibility so that the lease is structured to best
accommodate the individual cash flow requirements of a specific business. For example, you
Leasing Industry in Pakistan | 6/6/2010

may have balloon payments, step up or step down payments, deferred payments or even
seasonal payments. Some of the major benefits of Lease Financing are as follows:

CONSERVES WORKING CAPITAL AND CREDIT LINES

Leasing provides another source of credit that is specifically designed to accommodate


equipment, furniture, and vehicle acquisitions. Leasing does not tie up cash in equity, so
working capital and bank lines will remain available for future expenditures and investments.

17
TOTAL SOLUTION FINANCING

While other financing options may require large down payments, most leases require an
advance of only one or two payments. In addition, associated soft costs such as software,
training, and installation can often be included in the cost of the lease.

BETTER EQUIPMENT MANAGEMENT

Leasing provides a viable alternative to cash purchases of capital assets. Managers can
maximize returns by investing in assets that produce positive financial results for their
organizations. By utilizing Lease Finance Group’s Master Lease Program, you can avoid the
burden of spending time and money to find a source of funds for each acquisition.

FIXED PAYMENT FINANCING

Unlike bank lines of credit featuring variable rates, lease payments are fixed. These fixed lease
payments protect companies against rising interest rates and lessen the impact of inflation.

TAX BENEFITS

True lease payments are generally 100% tax deductible as an operational expense. This means
that leasing can save on taxes because the cost may come out of pre-tax dollars instead of
after-tax profits.

DISADVANTAGES OF LEASE FINANCING

Leasing is a preferred means of financing for certain businesses. However it is not for everyone.
The type of industry and type of equipment required also need to be considered. Tax
implications also need to be compared between leasing and purchasing equipment.

Leasing Industry in Pakistan | 6/6/2010


 You have an obligation to continue making payments. Typically, leases may not be
terminated before the original term is completed. Therefore, the renter is responsible
for paying off the lease. This can pose a major financial problem for the owners of a
business experiences a downturn.
 You have no equity until you decide to purchase the equipment at the end of the lease
term, at which point the equipment has depreciated significantly.
 Although you are not the owner, you are still responsible for maintaining the
equipment as specified by the terms of the lease. Failure to do so can prove costly.

18
SUMMARY OF ADVANTAGES & DISADVANTAGES OF LEASE FINANCING:

One of the most popular trends in the business world in recent years has been to lease finance
on items such as equipment. More and more businesses, banks, and other organizations that
sell expensive equipment are giving the option to lease their equipment, and many of these
organizations give the option for the lessee to buy the equipment in the end, sometimes for a
reduced price. It is important to look over the lease contract paperwork carefully to check the
policy on buybacks, information about the monthly payment amount, policies on early
termination or returns, and the time periods involved. Leases can be made for different time
spans, from as little as one year to as much as five years or more. Like most decisions, making
the decision to lease finance has its advantages and disadvantages.

One of the main advantages of leasing equipment is that the lease will not be considered a
direct liability for you financially, so if you wanted to lease more equipment or borrow money
in the future, the lease would not be held against you. In addition, there are no hidden costs or
changing rates - you will have the same payment rate every month, and you will not have to
make large payments in the beginning that could possibly put you in debt. Another advantage is
the fact that you will not have to constantly purchase new equipment because of the ever-
changing technology and constant updating of equipment. Some companies give you the
opportunity to trade in the equipment you are leasing for newer equipment when your lease
period is over. There are many other advantages such as the potential for tax benefits if you
properly structure the lease, optimize your usage of the equipment by only paying for it when
you need it, and it is not as difficult to get approval for lease financing as it is to get a business
loan. In fact, it will increase your chances of getting loans or leases in the future because it will
improve your debt-to-equity and earnings-to-fixed assets ratios.

Unfortunately, where there are advantages, there are also disadvantages. The positive benefits
of lease financing often depend on the particular industry and what type of equipment is being
leased. One of the most obvious disadvantages of lease financing is that the equipment is not
Leasing Industry in Pakistan | 6/6/2010

your own and does not give you any equity, unless you decide to purchase the equipment at
the end of the lease term. You can use the equipment as you wish but you are responsible for
monthly payments, and you may be responsible for equipment maintenance (if it is not
included in the lease terms). Depending on the situation, it may be better to purchase
equipment rather than leasing it.

In conclusion, it is best to weigh all of your options. Consider first the type of industry that you
are in and the type of equipment that you would be buying or financing via a lease. Would it be
easier to buy equipment right out, or would you want to be responsible for consistent
payments over a long period? All of these factors should be carefully contemplated before
making the decision to lease finance or not to lease finance.

19
LEASING INDUSTRY IN PAKISTAN

With the development of Pakistan's economy during the past decade and the privatization,
deregulation and other industrial policies of the Government of Pakistan, the economy received
a boost after a prolonged period of sluggish economic activity over the '70s and '80s.

The first leasing company was established in 1985. The growth of the leasing industry in
Pakistan initially lacked momentum due mainly to a general lack of awareness regarding its
nature and benefits. From 1985 to 1997, 32 leasing companies were incorporated with the
minimum capital of Rs. 100 million. The minimum capital requirement was raised to Rs. 200.00
million by June 2000. This lead to mergers and acquisition. Thereby the number of leasing
companies is reduced to 27. In addition, nine leasing Modarabas & 3 Investment Banks are
actively involved in leasing business. In the mid-nineties annual average growth was in the
range of 30 - 35 percent. The real growth in the leasing came in the period 1992 - 95, when over
20 leasing companies were set up. In October 1995, leasing companies' paid-up capital was
Rs.7.572 billion, with market capitalization of Rs.6.0 billion as on 30-06-2002.

Leasing is not a very old phenomenon in Pakistan, but has gained acceptance very rapidly. The
reasons are growing awareness, ease in obtaining the facility compared to conventional forms
of financing (bank loans), inherent tax benefits, simple procedure and flexibility to cater to the
needs of the customer. Profit is earned with the asset, not the ownership. In leasing, the
ownership is vested in the leasing company and in return, for rental payments, the 'lessee' has
virtually unrestricted use of the asset. Leasing is a medium to long-term hire of assets. It
effectively increases a company's total availability of capital and leaves other sources of funds
available for usage that is more profitable.

The leasing sector in general has experienced commendable 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

Leasing Industry in Pakistan | 6/6/2010


backdrop of Islamization of the economy effective fiscal year 2002 - 2003 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, machinery and equipment relating to priority sectors of the economy including
energy (CNG), IT (Computer hardware, software and accessories), textiles, engineering etc
subject to their intrinsic value. Agriculture sector is receiving special focus. The presence of
commercial banks and DFI's in the lease market has impacted the leasing company's margin,
but their capability of offering large ticket leasing has enhanced the acceptability of leasing
options.

20
Consolidated Statistics / Overview of Leasing Sector

2006 2007 2008

No. of Companies 29 27 25

Paid up Captial 12,185 13,182 17,448

Reserves 8,599 7,877 8,477


Total Equity 20,784 21,059 25,925
Investment in Lease Finance 75,151 72,908 71,597
Investments 21,687 22,817 29,896
Borrowings 78,882 83,196 90,792
Revenues 14,665 15,028 16,907
Operating Expenditure 5,009 5,822 5,779
Financial Charges 7,419 8,467 8,954
Taxation 193 91 411
Net Profit 2,044 636 2,094
Cash Dividend 900 961 884
Total Assets 123,501 128,315 136,569
Leasing Industry in Pakistan | 6/6/2010

21
Leasing Companies At A Glance

Net
Earnings
Total Total investment Net Staff
S.No. Name of the company Per
Assets Equity in Lease Profit Stength
Share
Finance

Al- Zamin Leasing Corporation


01 3,015.06 698.09 1,708.64 74.80 1.62 110
Limited

02 Askari Leasing Limited 12,383.86 1,201.89 11,335.78 153.19 3.41 225

Capital Assets Leasing


03 175,19 97.91 16.75 (21.23) (1.98) 22
Corporation Limited

Grays Leasing Limited


04 Crescemt leasing Corporation 1,572.51 294.21 1,458.66 (10.28) (0.51) 41
Limited

Intanationl Multi Leasing


05 133.72 82.97 90.28 0.47 11 7
Corporation Limited

06 NBP Capital Limited 1,089.00 668.00 468.01 12.00 0.24 24

Network Leasing Corporation


07 497.94 (353.44) 116.71 (55.34) (3.16) 34
Limited

08 ORIX Leasing Pakistan Limited 27,815.00 2,604.00 23,508.00 267.00 3.84 575

Pak-Gulf Leasing Comany


09 563.88 281.58 236.25 10.85 .0.56 23
Limited

Pakistan Industrial &


10 735.69 143.58 240.09 (43.93) (1.11) 30
Commercial Leasing Limited

Saudi Pak Leasing Company Leasing Industry in Pakistan | 6/6/2010


11 7,435.38 547.33 5,065.00 73.47 1.63 74
Limited

Security Leasing Corporation


12 5,577.27 5,065.15 4,064.00 211.81 5.55 66
Limited

Sigma Leasing Corporation


13 1,370,15 387.18 306.17 54.58 1.82 18
Limited

14 SME Leasing Corporation 1,916.86 435.24 1,438.14 30.79 0.96 69

22
Limited

Standard Chartered Leasing


15 1,751.96 208.24 1,301.78 (63.26) (1.62) 25
Limited

16 Al- Zamin Leasing Modaraba 3,899.22 388.28 2,369.10 32.79 1.29 122

17 First Fidelity Leasing Modaraba 494.24 351.55 102.10 41.68 1.58 27

18 First Hibib Bank Modaraba 1,149.09 620.80 473.16 21.01 0.53 10

19 First Habib Modaraba 4,025.65 2,864.82 2,714.00 268.86 1.50 32

20 Stamdard Chartered Modaraba 3,076.00 892.33 2,858.54 97.30 2.14 22

Escorts Investment Bank


21 6,496,91 851.85 55.92 137.82 3.13 135
Limited

Fist Dawood Investment Bank


22 11,064,19 1,778,.99 2,125.41 113.65 2.00 52
Limited

23 IGI Investment Bank Limited 9,831.40 2,182.25 3,424.62 (6.39) (0.06) 143

24 Trust Investment Bank Limited 8,089.37 982.55 4,876.63 149.78 2.56 239

Pak Oman Investment


25 22,400.95 7,116.72 1,243.66 542.32 0.88 88
Company Limited

Total 136,569.49 25,925.23 71,597.40 2,093.62 2,213


Leasing Industry in Pakistan | 6/6/2010

23
Example Of Two Major Leasing Companies In Pakistan:

ORIX Leasing Pakistan Limited (OLP) started operations in 1986 and is listed on the Karachi,
Lahore, and Islamabad Stock Exchanges. OLP specializes in providing lease financing to small
and medium-sized enterprises, however, its customer base also includes large corporations,
public and private limited companies, micro enterprises, and individuals. Financing is primarily
provided for industrial machinery, commercial vehicles, saloon cars, computers, and office
equipment. OLP's Consumer Auto Division provides vehicle financing for individuals. The
Company has a diverse portfolio of products and services including finance and operating
leases, auto-financing, consumer financing, factoring, working capital financing, agricultural
loans and micro-enterprise financing. OLP's E-Business Division provides and operates point of
sale terminals together with infrastructure facilities for issuers of credit, debit, smart and
loyalty cards.

OLP is the regional head office for ORIX Group companies in the Middle East, North African and
Central Asia regions. In collaboration with ORIX Corporation, OLP has set up companies in
Oman, Egypt, Saudi Arabia, UAE and Kazakhstan by participating in leasing joint ventures and
provides these companies with management and technical support. Its joint venture in
Pakistan, OLP's most recent joint venture is ORIX Properties Pakistan (pvt) Limited. The new
Company will concentrate on development and management of properties.

Following the spirit of EC21, including such qualities as "pride," "trust," and "respect," ORIX's

Leasing Industry in Pakistan | 6/6/2010


Business Conduct Principles guide our practice of compliance as we pursue our vision to be a
globally respected company. These principles require us to make our utmost efforts to:

Satisfy client needs by offering products and services that create real and
lasting value.
Abide by the letter and spirit of laws, regulations, and social rules, and
promote free trade and competition.
Maintain transparent and sound corporate management by providing
adequate disclosure to the public.
Continuously improve our business by maintaining healthy corporate

24
governance and sharing appropriate information with our shareholders and
the market.
Respect each employee as an individual, and provide him/her with
opportunities and environments that encourage professional development.
Respect the culture, customs, and environment of countries and regions in
which we operate, and make genuine, meaningful contributions to their
economies and societies.
Strictly avoid involvement or association with unlawful or socially
questionable organizations.
Be a good corporate citizen in each country or region by maintaining proper
and fair relationships with official bodies such as government, public
administration offices and the judicatory, and social organizations such as
media groups.

ORIX Auto Leasing:

ORIX Consumer Auto Division offers flexible product range tailored to suit the specific
requirements and financial needs of individual customers. We make sure that our product
portfolio is in compliance with the cash flow requirements and the changing individual needs of
our customers.

Our dedicated professional executives ensure that we not only respond quickly to our
customers requirements but also provide customized innovation. Our staff has absorbed the
spirit of challenge and learning, a trait that contributes to our continuing leadership in this field.

There is a lot of wisdom in being with ORIX. Our plans are as easy to understand as road signs.
Leasing Industry in Pakistan | 6/6/2010

SalientFeatures

 ORIX Consumer Auto Division offers both


leasing and financing facilities of vehicles.
 The following are the flexible product range
tailored to suit the customer’s needs:
o Straight Leases
o Cash Back Leases
o Step up and Step Down Leases
o Balloon Payment Leases

25
o Leases with Grace Period
o Financing against vehicles
 An auto lease contract is a non-cancellable
contract for a specific period, typically from
three to five years.
 The lessee will receive the full benefits of all
warranties, guarantees, etc., offered by the
manufacturers.
 The vehicles insured by ORIX on behalf of
the lessee with Pakistan’s leading insurance
companies and ORIX’s lessees will enjoy the
following distinctive features: No deductible
amount on the policy, coverage of terrorism,
coverage of life insurance, coverage of third
party limited liability insurance.
 The auto lease comes with a complementary
Tracking Device option.
Leasing is acceptable within the Islamic
modes of financing as fixed rental payments
are made.
 ORIX Branch Network is present throughout
Pakistan.
 ORIX Consumer Auto Division can lease
almost all types of vehicles ranging from
small to large ones. Just take your pick.

ORIX Operating Leases:

ORIX Operating Lease Division offers the facility of renting the equipment for the duration it is
needed. The operating lease solutions provide full use of an asset while avoid many risks Leasing Industry in Pakistan | 6/6/2010
associated with the ownership of equipment such as depreciation, obsolescence and asset
disposal. An operating lease acts as a true hiring arrangement where the rental is treated as an
expense and allows equipment off balance sheet for accounting purposes.

26
Salient Features

 ORIX provides equipment on short and long term rentals.


 The equipments are rented along with entire range of services such as managing
operations, maintenance, repair, replacement, up gradation and logistics through our
experienced asset manager.
 Lease payments are tax deductible thus reducing the rental cost of equipment.
 ORIX has the flexibility to adapt its products according to customer requirements by
offering a tailor-made solution.

Benefits of Operating Lease

 Access to the most modern equipment and technology without the associated cost of
ownership.
 Hedge against equipment obsolescence.
 Hassle-free delivery and start-up of equipment.
 No worry about disposing of equipment.
 Flexible rental payment arrangement.
 Preserve customer credit lines.
 Enhanced ROA & ROE ratios, as operating lease is not reflected on balance sheet.

How Operating Lease Works


Leasing Industry in Pakistan | 6/6/2010

Products

 Generators
 Agricultural Equipment
 Vehicle
 Communication Equipment
 Used Rental Equipment also available for sale.

27
Lease Financing In Bank Alfalah Limited:

n modern days leasing has now be come an economic and financial reality of primary
importance. It is the originality of the leasing techniques and its economical advantages, which
has enabled it to enter the world of industrial investment in Pakistan and on the international
scene.

Lease finance provides a significant source of funds for companies to acquire or use assets.
Leasing provides additional earning opportunities to acquire assets and to get the inflows
simultaneously out of the operations of the same assets. The ownership of the asset is vested
with the Bank (lessor) and in return for rental payments, the client (lessee) has full use of the
asset. Being a medium to long term mode of financing, it allows the lessee to use the funds for
other profitable purposes which otherwise would have been tied up in case of immediate
payment for purchase of the asset.

Bank Leases:

The lease finance facilities are available for a variety of assets (imported/local) conforming but
not limited to the following categories:

1. Vehicles (Private & Commercial)


2. Plant, Machinery and equipment
3. CNG Equipment
4. Generators(Industrial & Commercial)

Who Can Apply?

Leasing Industry in Pakistan | 6/6/2010


1. Sole Proprietors
2. Partnership Firms (Registered / Un-registered)
3. Private Limited Companies
4. Public Limited Companies (Listed / Unlisted)
5. Govt./ Semi – Govt. Organizations/ Autonomous Bodies

Leasing Structure:

BAL works closely with its existing and prospective business partners to deliver most
comprehensive and tailored leasing solutions to meet all asset needs.

28
BAL offers the most competitive and flexible terms & conditions for lease concerning choice of
assets, repayment, pricing, and tenor which range between 3 to 5 years commensuration with
the specific requirement of the lessee, useful life of the assets and client’s ability to repay the
lease rentals.

Frequently Asked Questions At Bank Alfalah Limited:

Q. How is lease beneficial to a business?

A. Leasing permits maximum conservation of capital, which can then be utilized for other
business needs; it also preserves existing credit lines from financial institutions for investment
in much profitable purposes. Leasing allows the client (lessee) to obtain benefits of taxation
since lease rentals are allowable as deductible expenses. Leasing is also acceptable within the
Islamic modes of financing due to the concept of rental payment.

Q. How many types of Lease Arrangements do BAL offers?

A. There are two types of lease finance facilities, i.e., Direct Lease andSale & Lease Back. In the
case of direct lease, direct payment is made to the vendor/supplier/indenter for the purchase
of asset(s). While in the case of sale and lease back, the client having bought the asset(s) from
his own funds may refinance and the payment is made to the client.

Q. How is a lease different as compared to a loan?

A. In leasing, the leased asset itself is considered as a security and in case of loan, additional
collateral/security is a mandatory requirement. Further, mortgages takes a lot of processing
time in case of loan, while processing in leasing is much faster.
Leasing Industry in Pakistan | 6/6/2010

Types:

Alfalah Karobar Finance:

 AKF is a Running Finance facility between Rs 0.50M to Rs 20.0M.

 Tailor-made product for SMEs for their working capital financing based on the cash flow
methodology. (Our Edge = Better pricing, quicker TAT and low processing charges.)

 At Bank Alfalah, all branches are designated to deal with AKF business.

29
 The purpose of the AKF is financing procurement of raw material, finished goods and
receivables of SME businesses.
 SME Customers with following acceptable criteria are entertained in this product:

1. Resident Pakistanis
2. Individuals/ sole proprietors aged up to 65 years.
3. In the same business for the last three years.
4. Could offer mortgage urban residential/commercial/ industrial properties (third
party collateral also allowed).
5. Overall debt burden not to exceed 40% of the projected cash flows over the
period of financing.
6. Maximum AKF entitlement to be worked out by considering the lowest of: 60%
of assessed market value of the mortgaged property, or 35% of sales turnover or
condition # 5 above.
7. Validity of the AKF shall be initially for a period of one year.
8. Quarterly mark-up shall be serviceable within 15 days of its becoming due.
9. Turn-around-time for the approval of AKF would be 20 working days from the
date of receipt of complete LAF along with its attachment.
10. Processing charges of Rs 2,000/- are recovered upfront with Loan Application
Form.
11. Clean-up requirement: At least 25% of the AKF approved limit shall be required
to be cleaned-up for two days in six months.

Eligibility Criteria of AKF

1. Resident Pakistanis.

2. Aged up to 65 years.

Leasing Industry in Pakistan | 6/6/2010


3. In business for the last three years

4. Could offer mortgage urban residential/commercial/industrial properties.

AKF - Rates & Charges


Loan Processing Charges under AKF
Processing fee (Up-front with LAF) Rs.2,000/-
Documentation charges Actual cost of revenue and special adhesive stamps
Legal charges Actual & approved charges of lawyers on the Bank’s
approved panel.

30
AKF - Rates & Charges
Loan Processing Charges under AKF
Valuation charges Actual & approved charge of valuators on the Bank’s
approved panel.
Business & Financial Appraisal charges Rs. 5,000/-(approx)

Alflalh Malkiyat Finance:

Alfalah Milkiat Finance (AMF) is a unique long term financing facility offered to SMEs to
purchase, renovate or expand their business premises. It is being offered keeping in mind
requirements of the small business owner who needs to take his/her business to the next level.

AMF is grouped into four sub categories to help you identify which arrangement suits your
needs best. .

AMF-1: Acquisition of rented commercial/ industrial property by present tenant..

AMF-2: Construction on owned and in possession commercial/ industrial premises/ plot.

AMF-3: Purchase of constructed commercial/ industrial property.

AMF-4: Renovation of owned and in possession commercial / industrial property.

You are eligible to apply if:

 You have been in business for at least 3 years.

 Amount of finance you need is between Rs 0.5 Million to Rs 30 Million under AMF 1, 2 &
3 or a maximum of Rs 3.5 Million for AMF 4.
Leasing Industry in Pakistan | 6/6/2010

Salient Features

 AMF 1,2 & 3 shall be repayable in 2-15 years whereas AMF-4 shall be repaid in 2-4 years.
 Mark up shall be (1 Year KIBOR + 4%)
 Monthly installments will be hassle free through post dated cheques.
 You shall disburse AMF approximately within one month after completion of
documentary requirements.
 The property being financed shall be mortgaged in favor of the bank.

31
Eligibility Criteria of AMF

The prospective customer should meet the following acceptance criteria:

1. They should be resident Pakistani(s).

2. Their constitution can be individuals, sole proprietorships, partnerships, private limited


companies, & public limited companies.

3. Age of the prospective customer (individuals/proprietor) should not exceed 65 years at


the maturity of loan.

4. Customers should be operating the existing business at least for the last 3 years.

5. The security against Alfalah Milkiat Finance should be mortgage of urban


commercial/industrial property (ies).

6. Minimum equity participation of the SME shall be 30% under AMF 1 & AMF 3. No equity
participation required for AMF 2 & AMF 4.

AMF - Rates & Charges

Loan Processing Charges under AMF


Processing fee (Up-front with Minimum of Rs.5,000/- or 0.1% of the loan amount,
LAF) whichever is higher.
Documentation charges Actual cost of revenue and special adhesive stamps.
Legal charges Actual & approved charges of lawyers on the Bank’s
approved panel.

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Valuation charges Actual & approved charges of valuators on the Bank’s
approved panel.
Business & Financial Appraisal Approx. Rs. 5,000/-
charges

Alfalah Quick Finance

Alfalah Quick Finance is a personal loan against National Saving Certificates, Prize Bonds, Alfalah
GHP Principal Protected Fund & PKR/FCY deposit for meeting personal, family and household
needs.

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It is one year revolving limit with quarterly mark-up payments. The amount of financing under
AQF ranges from Rs. 50,000 to 2.5 Crore.

AQF shall not exceed 90% of the encashment value of the security offered. In case of financing
against Foreign Currency Deposit the maximum financing should not exceed 85% of the deposit
encashment value.

In case of Alfalah GHP Principal Protected Fund taken as a security the financing approved
under AQF shall not exceed 70% of the face value of units held by the borrower.

Eligibility

 All resident Pakistani individuals, such as, salaried class, self employed business persons.
 Age of the individual/joint-borrowers should be 18 years minimum and 65 years
maximum.
 Clean ECIB

Performance Of Leasing Industry Of Pakistan

Economic slowdown resulted in new business volume dropping by 4% in financial year 2008 to
Rs.33,950 million from Rs.35,532 million in the corresponding period last year. Leasing volume
was largely derived from asset based funding to small and medium size enterprises being
distributed over plant and machinery, vehicles and equipment. Revenues increased by 12.50%
from Rs.15,028 million to Rs.16,907 million. Increasing interest rate environment resulted in
rise in financial charges which were higher by 5.75% at Rs.8,954 million from Rs.8,467 million in
the preceding year. The profit for the year ended 30th June, 2008 was Rs.2,094 million as
compared to Rs.636 million in fiscal year June 2007. The profit for the previous fiscal year was
understated on account of losses amounting to Rs.538 million reported by two companies
which have merged.
Leasing Industry in Pakistan | 6/6/2010

Leasing cumulative assets increased to Rs.136,569 million in 2008 against assets of Rs. 128,315
million in 2007 showing a growth of 6%. Investment in lease finance decreased marginally from
Rs.72,908 million to Rs.71,597 million in 2008. The break down of finance lease asset portfolio
was well diversified car and commercial vehicles being around 52.84%, followed by plant and
machinery at 39.50% and computers and office equipment at 6.04%. The highly competitive
nature of the market forced our members to invest in assets other than our core business for
higher returns; consequently only 53% of total assets were in lease finance as at June 30, 2008.
Total equity of the member companies increased to Rs.25,925 million as compared to Rs.21,059
million in the preceding year. This reflects the commitment of members to strengthen the
equity base for future growth prospects. On the regulatory front, Securities & Exchange

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Commission of Pakistan has enhanced minimum equity requirement for leasing companies
from Rs. 200 million to Rs. 700 million latest by the year ending June 2011. Statistics compiled
for leasing sector show a return on equity of 8.08% (2007: 3.02%) and return on assets of 1.53%
(2007: 0.50%).

The trend of declining volume continued in the second half of calendar year 2008 as the
liquidity crisis hit the leasing sector more severely than other competing financial institutions.

Future Prospects:

Following the unprecedented financial crisis of 2008, political instability and deteriorating law
and order situation, there is significant uncertainty which will have a bearing on demand for
leasing in the short term. Additionally, in a difficult economic environment, companies will opt
to delay or defer purchase of assets, whenever possible. Leasing being an asset driven product,
it is likely that volume of business will fall in financial year 2009. It is also likely that the number
of delinquent accounts will increase in 2009 due to downturn in the economy and the
consequent credit crunch and this will lead to higher non performing portfolio. The incremental
provisioning against non performing portfolio will have an impact on profitability of leasing
companies.

However, it is expected that leasing sector will adapt to the above challenges and companies
with larger equity base and strong risk management framework will benefit from increasing
business volume as overall market size has increased and a number of financial institutions
have discontinued the leasing product.

Leasing Industry in Pakistan | 6/6/2010

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