Leasing
Leasing is relatively a new development in Bangladesh financial landscape in which it made its only in 1985 with the incorporation of IDLC (Industrial Development Leasing Company of Bangladesh Limited) as a joint venture leasing company comprising of Korean Development Leasing Corporation (KDLC), IFC, a Private Sector wing of the World Bank and others. It started its business as a non-deposit taking organisation. Considering the complex accounting and tax treatment character of leasing and there being no leasing expert available in Bangladesh at that time, JD Lee, a Korean leasing expert, was appointed as the first CEO and Managing Director of IDLC who virtually laid the foundation of leasing business in Bangladesh. Now there are thirty Financial Institutions (leasing) operating in the country. Of these only one is fully owned by the Government, fifteen are local, eleven are joint ventures with foreign participants and two are housing finance companies.
As it appears in any capitalist economy, there are financial intermediaries side by side with banks to cater to diverse financial needs of those segments of the community which do not normally have easy access to bank credits. Banks normally do not feel at ease in financing segments not in a position to provide adequate cash margin in the form of equity and collateral to secure their loan whereas the leasing companies pay more emphasis on business potential and cash flow instead of collateral and equity. Thus it is observed that the leasing companies step in where the banks step out which is why the leasing companies have more penetration on the SME sector which is estimated to have about six million entitles spread over the whole country. About 90 percent of the finances of the leasing companies are focused on SMEs which contribute about 25 percent of the GDP. Industrial giants like Sony, Samsung and Microsoft etc. started as SME entities. Sony started with twenty employees in 1946, Samsung with forty-three in 1969 and Microsoft with two in 1975.
In lease financing, the leasing company (lesser) transfers to the lessee (user) substantially all the risks and rewards incident to ownership of the asset in return for payment of rental(s) over an agreed time called the lease tenure. Under this method of financing a leasing company through a Lease Agreement acts as the lesser with right to repossess the leased assets in case of default by the lessee to pay the rental in time but in practice intervention of the court is required to get assistance of the law enforcing agencies for physical repossession of the leased assets which often lead to legal complications. International Accounting Standard, IAS 17, Classifies a finance lease as one where the lesser transfer to the lessee, substantially all the risks and rewards incidental to the ownership of the asset whether or not the title is eventually transferred. In a finance lease, the rental payable the lesser to recover the capital cost of the equipment and earn a return on the investment'.
Until the enactment of the Non-Bank Financial Institution (NBFI) Act 1993 and the Financial Institutions Regulation 1994, the leasing companies were not under strict regulatory requirement of Bangladesh Bank. It was the first regulatory initiative by the Govt. to bring under its supervision the activities of the leasing companies, subsequently re-named as financial institution (FI) to bring more transparency and accountability in their activities. Consequently all the leasing companies previously licensed were asked to take fresh license from Bangladesh Bank, which gave them new terminology as NBFI/FI. Thereafter, leasing companies ceased to exist as separate entities. In order to strengthen the financial base of the FIs Bangladesh Bank, with a circular issued on 29 June 2003, mandated the FIs to raise their paid up capital to minimum BDT 250 million and also pressed upon them to go for public listing through the issuance of IPOs within 30 June, 2007. As per the circular, most of the companies of FIs enroll in the capital market.
Bangladesh Bank now regulates the activities of the FIs through on-site and off-site supervision and monitoring and extensive policy control and guideline. One of the most vital aspects of the NBFI Act 1993 is that it has allowed the FIs to take term deposits from the public as well as banks and other institutions. As a result, most of the FIs now supplement about 55 percent of their working fund from deposits so mobilized. This has largely reduced their dependence on borrowing from the banking system, which in the mid nineties was about 90 percent. The FIs also cater to their working fund by issuance of bonds, safety measures of receivables against assets and loan from foreign institutions and donor agencies with prior approval from Securities and Exchange Commission (SEC), Bangladesh Bank as the case may be.
The greatest barrier to the growth of the FIs is the cost and paucity of fund. The fund cost of the FIs is almost double averaging at 12.5 percent to 13.5 percent as against 7 percent to 8 percent of those of the banks which have easy access to wide array of deposits including interest free demand deposits, low cost savings deposits, short term deposits etc. The FIs are allowed to take term deposits only from the public usually for a period of minimum one year except institutional deposits from banks, FIs, corporate bodies which can be taken for six months only. However, the FIs can also have access to call-money market up to 15 percent of their net assets for their investment purpose.
The core areas of finance for FIs are textiles, garments and accessories, transport including road and marine, pharmaceuticals and chemicals, iron, steel and engineering including light engineering workshop, agro based industries and equipment including tractors, trailer and power tiller, power and energy, electric and electronics, IT/ ICT, packaging and Printing, real estate and housing, food and beverage, services, consumer durables and others.
In order to strengthen their working fund base and reduce dependence on borrowing from the banks through credit lines, FIs have introduced wide array of deposit products and services to induce individuals and institutional investors by offering attractive interest rates and money spinning options covering monthly interest payment, advance interest payment, double money, triple money payment options etc. The rates quoted by them are usually higher by 1% to 5.2% than the banks. Although, it has helped them mobilize deposits to ease their working fund constraint through these tools from their own sources, it has increased their fund cost correspondingly pushing up the lending rate thereby making it difficult for them to access to larger segments of clients who may ill-afford such high rates of interest.
In the backdrop of this situation there has been continuous demand by the FIs to Bangladesh Bank to open up re-financing window for them to reduce their fund cost so as to enable them to have a moderately playing field with the banks. Bangladesh Bank seems to be appreciative of the problems of the FIs and as such have allowed them access to the SME financing scheme, low cost special housing finance scheme agro based industries financing schemes under the re-financing window at par with banks. It is gratifying that Non-Performing Advances (NPAs) of the FIs have been hovering around 5 percent over the past few years except 2008-2009 when it slightly deteriorated following the financial meltdown across the globe.
It is pertinent to mention here that in the budget for the fiscal 2007-2008, the Government amended the third schedule of the Ordinance No XXXVI of 1984 withdrawing depreciation allowance to the leasing industry which it had been enjoying during the last twenty two years ever since its inception. With the scrapping of the depreciation allowance reportedly as part of compliance of IAS-17 (International Accounting Standard-17), the leasing industry has suffered serious set back and been dwarfed as a mere loan giving agency.
Started as a single financial product, the leasing companies used to enjoy tax-exempt benefit initially for five years, a benefit which has been withdrawn in 2001. However, lease financing- short term, mid term and long term loan and housing finance, still contribute almost 80 percent of the total financing activities of the FIs. Their total finance outstanding as on December 2007 stood at Tk 109.5 billion as against BDT 86.9 billion as on December 2006. Measured in terms of percentage, the penetration of the leasing sector against total bank credit will be around 5 percent. [A Quadir Chaudhury]
