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Lease financing in Bangladesh operates with certain objectives. This is aimed to promote productive enterprises by providing equipment lease financing and related services. Leasing companies assist in balancing, modernisation, replacement and expansion of existing enterprises. Small and medium scale enterprises get support from the leasing, finance and investment companies. Their operations also have an objective to activate the capital market by operating as managers to the issue, underwriters, or portfolio managers.
The International Finance Corporation (IFC), the soft loan arms of the World bank, promotes leasing as a method of financing industrial development in Bangladesh. Lease financing was first introduced in Bangladesh in the early 1980s. Industrial Development Leasing Company of Bangladesh Ltd. (IDLC), the first leasing company of the country, was established in 1986 under the regulatory framework of Bangladesh Bank. IFC played a key role in establishing IDLC. Now 29 leasing and finance companies are in the market regulated by the Bangladesh Bank under the non-banking financial institutions act, 1993.
Commercial banks and development finance institutions (DFIs) have been the traditional lending institutions in Bangladesh. In fact, the concept of lease financing is a relatively new one in the country.
"Initially, we concentrated on making entrepreneurs aware of the benefits of leasing," said A Quadir Chowdhury, President of the Association of Bangladesh Leasing and Finance Companies (BLFC).
As DFIs demonstrated poor recovery and fund recycling performance, leasing got the opportunity to develop as an alternative source of funding, Quadir Chowdhury, also the Managing Director of Phoenix Leasing Company said. He said some other factors also contributed to the development of the leasing business in the country. The commercial banks, he said, have been keener in providing trade financing and foreign exchange dealings instead of long-term loans because of the risks involved and their longer gestation period.
Private leasing companies also attract clients by providing relatively better services. The down payments in leasing are not high and the gestation period of loan cases is low.
Leasing companies, however, face some problems in conducting their business in the country. The relatively slow growth of the demand side compared to the fast growth of the lease business is one such problem. This leads many leasing companies to operate in partial capacity. The culture of loan default that prevails in the country is also a deterrent. Leasing companies often find it difficult to raise funds through short- or long-term borrowing from money lending institutions and capital market.
Cost of fund was cited by Quadir Chowdhury as a major hindrance to the growth of leasing and non-banking investment companies in Bangladesh. "As we borrow from the commercial banks at the rate of around 12 per cent and above, we cannot charge the rate of interest lower than this rate," he said adding "the banks themselves are involved in the lease financing and they can lend at lower rate of interest than the leasing companies." Borrowers naturally favour lower rate, he added.
Presently, the leasing and finance companies are allowed to take deposits for one year and above. The lease operators feel that the central bank can reduce the time to six months so that the companies can attract more businesses as clients who are more interested in short-term deposits. Subsidised credit is captive to commercial banks only, he said. We also request the government to ensure access of all financial institutions to the Equity Entrepreneurship Fund (EEF). "Discrimination and incompatibilities should be removed for better growth of the economy," president of BLFC said.
Bangladesh Bank, being the regulator, can provide the leasing and finance companies with re-financing facility to lower their cost, suggested Quadir adding "we can even pay back the money in monthly installments."
Quadir observed that the housing sector has become a bulging sector and suggested that the government can create a special fund so that the non-banking finance companies can finance at lower rates. There is huge demand for housing loans, he said and felt that the government has a role to look at people's housing problems.
The leasing and finance companies disbursed around Tk. 13 billion in the year 2003. The recovery rate, according to the association president, was around 95 per cent. All of our transactions are highly transparent, he claimed.
Prominent among the sectors of the economy that now receive lease financing services are housing, transport, construction and engineering, pharmaceuticals, medical and diagnostic centres and IT firms.
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