|
The leasing industry in Bangladesh is still in its nascent stage and there are several challenges that need to be taken care of, said Mustaque Ahmed, Deputy General Manager of People's Leasing and Financial Services Ltd in an interview with the FE. Excerpts:
Q: What is the state in leasing business in Bangladesh?
A: The concept of lease financing in Bangladesh is relatively new as major lending institutions are the commercial banks and the DFIs. Initially the leasing companies had to adopt the role of an educator to make Bangladeshi entrepreneurs aware of benefits of leasing.
During 1983-85 there was serious dearth of long-term finance for setting up industries in Bangladesh. The two DFIs in the nationalised sector Bangladesh Shilpa Bank (BSB) and Bangladesh Shilpa Rin Sangstha (BSRS) were in dire straits as the donor agencies suspended operation of their credit line due to poor recovery rate by these institutions. IPDC, the lone DFI in the private sector unto that time was constrained in its operation due to limited resource base and the commercial banks were more keen on trade financing and reluctant to provide long-term financing. Therefore, there was a perceived need for an alternative mode of project financing to bridge the vacuum created by the dormant and less active DFIs and commercial banks in the nationalised and private sectors. IDLC came into being in Bangladesh against the backdrop of this scenario to fulfil the need for a new financial intermediary and as an alternative to existing long-term financing. It was particularly welcome to entrepreneurs, who were required to undertake balancing, modernisation, replacement and expansion (BMRE) programme of their existing operation to remain competitive in the market. So long, for all their requirements they had to approach the DFIs for long-term finance and go through a lengthy process to get approval. More often the DFIs could not match the timing for procurement of such machinery, which resulted in loss of production and sometimes in case of export oriented industries loss of market as well.
The present status of the leasing industry in Bangladesh reveals its potential for future growth. But it also indicates to an erosion of business too. Default culture, which has plagued the country's banking sector, could threaten the leasing companies also and a substantial portion of the money advanced to the users could become either doubtful or bad. Leasing industry is also operating in the same environment of default culture but until now managed to overcome this serious problem through close monitoring and identification of good clients. The number of active lessors in the industry reveals that leasing industry in Bangladesh is still in its nascent stage and there are several challenges that need to be taken care of.
Leasing operation has come a long way in Bangladesh since the setting up of IDLC. Though a new concept, the industry has matured and grown consistently over the past decade and gained its due place in the financial sector after overcoming the initial adversity. More new leasing companies have been set up while some banks and financial institutions have added leasing operation to their existing line of business thereby offering a wider range of services to the clients. It was largely due to the efforts made by IDLC, the pioneer in the sector and United Leasing Company (ULC), another joint venture leasing company that a strong market consciousness was created among the entrepreneurs and the leasing industry was successful in maintaining a reasonable growth despite the political turmoil over the past years. The total volume of lease contracts singed in 1998 was Tk 3,331 million and disbursed against contract was Tk 2,597 million; contracts in 1999 was Tk 4,088 million and disbursed was Tk 3,580 million; in 2000 contracts was Tk 5,650 million and disbursed was Tk 4,956 million: in 2001 contracts was Tk 7,160 million and disbursed was Tk 6,180 million; in 2002 contracts was Tk 9,150 million and disbursed was Tk 8,000 million. Lease contracts and disbursement were increased to 175% and 208% respectively from 1998 to 2002. The annual average growth rate of contract was 35% and disbursement was 42% since 1998 to 2002, which reflects acceptance of leasing as an alternative source of term financing. The growth of trend of leasing business is shown in the following graph.
Q: You often say that there are too many companies in one small market. Besides, the leasing business of the banks is affecting your growth. Would you please explain?
A: In today's open market economy, competition among various leasing companies has become unavoidable which compels the companies to share the total market based on the capacity of the individual company. All the companies are competing with each other, vying for more share in the one small market.
In Bangladesh, the leasing industry faces competition from two areas: (1) competition from traditional source of financing and (ii) competition from other leasing companies. The government owns all the major DFIs who provide term lending. The government also owns a large number of commercial banks and majority of the population still maintain their banking transactions with the commercial banks.
A number of new local as well as foreign leasing and finance companies have been set up to avail the comparative advantages of leasing. These companies set their target to provide swifter, more efficient and more personalised service to the clients and plan to seek out new market segments. Therefore, development of new products and new market are becoming matters of vital importance.
A number of commercial banks have recently started their leasing operation to transact leasing business. In fact a few of them have already set up separate teams to transact the business and other in the process to follow them. This indicates future competition and erosion of business for the existing leasing companies.
Q: You talk about cost of fund, as you have to borrow fund from banks. The central bank allowed the leasing companies to mobilise term deposits for one year. Is it not enough for the leasing companies?
A: The main sources of fund of the bank are deposit from the public, deposit from the corporate bodies, government department and agencies. About 15% of the deposits of the banking sector is demand deposit and 25% constitute savings deposit. The rest are fixed deposits. The demand deposits are interest free while saving deposits are low interest bearing where effective interest rate is averaged at 3% to 4% thus bringing the average fund cost around 8% to 9% which is half of leasing companies.
Most of leasing companies in the western countries are subsidiaries of large banks. It is, therefore, logical that they rely quite heavily on their parent banks for their funding requirements. In the Far East and South East Asia countries, deposits are often resorted to as a medium-term source of finance, but in the west, this source of financing has not found favour for the simple reason that alternative source of finances are available at more attractive rate and with longer repayment periods. In Bangladesh, the commercial banks were by far the most important source of fund for the leasing companies. The government also continued to borrow from the banks to finance its credit. However, due to low demand for credit caused by modest level of business activity, the banking system had excess liquidity for the most of the years. Consequently, interest rates in the overnight "call money" market fluctuate in the range from 8% to 60%. Recently, the World Bank has initiated a financing programme to meet-up the fund crises of different financial institutions - both bank and non-bank. The least preferred alternative is the capital market for reasons of cost.
The private sector leasing companies in Bangladesh are not subsidiaries of banks although banks have a strong presence as shareholders in some companies. Consequently, they have not had the kind of access to bank funds that their counterparts in the west have enjoyed. What little bank finance has been made available to the leasing companies has been mainly in the form of demand loans and short-term cash credit limit, which on an average cost 13%. In addition to the cost, there is also the anomaly of a mismatch in that the leasing company has to borrow "short" and lend "long".
Leasing Companies cannot mobilise savings deposits. But in Bangladesh, small savings are the main source of fund. Leasing companies in Bangladesh had relied extensively on public deposits - this was not a new development, as the Bangladesh Bank itself was constantly encouraging and supporting the deposit raising activities of leasing companies. The asset-liability mismatch is the surest culprit of all leasing companies woes today. Financial Institution Department of Bangladesh Bank has issued a circular to the all Financial Institution is not taken the deposit less than 1 (one) year. Most of the deposits are one year deposits while the deployments of funds are mostly for longer tenures.
Q What can be done to ensure credit facilities for leasing companies on easy-term? Why don't leasing companies mobilise funds from the capital market?
A: The only avenue available to the leasing companies to raise long-term finance is the capital market. This could be either in the form of debenture/bonds or share capital. To allow of debentures/bonds issued by the FIs to be purchased by the commercial banks as freely transferable and negotiable instruments and also for inclusion while calculating statutory liquidity requirement (SLR). To waive of the restriction on holding of shares of institution including foreign institution and investors not exceeding 25% of the total shares. To reduce of the time-frame from one year to maximum six months for the FIs for taking term deposits against issuance of receipts. Leasing Companies should make initiatives to make this financial service popular among the entrepreneurs. If necessary, Bangladesh Bank should provide credit to this sector with the conditions, which are applicable for commercial banks. Bangladesh Bank may form guidelines on commercial banks funding to leasing companies.
Securitisation of lease assets and receivable of rentals could be made available to capital market to raise funds for leasing companies. Leasing companies also be encouraged to be accept deposits as license deposit taker (LDT) for three months and above as practised by the developed countries like UK, USA, EC. LDT and leasing companies are not same entities in Bangladesh. Leasing companies as a LDT could have the prospect and flexibility in terms of raising funds from the public.
The performance of the leasing companies in recycling the funds i.e. recovery is much better than the DFIs. Therefore, the government should be made aware of the overall benefit to the economy if a portion of funds is channelised to the leasing companies instead of DFIs. The leasing companies should give sincere efforts in this regard immediately.
Mobilise funds from international development financial institutions and ensure more long-term soft loan. Public deposit, being unsecured loan, the leasing companies would have to enjoy a high degree of credibility with the public, in order to be able to mobilise deposits. But the concept of lease financing in Bangladesh is not popular among the public and leasing company can take deposit from the public. So public deposits could not mobilised by leasing company as bank. Secondly, there is also the problem of mismatch. As against a maximum maturity period of three years, a typical leasing transaction runs up to five years. In fact, as longer leases are gaining popularity, public deposits can only form one component of the overall mix of funding.
Q: What is your suggestion about the tax on depreciation value?
A: The existing taxation law in Bangladesh allows depreciation benefit to the legal owner of the asset. Depreciation on building, plant, machinery and furniture will be allowed as admissible it the assets are property of the assessee and used for the purpose of business or profession - section 29 (viii). In computing the profit or gains from business or profession, an allowance for depreciation shall be made in respect of any building; machinery and plant or furniture owned by the assessee as per Third schedule para 2. Thus lessor enjoys the benefit of depreciation as envisaged in section 29 (viii) of the Income Tax Ordinance 1984, as per rates prescribed under the Third Schedule.
Further the leasing companies are eligible for initial depreciation in addition to normal depreciation at rates prescribed under the Third Schedule. However, the initial depreciation is available only for building and plant & machinery. As leasing companies rarely offer buildings on lease, initial depreciation allowance on plant & machinery is considered at the rate of 25%.
The initial depreciation should be extended to any kind of fixed asset including leasing asset. So that, leasing companies (lessor) enjoys the more benefit of depreciation.
|