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Bangladesh as a whole having a population of 140 million is a huge market for financial institutions, including the non-banking financial institutions (NBFIs), says Sayyed Husain Jamal, Managing Director of Vanik Bangladesh Ltd in an interview with the FE.
Excerpts of the interview follow:
Question (Q): What is the state of leasing business in Bangladesh?
Answer (A): Leasing business in Bangladesh emerged as an alternate source of finance in mid '80s. With the increasing success of Industrial Development and Leasing Company of Bangladesh Limited (IDLC) and United Leasing Company (ULC) as leasing companies, the concept of leasing business gradually began to be popular. The growth of leasing business during the period from 1985 to 2003 is most phenomenal. As at the end of December, 2003 total lease exposure was recorded at Tk. 1.0 billion.
Leasing has enormous scope to flourish in Bangladesh. Because it has some inherent advantages compared to banking. In leasing recovery ratio is very high. Since the asset is owned by leasing company it can be repossessed in case of default. Post-dated cheque if dishonoured puts the lessee in vulnerable situation leading to issuance of body warrant.
(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): Leasing business in Bangladesh has been in operation since 1985 when IDLC was set up under the behest of Industrial Promotion and Development Company of Bangladesh Limited (IPDC). IDLC was immediately followed by ULC. In 1995, four leasing and finance companies namely Phoenix Leasing Company, Uttara Finance and Investments Limited, Peregrine and GSP Finance Companies obtained Bangladesh Bank's licence. Since then many more companies came into existence as non-banking financial institutions (NBFIs) which include two housing and three specialised companies. NBFIs are at present 28 out of which 15 companies are predominantly engaged in leasing business. Yes, if you take into consideration only Dhaka and Chittagong, you may call it comparatively a small market. But compared to Bangladesh as a whole having 140 million population with enormous scope for economic development at every nook and corner of the country, you cannot call it at saturation.
If the leasing business is done by commercial banks in addition to banking, it will adversely affect leasing companies in two ways: (i) banks having low cost of fund at their disposal will be able to apply low rate of interest in case of their lessees - which cannot be afforded by leasing companies. (ii) banks doing leasing themselves will not extend any credit line to leasing companies.
Such banks and leasing companies will therefore get involved in unequal competition to the detriment of greater national interest.
This unhealthy competition can be turned into complimentary to each other under guardianship of common regulatory body i.e. Bangladesh Bank. As for example, any industrial project requires four things - (i) land and building, (ii) capital machinery, (iii) working capital, (iv) foreign exchange business.
Out of above, SI. No. (i) is normally provided by the sponsors as part of their equity. S1. No. (iii) & (iv) are absolutely items of banking. S1. No. (ii) can be financed by both banks and leasing companies. But to assign this part of financing to leasing companies is more advantageous for two reasons - (i) machineries if leased out by leasing companies will remain under ownership of such companies. As a result, in case of default leasing companies can repossess such assets which banks cannot do without court's order. (ii) machineries are to be imported in the name of leasing companies which, will therefore, act as a deterrent to underinvoicing or overinvoicing.
(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 most important constraint now facing leasing companies is dearth of resources i.e. liquid fund. The main sources of such fund are (i) credit lines/borrowings from banks, (ii) term deposit from public. Mobilisation of term deposit from members of public is not at all adequate for two reasons - (i) term deposit for less than 12 months cannot be mobilised, (ii) people are shy to deposit in non-scheduled financial institutions.
(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 simple answer to this question is to provide credit facilities to leasing companies on easy terms by way of opening "Refinance Window" in Bangladesh Bank. Secondly at the instruction of Bangladesh Bank, commercial banks may invite leasing companies to participate in syndicated loan for any industrial project under a complementary package as stated above. Yes, another important area of raising fund is the capital market. By way of issuing securities in the form of bond, debenture, securitisation etc. fund may be mobilised. But again question remains can a leasing company's bond compete with any government or semi-government's bond? Where government is a player other players are not likely to penetrate into the market and that too in a volatile uncertain situation prevailing ever since 1996 debacle.
(Q): What is your suggestion about the tax on depreciation value?
(A): Depreciation is the way of charging the income of an assessee against the use of particular asset as recovery of investment cost in that particular asset and to match the reduced market value of the asset due to its wear and tear. The rate and method by which depreciation is charged to the income of the assessee is important in the sense that it can result in deferment of tax liabilities. Deferment of tax liabilities results in deferment of cash outflows. If cash outflow can be deferred, then definitely it adds to the wealth maximisation effort of the assessee because of the time value of money. A taka paid one year later than today can add value to the assessee. Because if the money is retained and invested in some earning sources, then the same money will end up with higher value due to added income to that invested money. Based on this concept, charge of depreciation goes in favour of the assessee. Now, for financial institutions and banks, especially the leasing companies, the higher tax rate (45%) as imposed by Finance Act 2003, has made it more important for such financial institutions to find out ways to defer tax liabilities and in that case charging higher depreciation rate is one of the most important tools.
The current rates of tax depreciation for two broad categories of leased assets are:
ii) machinery and equipment - 20%
iii) vehicle (plying for hire) - 24%
Moreover, initial depreciation @ 25% can also be enjoyed on investment in assets, under the 1st category i.e. machinery & equipment. From the viewpoint of leasing companies, these rates are in their benefit, which can be further maximised by increasing these rates. But considering the impact of deferred tax on the collecting side, the government, who are to use the collected tax in other economic avenues, the increase in depreciation tax rate may not be suggested. Because, in that case the economic growth due to advantage to the leasing companies may be offset by the foregone economic growth that could be achieved through utilisation of collected tax, if not deferred.
But from January 1, 2004 the leasing companies are to adopt finance method of accounting as the ICAB adopted IAS-17 as BAS (Bangladesh Accounting Standards). In that case leasing companies will not charge depreciation in their accounts, as there will be no leased asset in the balance sheet. On the other hand, the lessee will show the leased asset in their accounts and accordingly charge depreciation in their books. But as the ownership of such assets lie with the leasing companies, the tax authority is to treat the lessor as the true owner and in that case it will create confusion as to whom the depreciation benefit should be provided. Moreover, the complexity that will arise as to how the un-depreciated balance amount of leased assets, charged so far in lessors tax accounts, will be treated or be adjusted, is not yet addressed by the NBR. So clear ruling in these regards are to be sought from the NBR to make the situation clear.
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