Leasing firms, banks in turf war

Competition is intensifying for leasing companies, as at least seven commercial banks and state-owned Investment Corporation of Bangladesh (ICB) have got into the leasing business.
Banks now undertake leasing through a division or unit. In addition, banks receive a depreciation allowance, which the leasing companies have been missing out on since fiscal 2007-08, industry people said.
In the past few years, banks, such as The City, Prime, Pubali, Dutch-Bangla, Mutual Trust, National Credit and Commerce Bank and Uttara, have stepped into the arena, putting up a good fight for the leasing and finance companies.
The main focus of leasing is on new ventures, machinery and motorised vehicles, which accounted for over 50 percent of lease disbursement in fiscal 2007-08. The focus is now shifting to other areas, such as capital market, SME and home loans.
“Leasing accounted for nearly 80 percent of our business in 2005. It came down to only 30 percent in 2009,” said Mafizuddin Sarker, managing director of LankaBangla Finance, a leading leasing company.
“It is more or less the same with other companies,” said Sarker, also chairman of Bangladesh Leasing and Finance Companies Association (BLFCA), a forum of 29 companies.
Leasing is an important method of financing. Leasing firms play a role analogous to that of banks and other financial institutions, but act by buying and then leasing equipment to their clients rather than loaning money to buy it.
Sarker said if banks want to venture into leasing, they should do it by setting up subsidiary companies. He argued that such subsidiaries should be governed by the rules applicable to leasing companies.
Permitting banks depreciation allowance that the leasing companies are missing out for the past three years is unacceptable and unsustainable, the BLFCA president said.
It will be tough for the leasing companies to compete with banks, as they enjoy much greater liquidity, clients and network, the industry people said.
Since banks are paying no more than 6-8 percent interest on customer deposits, leasing is immensely profitable for them. On the other hand, margins for leasing companies have shrunk. They need to pay 12 to 14 percent interest on funds and can seek 16-18 percent from lessees.
According to industry insiders, leasing companies depend on bank finance for their business: small companies depend 100 percent on banks while the larger ones depend 60 percent to 70 percent.
The association has also expressed concern to the central bank governor on the issue, but no measures have been taken yet.
Anis A Khan, managing director of Mutual Trust Bank, said banks should undertake leasing by forming a separate company. He however said it is not illegal for banks.
“Leasing by banks is not illegal. The law permits it,” said Helal Ahmed Chowdhury, managing director of Pubali Bank. The bank has set up a division to take on leasing.
The first leasing company was set up in Bangladesh in 1985. The sector has since grown and now the total number of companies in the leasing sector stands at 29, of which, 22 are specialised in lease and long-term financing. Bangladesh Bank licensed these companies under the Financial Institution Act 1993.
According to BLFCA data, leasing companies make long-term investment worth about Tk 3,000 a year. Outstanding long-term investment of these companies now stands over Tk 11,000 crore.
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