Leasing firms face tough time as banks take slice of the pie

Commercial banks are increasingly branching into leasing business, causing a great market competition.
Industry people said banks now do it through a division or unit, which is not sustainable. Some banks even run the business without a unit.
“If banks want to do leasing, they should do it by setting up subsidiary companies,” Anis A Khan, chairman of Bangladesh Leasing and Finance Companies Association (BLFCA), told The Daily Star.
Khan argued that such subsidiaries should be governed by the rules that are similarly applicable to leasing companies.
In the past several years, at least 10 commercial banks have stepped into the arena, which include Islami Bank, City Bank, Bank Asia, Mercantile, National Bank and Prime Bank.
“How can a leasing company with a small capital base compete with banks that are wallowing in liquidity and undertake a wide range of activities,” a senior official with a leasing company said.
The major focus of leasing in Bangladesh is on plant and machinery, which accounts over 50 percent of lease disbursement in the financial year 2007-08.
The first leasing company was set up in the country 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.
Leasing is an important method of financing. Lease 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.
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 at Tk 11,000 crore.
“Doing leasing business by banks is nothing illegal, laws allow it,” said Shamsul Arefin, managing director of Uttara Finance and Investment Ltd.
But the question arises, as the leasing companies are losing their clients, Arefin claimed.
“Banks offer the same interest to the leasing companies as their individual clients for lease finance are offered. It is not competitive for us,” he pointed out.
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 bank finance and large ones for 60 to 70 percent.
Leasing companies' financial strength is much lower than banks. A leasing company's required capital is Tk 25 crore, while it is Tk 400 crore for a bank (according to Basel II guideline).
Besides income from interest, bank earn from different commissions and charges for their services, the facility a leasing company does not enjoy.
“If all banks come into leasing business, we will be wiped out,” Arefin feared.
Is the growth likely to cease with companies facing competition from banks? Anis A Khan, chairman, BLFCA, who also heads the IDLC Finance, is concerned, but not worried.
Khan said: “We have expressed our concern to the BB governor on the issue, but no measure is taken yet.”
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