ijcrb.webs.com INTERDISCIPLINARY JOURNAL OF CONTEMPORARY RESEARCH IN BUSINESS JANUARY 2012 VOL 3, NO 9 Shahid Hussain

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1 Financial Trends of Leasing Companies in Pakistan over the Decade 1 Saleha 1 Lecturer: Department of Pharmacy, the University of Lahore, Pakistan 2 Yasir Hassan 2 Lecturer: Lahore Business School, the University of Lahore, Pakistan 3 Usman Talat Butt, Farhan Javed, Anas Rashid, Maira Akram, Hina Jabbar, Safina Waheed, Shahid Hussain 3 Lahore Business School, the University of Lahore, Pakistan Abstract The goal of our research paper is to discuss the financial trends of leasing in Pakistan during (2001 to 2010). We also want to analyze the financial performance of leasing sector during the last 10 years. Our study finds out the increasing or decreasing trends of Sales, Profit before Tax, and Paid up capital, Equity, and Total Assets. With the help of graphs we can clearly examine the averages of Sales, Total Assets, and Profit before tax, and Paid up capital. Key Words: Leasing, Paid up capital, Equity, ROA, ROR, and ROE Introduction Leasing is a method of purchasing land equipment or other machinery without having to pay a full amount upfront. The agreement between two parties for the rental property of land or asset is called as Leasing. The company who owned the asset is called as lessor. The party who uses the asset is called as lessee. Leasing activity was first initiated in India in 1973.The primary difference between Leasing and Buying is the ownership of the asset. In Pakistan the first leasing company was established in the era of In Pakistan From 1985 to 1997, 32 leasing companies were established with the minimum capital of Rs. 100 million. When the minimum Capital requirement was increased to Rs 200 million than this act leads to merger of small companies and only 27 companies left in Pakistani market. The major growth in the leasing sector was done during the period of 1992 to 1995, only in this short span of time 20 leasing companies were established in Pakistan. In October 1995 the leasing companies paid up capital reaches to Rs billion, with market capitalization of Rs.6.0 billion as on The Leasing sector is gaining fast acceptance in Pakistani economy. The listed paid up capital of Karachi Stock exchange was Rs 518 Billion. In this money Rs 6 Billion account for Leasing Sector. In Pakistan the par value of each leasing company is Rs 10 which is too small. In future this value would be raised to Rs 100. The total GDP of Pakistan was US $128 billion. The share leasing companies in Pakistan GDP was only 0.10%. The biggest company of Pakistan in leasing sector in the National Development Leasing Corporation (NDLC) - is a singular public sector company, while the majority of its shares are in the private sector. Types of Leasing Operating lease. Finance lease. Capital Lease. Direct Financing Lease. Full Pay out Lease. 290

2 Leverage Lease. Net Lease. Open End Lease. Leasing and World In the era of 1960's American business "moved" leasing across the ocean to Europe, where the first leasing company - "Deutsche leasing GMBH" appeared in 1962 in Dusseldorf. By the mid-60's leasing operations in the U.S. accounted for 1 billion dollars. By the end of the 80 years they have raised to $ 110 billion dollars, i.e. a quarter-century has increased by more than a hundred times. Such rapid growth in rental operations due to multiple benefits associated partners in the leasing transaction. At this time, the countries with market economies, leasing operations for business entities are advantageous for re-equipment of production. The United states also start giving their aircrafts on Lease after 1980s. In Pakistan recently Pakistan International airlines buy aircrafts on lease. Literature Review Ahmad, Raza, Amjad, & Akram say that on the basis of return on assets (ROA), return on equity (ROE), and return on revenues (ROR) the financial performance of leasing companies was good in 2006 & 2008 but the condition is totally adverse in 2007 & 2009 but the major downfall is in The study of Ahmad, Raza, Amjad, & Akram, (April 2011) also showed the same results that the performance of leasing companies was deteriorated and ratios were negative in Lease ratio was increasing from but there is also a decrease in ratio in 2009 and net investment in finance lease to total assets has no constant trend of increase or decrease. According to the return on assets (ROA), return on equity (ROE), and return on revenues (ROR) Askari has the first position in ranking, Pak- gulf has second and Orix has third position. On the basis of net investment in finance lease to total assets and lease ratio Askari is at the top in ranking and Pak- gulf has third position whereas according to the net investment in finance lease to total assets SME has second position and on the basis of lease ratio SLC has second position in ranking. Finally, this effort highlighted important information useful for managers about the activities that may increase the financial performance of leasing institutions in Pakistan. On the other hand, it is also pertinent to mention that the objective of this study is purely for academic purposes and authors intention is not to make any ranking of leasing companies in Pakistan and nor to give any guidelines for investment purposes. Therefore, it is recommended that for financial decision making, financial analysis of all the leasing companies with data over a reasonable period of time must be considered. [1] Ali Raza and Muhammad Akram says that The performance of leasing companies in 2010 is better than the performance in 2009.The ratios regarding 2010 are showing positive change from 2009 but the performance was deteriorated in Our results are consistent with the reporting by SBP Satiability Review of Financial Sector. The numbers of leasing companies are gradually decreasing And minimum equity requirements (MER) has the major stake but the decrease in Performance in 2009 is due to the high provisioning cost, high discount rate, and high financial expenses, instability of economic conditions, political instability, and competition with banking sector, separate regulatory body of leasing companies and commercial banks and high reliance on borrowing from other financial institutions. It is suggested to allow the leasing companies to execute the business of land and Residential apartments and buildings so that they can earn better profit and enable the small entrepreneur 291

3 with financing and there should be only one regulatory body for leasing companies and banking sector so that the products and services could be different from each other. Some restrictions can be applied on banks or leasing companies regarding products and services if banks and leasing companies want to offer the same line of products and services. Results are based on the data of sample leasing companies by taking only three year period of time. For future studies, it is suggested that the time period and number of companies should be increased while considering leasing sector for financial analysis. Further, Pakistan is low income developing country and has specific local dynamics of leasing which are different from other countries so these results cannot be generalized for other developing countries. [2] Performance of the leasing sector in the country was not encouraging during FY09. Asset base decreased by around 13.0 percent and dropped from 63.7 billion to Rs 55.5 billion during FY09. The sector showed losses before and after taxation of Rs.1.5 billion & Rs.1.4 billion respectively during FY09 as compare to the profit before & after taxation of Rs million and million respectively last year. [3] This study concludes that there is a decline in the entities of NBFCs, except mutual funds, due to the under mentioned reasons and minimum equity requirements and decrease in the assets growth rate is mainly due to the mutual funds because mutual funds have an ample share in assets of NBFIs. On the basis of ratios analysis it is concluded that the financial performance of NBFCs has been better in 2008 as compared with There has been an overall decline in the performance of NBFCs due to the increase in discount rate, unstable economic conditions, and less confidence of investors. [4] McCugan and Caves' survey of non-banking lessors between 1969 and 1972 tells that the leasing industry's structure is quite competitive. Self-assessed shares in appropriately defined markets suggest fairly low concentration ratios. The national market is somewhat fractured by size, region, and equipment type. No product differentiation or entry barriers can be found. The industry's growth rate is quite high. [5] According to the Statistics given by Saudi Pak leasing limited company the paid up capital has been raised from Rs. 3.8 billion in 1996 to Rs. 4.7 billion in 2000, showing an increasing and positive trend of nearly 24% over the period of 5 years. Lease Financing raised from Rs.21 billion in 1996 to Rs.30 billion in 2000, maintaining its increasing trend in the period of 5 years and showing an overall increase of 43%.Net Profit, was showing a decreasing trend during the time period of 1996 to It has now raised in the year 2000 showing increase from Rs. 451 million to Rs. 573 million in 2000 an improvement of around 20% in the year above. The revenues rose from around Rs. 4 billion in 1996 to Rs. 5.8 billion in 2000 which shows an increase of 45% in the five-year period. [6] According to the Pak Gulf director report of the shareholder the fiscal year 2007 to 2008 was a weaker year as compared to the preceding years. Pakistan economy has faced a declined trend in the year under reference. Growth rate which was over 7 percent for previous half of the decay, reduced to 5.8% during this year. [7] According to Pakistan economist report As on June 30, 1997 the paid-up capital of these 41 companies, (33 leasing companies and 8 modarbas doing leasing as core business), exceeded Rs. 6.3 billion with revenues of more than Rs. 3.8 billion. As against this, the total assets of these companies were more than Rs. 37 billion. In spite of poor performance of the economy in , member companies earned an aggregate after tax profit of over Rs. 1.2 billion out of which Rs. 665 million was distributed among the shareholders. [8] According to State Bank of Pakistan in recent years, leasing sector has undergone structural changes, with number of leasing firms significantly dropping on account of their mergers with investment and commercial banks. Unsurprisingly, the number of leasing firms has 292

4 reduced from 20 in FY08 to 12 in FY10, with their total assets plummeting from Rs 110 billion to Rs.47 billion during the same period. [9] Methodology: We are using a secondary Data from Karachi stock exchange to conduct our research. ANOVA is used to compare the means of different variables from year (2001 to 2010). Least significance difference (LSD) test is applied for comparing d the means of different years that it is significantly different from each other or not. Multiple linear regressions is also applied to conduct our research. Empirical Results A histogram is one of the basic quality tools. It is used to graphically summarize the data and show the distribution and variation of a process data set. 293

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14 By analyzing this graph we can see that Paid up capital & equity was maximum between 2008 & In 2001 the equity was minimum less than 300 million. The paid up capital is also at the lower point in In year 2001 the mean value of total asset was nearly 2000 million. The means of Total assets shows increasing trend till the mid of 2008 & But the fact is that the value of total assets will be declining after 2008.The Sale was lowest in 2001 than it starts increasing in But the interesting fact is that Sale was high in year

15 NO. OF SHARE Years Standard Deviation Mean Coefficient of Variation , TOTAL EQUITY (MILL) Years Standard Deviation Mean Coefficient of Variation TOTAL TOTAL ASSETS(MILL) Years Standard Deviation Mean Coefficient of Variation

16 TOTAL SALES (Million) Years Standard Deviation Mean Coefficient of Variation TOTAL PROFIT BEFORE TAX Years Standard Deviation Mean Coefficient of Variation

17 TOTAL PROFIT AFTER TAX Years Standard Deviation Mean Coefficient of Variation TOTAL Paid Up Capital Years Standard Deviation Mean Coefficient of Variation Total

18 ANOVA PAID-UP CAPITAL (Rs. In mil) FACE VALUE NO. OF SHARE EQUITY (MILL) TOTAL ASSET (MILL) SALES (MILL) Sum of Squares df Mean Square F Sig. Between Groups Within Groups Total Between Groups Within Groups Total Between Groups Within Groups Total Between Groups Within Groups 3.692E Total 3.949E7 180 Between Groups 4.187E E Within Groups 3.967E E7 Total 4.386E9 180 Between Groups Within Groups 6.049E Total 6.566E7 180 Hypothesis: Sales: H0: µ2001= µ2002= µ2003= µ2004= µ2005= µ2006= µ2007= µ2008= µ2009 H1: At least one mean is significantly different. Profit after tax: H0: µ2001= µ2002= µ2003= µ2004= µ2005= µ2006= µ2007= µ2008= µ2009 H1: At least one mean is significantly different. Since the P value is less than 0.05 so we reject our null Hypothesis. Now we are applying LSD to check that which year mean is significantly different from other. 307

19 Years years Mean Difference Sig * * * * * * * * * By applying LSD we can find that the mean value of year 2001 and 2008 is significantly different. Similarly the mean of year 2002 and 2008 is significantly different. We can also say that µ2008 µ2001, µ2002, µ2003, µ2004, and µ2005. All the P values given in this table is less than Multiple Linear Regression: Now we are applying Multiple Regression analysis by using backward method. 308

20 Conclusion: Our study provides an overview that how Financial trends of leasing in Pakistan changes with the passage of time. The interesting fact is that our Paid Up capital and equity were lower in year 2002, but the Profit before tax was higher in years The amount of sale was at highest point in year 2008 that show the positive attitude of peoples toward leasing sector. The average amount of total assets was more than Rs.6000 million in year Both the sale and total assets gradually declining after year 2008 this is may be due to poor economic and political condition in the country which forces investors to less invest in Pakistani Market. 309

21 References Alam, H, Raza, A,Farhan, M,& Akram, M.( June 2011). Leasing Sector in Pakistan: A comparison of Financial performance of Leasing Companies. International Journal of Business and Social Science, Vol.2, No.10. Alam, H,Raza, A,& Akram,M.(April 2011).Financial Performance of Leasing Sector. The Case of Pakistan. Interdisciplinary Journal of Contemporary Research in Business, Vol.2, No.12. SBP. ( ). Financial Statement Analysis of the Financial Sector. Pakistan. Ahmad, H. K., Raza, A., Amjad, W., & Akram, M. (2011). Financial performance of nonbanking finance companies in Pakistan. Interdisciplinary Journal of Contemporary Research in Business, 2 (12), Morgan,E, Lowe,J, Tomkins,C.(June 1980).The UK Financial Leasing Industry A Structural Analysis. The Journal of Industrial Economics, Vol.28, SBP. (2011). Financial Stability Review, FullDec.pdf. 310