Professional Documents
Culture Documents
Leasing Report 2
Leasing Report 2
ABSTRACT
[CHAPTER 1]
safe disposal of wastes is expected to bring
further opportunities for leasing industries.
[INTRODUCTION]
company Ltd. started its operations in 1989. The leasing business became competitive with the
increase in the number of companies and wider distribution of their market share.
In conducting this research, some limitations were felt, which should not be hided, are stated as
follows:
Due to the limitation of time it was not possible to cover all the details of the study.
Leasing business in Bangladesh is not well organized like banking and that is why collection
of information from such unorganized sector was quite tough.
This study is mainly affected by all the limitations of Information.
For the confidential reason, many leasing companies did not provide sufficient information to
internet.
1.4. METHODOLOGY:
Sample Selection
There are 22 leasing companies in Bangladesh now. But in primary investigation, it is found that all of
them are not in operation. Some are found in operation from early 2000 and they did not publish their
financial reports till now.
Collection of Data
The present study analyzed financial data of leasing companies in Bangladesh, which are collected
from the financial statements of various leasing companies. These data are secondary in nature.
Page | 2
leasing
All leasing companies in Bangladesh have legal bindings to provide information about problems. One
researcher, if so desires, can collect the problems and prospects of leasing companies in Bangladesh
paying some efforts. One such attempt was taken for all leasing companies were made available.
Basically, it gave us the scope to undertake the present research.
Leasing, in general, is viewed as a method of financing the acquisition of capital equipment. Leasing
involves a contractual relationship in which the owner (lessor) or an asset or property grants to a firm
or a person (lessee) the use of the asset's services for a specific period, usually for an agreed sum of
rent (Weston and Brigham, 1978). Leasing, therefore, enables a firm to avail the services of a plant or
equipment without making the investment or incurring debt obligation. The firms can use the asset by
paying a series of periodic amounts called "lease payments" or "lease rentals" to the owner of the
asset at the predetermined rates and generally in advance (Harm Levy and Marshall Samuel, 1973).
The payments may be made monthly, quarterly or annually. Often there is no initial deposit or fee.
Lease contracts have two parties, namely, Lessor and Lessee. A lessor may be a leasing company, a
manufacturer, a subsidiary or an associate of a large business organization. A lessee may be a
company, cooperative society, a partnership firm, an individual, government or its agencies (Gupta,
1995, p.2).
The lease must have the following basic characteristics viz.:
A contract of commercial nature between the lessor (owner) and the lessee (the user);
The contract should provide for periodical payment of rentals for using the asset for a fixed
term by the lessee;
On the expiry of the lease term the hirer should return the asset to the owner or dispose it in
the manner desired by the owner.
These characteristics combined will provide the definition of lease (Verma, 1995, p. 3 1).
Page | 3
leasing
ABSTRACT
Leasing in Bangladesh is a
“financial business” and cannot be
carried on except in terms of a
license granted by Bangladesh
Bank.
[CHAPTER 2]
[LEASING IN BANGLADESH]
Page | 4
leasing
Leasing in Bangladesh, like in many of its peer countries, owes its origin to the efforts of the
International Finance Corporation (IFC), Washington. At the instance of IFC, the first Leasing
Company in Bangladesh, Industrial Development Leasing Company of Bangladesh Ltd. (IDLC) was
set up in 1984 and commenced its operations in 1986, with a 20% shareholding from Korea
Development Leasing Corporation.
For several years, IDLC remained the sole leasing company in Bangladesh. However, the real
momentum began in the 1990s. The country’s central bank, Bangladesh Bank, put in place a
regulatory mechanism under the Financial Institutions Act 1993 and the Financial Institutions
Regulations 1994.
In 1997, there were 15 leasing companies in the country. Besides, some of the banks and financial
institutions also added leasing divisions to their existing operations.
Leasing is an asset renting activity, and is therefore, governed by common law. The Contracts Act
1872 applies to contracts of leases. Sections 148 to 171 of the Contracts Act cover provisions relating
to bailment.
As these provisions are identical to those applicable under English law, the chapter devoted to general
law of leasing adequately covers the law in Bangladesh as well.
It may be noted that the general law of contracts is limited to bailments of “goods”. “Goods” include
movable property only – immovable property is not covered by common law. As it the common
feature of all Anglo-Saxon legal systems, transactions in immovable properties are covered by a
separate system of laws.
The taxation system in Bangladesh has been a subject matter of criticism over a last few years. The
system is characterized by many incentives, tax holidays and concessions as a result of which the
share of corporate taxation to total tax collection by the Govt. has come down drastically over the past
few years.
Taxes on corporate profits, of both domestically and foreign owned companies amounts insignificant
as a 0.95% of GDP in Bangladesh, compared with more than 6% in developed nations. The main
reason cited for this low contribution is the tax incentives granted by the Govt., which are very liberal
as compared to its counterpart countries.
It is probably with tax reform in view that the Govt carried out certain reforms in depreciation laws in
Budget 1998-99. Among other provisions, the important change that would have a far-reaching effect
on leasing companies is the change in depreciation system by scrapping of initial year depreciation
Page | 5
leasing
allowance, extra shift allowance and normal depreciation, replaced by a single rate of normal
depreciation
Leasing sector in Bangladesh achieved an excellent growth rate of its business over the years. There
were ups and downs in the growth of leasing business over the years. After setting up first leasing
company in 1986, it recorded 72.03 per cent growth in real term in 1987 over the previous year. After
1988, the growth rate began to diminish and that had continued up to 1989. The year 1990 witnessed a
sudden spurt in business of leasing companies. The leasing business was up by 56.16 per cent on last
year's figure. This has happened due to entry of two new leasing companies into business in 1989.
The growth trend then witnessed earning during the 1991 and1992 period, increasing again in 1993
and 1994. The growth rates were quite pronounced in 1995 and 1996. The growth rates were 62.29
per cent in real term in 1995 over the previous year and that was 61.4 per cent in 1996. This was due
to the entry of more leasing companies into the market and of aggressive operation of new leasing
companies. The rates were irregular in the second half of the 1990s. However, in 1998, leasing sector
of Bangladesh experienced a drastic diminished growth trend with only 2.65 per cent in real term
previous year's figure, although two new leasing companies made entry into the leasing market. This
diminished trend was witnessed possible due to the unprecedented flood in 1998 when most economic
activities virtually came to stand still. However, in 1999, the industry showed signs of recovery
registering 30.12 per cent growth. The growth rate of' leasing business then rose to 30.89 per cent in
real term 2000, decreased again in 2001 to 24.09 per cent in real term. Leasing business in nominal
figure gave almost the same trend and variations over the years. The leasing industry has, therefore,
consistently increased since 1986 with some variations. The sector accounts for 38.26 per cent in
nominal term and 32.18 percent in real term Compound Annual Growth Rate (CAGR). Moreover,
business has increased by around 141 times in nominal term and 71 times in real term over the period
under study. This trend is quite encouraging for the leasing industry. However, reasons for slow
growth rates of leasing business in some years were results of mainly ups and downs of industrial
growth, diversification of leasing companies into other activities and withdrawal of tax benefits.
Like some other countries, leasing companies in Bangladesh owes its origin to the efforts of the
International Finance Corporation (IFC), Washington. Currently there are 22 leasing
companies in our country performing mainly the following functions:
Page | 6
leasing
Government owned
Page | 8
leasing
ABSTRACT
Leasing has immense potential in Bangladesh. However, leasing in Bangladesh faces serious
handicaps which may mar its growth in future. The following are some of the problems.
1. Unhealthy Competition:
Page | 9
leasing
The market for leasing has not grown with the same pace as the number of lessors. As a result, there is
over supply of lessors leading to competitor. With the leasing business becoming more competitive,
the margin of profit for lessors has dropped from four to five percent to the present 2.5 to 3 percent.
Bank subsidiaries and financial institutions have the competitive edge over the private sector concerns
because of cheap source of finance.
Leasing requires qualified and experienced people at the helm of its affairs. Leasing is a specialized
business and persons constituting its top management should have expertise in accounting, finance,
legal and decision areas. In Bangladesh, the concept of leasing business is of recent one and hence it
is difficult to get right man to deal with leasing business. On account of this, operations of leasing
business are bound to suffer.
3. Tax Considerations:
Most people believe that lessees prefer leasing because of the tax benefits it offers. In reality, it only
transfers; the benefit i.e. the lessee’s tax shelter is lessor’s burden. The lease becomes economically
viable only when the transfer’s effective tax rate is low. In addition, taxes like sales tax, wealth tax,
additional tax, surcharge etc. add to the cost of leasing. Thus, leasing becomes more expensive form
of financing than conventional mode of finance such as hire purchase.
4. Stamp Duty:
The states treat a leasing transaction as a sale for the purpose of making them eligible to sales tax. On
the contrary, for stamp duty, the transaction is treated as a pure lease transaction. Accordingly, a
heavy stamp duty is levied on lease documents. This adds to the burden of leasing industry.
The problem of delayed payment of rents and bad debts add to the costs of lease. The lessor does not
take into consideration this aspect while fixing the rentals at the time of lease agreement. These
problems would disturb prospects of leasing business.
Over past couple of years, the economy itself has done pretty badly. The demand for capital
equipment has been at one of the lowest ebbs. Automobile sales have come down; corporate have
found themselves in a general cash crunch resulting into sticky loans.
7. Tax-based credits:
In most of the cases of frauds or hopelessly-wrong credit decisions, there has been a tax motive
responsible for the transaction. Bangladesh has something which many other countries do not- a 100%
first year depreciation on several assets. Apparently, the list of such assets is limited and the
Page | 10
leasing
underlying fiscal rationale quite holy and sound – certain energy saving devices, pollution control
devices etc. qualify for such allowance. But that being the law, it is left to the ingenuity of our
extremely competent tax consultants to widen the range with innovative ideas of exploiting these
entries in the depreciation schedule. Thus, there have been cases where domestic electric meters have
been claimed as energy saving devices, and the captive water softener in a hotel has been claimed as
water pollution control device! As leasing companies were trying to exploit these entries, a series of
fraudsters was successful in exploiting, to the hilt, the propensity of leasing companies to surpass all
caution and all lending prudence to do one such transaction to manage its taxes, and thus, false papers
for non-existing wind mills and never-existing bio-gas plants were fabricated to lure leasing
companies into losing the whole of their money, to save the part that would have gone as government
taxes!
8. Resource Crunch:
The sources of finance available to leasing companies are: (a) equity share capital; (b) reserves and
surplus; (c) debentures; (d) long-term loans; (e) public deposits; (f) bank loans; and (g) inter-corporate
deposits and other sources. Of late, looking at the performance and prospects, investors seem to have
lost confidence in leasing companies. This is reflected in the fact that the shares of most leasing
companies are quoted at an extremely lower price, compared to the book-value and per value.
Therefore, it is becoming difficult for the leasing companies to raise equity share capital in the
existing conditions. It is also not possible for them to issue either fully or partly convertible
debentures because these are closely linked with the net worth and trading of equity shares in the
market.
Unfortunately, the tax benefits which leasing companies enjoy in the developed countries are not
available to the BD leasing companies. Tax benefits arising out of depreciation, investment
allowance of deposit scheme, etc., are not conducive to the growth and promotion of leasing
companies. Investment allowance was abolished from 1 April 1987, and in its place an investment
deposit scheme has been introduced. Under this scheme, the amount of deduction is limited to 20 per
cent of the profit of eligible business or profession as per the audited accounts. However, this scheme
excludes certain categories of leasing.
Leasing companies face some challenges in Bangladesh or there are some challenging issues for
leasing companies in Bangladesh. High cost of fund is the most challenging issue for leasing
companies in Bangladesh. As because leasing companies cannot collect demand deposits from the
depositors, their cost of fund is higher than the banking institutions. Their paid-up capital is lower
than banks in Bangladesh. For lower paid up capital, they cannot expand their business-like
banks. Lease amount and also the leased asset recovery problem is another challenging issue for
leasing companies. Lack of government assistance and lack of government rules and regulations
are also challenging issues for leasing companies in Bangladesh. The transaction cost
(documentation fee, processing fee etc.) of leasing companies is a bit higher than banks. Dhaka
University Institutional Repository 88 Banks are also providing same services as leasing companies
and also, they have limited investment sectors than banks. Leasing companies are not as popular as
banks in Bangladesh. Lack of popularity is also a challenging issue for leasing companies. Delay
in lease payment and lack of qualified employee make leasing companies facing challenges in
Page | 11
leasing
Bangladesh. There is a risk of capital losses due to obsolescence of the equipment’s or machines.
Leasing companies have to pay high interest for the commercial loan to banks. Due to manpower
shortage, the leasing companies in Bangladesh are facing challenges.
ABSTRACT
4]
and public-sector undertakings are looking
to industry to finance railway,
telecommunication, transport, power,
[PROSPECTS OF LEASING infrastructure sectors. The infrastructure
financing so crucial for an economic
INDUSTRY IN BANGLADESH]
growth cannot be accelerated without
leasing industry.
Acquisition of long-term assets requires huge cash outlay which is sometimes not possible for the user
because of lack of financial capability. In such a situation, the user can lease such capital assets.
Page | 12
leasing
Leasing serves as a long-term funding that could be used for the attainment of capital assets. A leasing
arrangement provides a firm with the use and control over the assets without incurring huge capital
investment. It requires only making periodical rental payment. It has been found that acquirement of
assets under leasing arrangement is cheaper and faster as compared to acquisition of assets through
other sources of financing. Leasing provision enables the lessee to use more of its own funds for
working capital purposes instead of using low yielding fixed assets. Acquirement of assets through a
leasing arrangement is particularly beneficial for small firms which cannot raise funds to acquire
assets because of lack of financial resources. The financial institution while lending money usually
attach several restrictions on the borrowers as regards management, debt-equity ratio dividend
declaration etc. These restrictions are not present in the case of lease financing. In recent times,
leasing for business needs such as business equipment’s has become gradually more popular at many
banks as more and more customers discover its advantages. It is easy to predict and budget for lease
payments because of equal monthly payment. An important reason for the appeal of leasing is its
flexibility. Business organizations can use leases for everything from equipment, to structures, to
vehicles. It is possible to match the lease terms to the use earning life of the equipment or facility and
to choose the type of payment plans that match the unique needs, ranging from monthly to annually.
60 high officials interview from 15 banks and 15 leasing companies have been taken to identify the
reasons of preference of lease financing over term loan by some of the borrowers in Bangladesh.
4.1 The reasons for the preference of lease financing are as follows:
i. Provision of collateral:
Collateral is not needed in case of lease financing. When term loan is acquired from banks or non-
bank financial institutions, generally assets as collateral is required as a security of the lending
institution. Provision of collateral is a determinant factor to select lease financing for some of the
borrowers in Bangladesh
Sometimes the time of loan repayment in lease financing is shorter than term loan. Generally, the
maximum repayment time of equipment lease is five years. In case of term loan for equipment
purchase, the time for loan repayment might be more than that. Shorter time of loan repayment is also
a determinant factor for the selection of lease over term loan from banks or NBFIs. It offers the
flexibility of the repayment period being matched to the useful life of the equipment.
The repayment pattern of lease financing is generally E.M.I (Equal Monthly Installment). Financial
planning for E.M.I is easier because of fixed amount payment. It is also easy to assess the future cash
flow of the firm for E.M.I. In case of loan repayment, the payment pattern is not generally E.M.I.
Some of the borrowers prefer lease financing over term loan for E.M.I in Bangladesh. The smaller,
regular payments required by a lease agreement facilitate businesses with limited capital to handle
their cash flow more effectively and adapt quickly to changing economic conditions. As a lease
Page | 13
leasing
agreement is almost always a fixed contract, it is relatively easy to make budget and forecast it.
Business budget can be maintained with these fixed amounts much more easily than an irregularly
occurring lump sum; allowing to keep a much better control over current and future cash flow.
Sometimes the grace period of lease is longer than term loan. Sometimes the rental payment of lease
is tagged to the cash inflows from the underlying lease assets. Usually it takes some time for the
lessee to generate cash flows and hence the lessee is allowed a grace period for starting the rental
payments.
In case of lease financing of a product, it is owned by the leasing company. The company has better
security on the finance of the lessee. It means that it is unlikely to need any further security for lease
financing.
In case of lease financing, no third-party guarantee is required. If the lease financing is to acquire
equipment, in that case the possession of the equipment remains to the leasing company up to the
completion of the lease rental payment.
Acquisition of assets through a leasing arrangement is particularly beneficial to small firms which
cannot afford to raise their capacity on account of scarcity of financial resources. The biggest
advantage of leasing equipment is that the cost is spread over a number of years. It is not needed to
pay the entire amount for the acquisition of the equipment. This can significantly help to maintain
cash flow which is critical to all businesses. Poor cash flow is the main cause of small business
failures, and leasing can help to keep it under better control.
It has generally been found that acquisition of assets under leasing arrangement is cheaper and faster
as compared to acquisition of assets through other sources of financing. For lease financing,
additional security like property mortgage, land security is not required. So, leasing process and
documentation is generally faster than term loan.
Page | 14
leasing
Lessors have more equipment related knowledge and expertise. They have also equipment
procurement related expertise. The lessors have direct relation with the local sellers or agents of the
equipment. As a result, the procedural complexity of lease is less.
Generally, there are few terms and conditions for lease financing. For that reason, less documentation
is needed for lease financing and the submission of documents is in one package. Usually, ownership
agreement, lease contract agreement etc. are needed in lease financing.
The financial institutions while lending money usually attach several restrictions on the borrowers as
regards management, debt-equity norms, declaration of dividends etc. Such restrictions are absent in
the case of lease financing.
Usually, term loans for corporate entities are for huge amount deals. For small equipment purchase,
lease is more preferred and convenient. For that reason, small firms which need small equipment are
generally preferring lease financing.
In lease financing, there is option for sale and leaseback arrangements. An asset can be sold and again
leased back. In this way, an organization can meet up the cash flow problem. When an asset is sold,
the cash inflow can be used to other purposes for an organization.
Leasing provides total financing of an asset or equipment. In case of traditional lending, a substantial
down payment is required. Leasing arrangements provides a firm with the use and control over the
assets without incurring huge capital expenditure and require making only periodical rental payments.
Down payment is not required in case of lease financing. Thus, leasing saves funds for alternative
uses.
Page | 15
leasing
Page | 16
leasing
ABSTRACT
[CHAPTER 5]
[ANALYSIS]
Provides lease finance mainly for procurement of industrial machinery, equipment and transport. ICB
provides professional advice and financial assistance to the intending clients. The period of lease,
rental, charges, and other terms and conditions are determined on the basis of type of assets and the
Page | 17
leasing
extent of assistance required by the applicants. Since introduction of this scheme in 1999 good
responses have been received from the intending lessees.
Industrial Development Leasing Company of Bangladesh (IDLC):
IDLC specializes in project financing and provides innovative investment solutions. This includes
investing in projects that add value and contribute to the country’s overall economic development. It
invests through equity participation, term lending and lease financing. IDLC has played pivotal role in
almost all the industrial sectors. It has also special focus in infrastructure and social sector projects
has also been providing innovative investment solutions and project advisory services to its clients in
industrial and social sectors like education and health care. IDLC makes investments in order to
achieve a number of objectives: -Employment and income generation-Revenue generation for the
government-Production capacity addition-Earned or saved foreign exchange-Linkage and business
development-Skills and technology transfer -Offering environmental risk assessment and its
management the positive image IPDC has created has been established through more than two
decades of consistent commitment towards excellence in providing financial services. With a
conscious effort to anticipate influences in the domestic and foreign investment, IPDC has the ability
to adapt to the changing needs of time.
Page | 18
leasing
ABSTRACT
6]
[CONCLUSION]
should be taken both by the government and by entrepreneur to associate the development of
lease financing in Bangladesh for the interest of economic development. Maintaining the
IAS-17 to compare and make compliance among the leasing companies must bring out
international harmonization of lease treatment. For the interest of the growth with equity a
proper allocation is needed and now lease can solve the problem of the proper allocation of
funds through lease financing.
Popularity of lease financing is due to tax advantages, timesaving and conservation of cash
and funds. Off-balance sheet financing opportunities provided by operating leases are an
additional attraction of leasing. In addition to the lease sanctioning procedure, establishing
effective working relationship with clients and continuous monitoring of leases ensure proper
utilization of leased funds.
The ownership and organizational structure of prominent leasing companies greatly
contribute to the success of leasing business in Bangladesh. Shareholding by institutional
investors ensures separation of ownership from management, creates greater accountability
and governmental influence.
The future challenges to the leasing business will come from increased competition in the
lease market and the increased government intervention to relate the leasing companies. In
fine, it can be said that leasing business will continue to grow in Bangladesh as a preferred
means of acquiring equipment for its convenience and flexibility in financing. The volume of
leasing business in this country will increase at a strong rate in the near future.
ABSTRACT
Page | 20
leasing
Bangladesh must notify true lease guidelines, and sooner the better.
So, we think that a modern and dynamic regulatory framework is required for the rapid and
effective development of DFIs. It is hoped that in future DFIs would be able to play more
significant role in the development of economy of Bangladesh. Further research on the
significance of their contribution in the economy is required
Page | 21
leasing
Books:
Lease Financing
Websites:
[CHAPTER 8]
[REFERENCE]
Banglapedia.org
Assignmentpoint.com
Wikipedia.com
Scribd.com
Page | 22