Assisnment : Financial regulations for leasing

companies in pakistan
Introduction

Banking and Financial Services | Finance Leasing 1 Banking and

Financial Services Finance Leasing Banking and Financial Services |
Finance Leasing 02 Banking and Financial Services | Finance Leasing 03
Introduction The Finance Leasing law (72(I)/2016 (the "Law") entered
into force, in Cyprus, on 28 April 2016 with a further Financial Leasing
Directive (the "Directive") issued by the Central Bank of Cyprus on 17
February 2017. The purpose of this legislation is to provide a regulatory
and supervisory framework for the operation of financial leasing
companies providing leasing services to the public. Currently, in Cyprus,
a number of local Banks and private companies offer Finance Leasing
services. The new directive by the Central Bank coupled with the new
accounting requirements set by IFRS16 present a new challenge for
organisations already operating in the leasing sector as well as for new
entrants. The purpose of this publication • Outline the regulatory and
supervisory framework around financial leasing in Cyprus

Definition of financial lease under the Law

According to the Law financial leases are defined as follows:

"the agreement whereby a bank or a financial intermediary registered

with the register held by the Bank of Italy under Article 106 of the Italian
Banking Law undertakes vis-à-vis the lessee to buy or let build an asset
at the choice and upon the instructions of the lessee, which shall bear all
the risks relating to the asset, including risk of loss, and the lessor
makes the asset available to the lessee for a given period of time in
consideration of an amount which takes into account the purchase or
construction price and the duration of the agreement. Upon expiry of the
financial lease agreement, the lessee is entitled to purchase the asset at
an agreed price; failing exercise of such option, the lessee shall return
the asset to the lessor."

The State Bank of Pakistan (SBP) (Urdu: ‫ت پاتکسِتان‬ ‫ )بینک ددوَل ت‬is the central
bank of Pakistan. While its constitution, as originally laid down in the
State Bank of Pakistan Order 1948, remained basically unchanged until
January 1, 1974, when the bank was nationalized, the scope of its
functions was considerably enlarged. The State Bank of Pakistan Act
1956,[1] with subsequent amendments, forms the basis of its operations
today. The headquarters are located in the financial capital of
Pakistan, Karachi whereas the bank has a fully owned subsidiary with
the name SBP Baking Services Corporation (SBP-BSC) which is the
operational arm of the central bank and has branch offices in 15 cities
across Pakistan, including the capital city, Islamabad and the four
provincial capitals and has head office in Karachi. State bank has other
fully owned subsidiaries as well namely, I) National Institute of Banking
and Finance (NIBAF) which is the training arm of the bank and also
provides training to commercial banks, 2) Deposit Protection Corporation
(DPC) and recently SBP was given ownership of 3) Pakistan Security
Printing Corporation (PSPC) as well.
Before independence on 14 August 1947, during the British colonial
era, the Reserve Bank of India was the central bank for both India and
Pakistan. On the 30th of December 1948 the British Government's
commission distributed the Reserve Bank of India's reserves
between Pakistan and India—30 percent (750 M gold) for Pakistan and
70 percent for India.[2]
The losses incurred in the transition to independence, the small amount
taken from Pakistan's share (a total of 230 million). In May
1948 Muhammad Ali Jinnah (Founder of Pakistan) took steps to
establish the State Bank of Pakistan immediately. These were
implemented in June 1948, and the State Bank of Pakistan commenced
operation on July 1, 1948.
Under the State Bank of Pakistan Order 1948, the state bank of Pakistan
was charged with the duty to "regulate the issue of bank notes and
keeping of reserves with a view to securing monetary stability
in Pakistan and generally to operate the currency and credit system of
the country to its advantage".
Initially, a large percent of the state bank was funded by industrial
families, who Quaid-e-Azam promoted. They would allot a percentage of
their annual profit towards the functioning of the bank. Most notably, the
Valika Family would allocate the largest share amongst these families,
who also possessed good ties with the Quaid, since September 1947
when the Quaid laid the foundations of the first textile mill of Pakistan,
Valika Textile Mills.
A large section of the state bank's duties was widened when the State
Bank of Pakistan Act 1956 was introduced. It required the state bank to
"regulate the monetary and credit system of Pakistan and to foster its
growth in the best national interest with a view to securing monetary
stability and fuller utilization of the country’s productive resources". In
February 1994, the State Bank was given full autonomy, during the
financial sector reforms.[3]
On January 21, 1997, this autonomy was further strengthened when the
government issued three Amendment Ordinances (which were approved
by the Parliament in May 1997). Those included were the State Bank of
Pakistan Act, 1956, Banking Companies Ordinance, 1962 and Banks
Nationalization Act, 1974. These changes gave full and exclusive
authority to the State Bank to regulate the banking sector, to conduct an
independent monetary policy and to set a limit on government
borrowings from the State Bank of Pakistan. The amendments to the
Banks Nationalization Act brought the end of the Pakistan Banking
Council (an institution established to look after the affairs of NCBs) and
allowed the jobs of the council to be appointed to the Chief Executives,
Boards of the Nationalized Commercial Banks (NCBs) and Development
Finance Institutions (DFIs). The State Bank having a role in their
appointment and removal. The amendments also increased the
autonomy and accountability of the chief executives, the Boards of
Directors of banks and DFIs.
The State Bank of Pakistan also performs both the traditional
and developmental functions to achieve macroeconomic goals. The
traditional functions may be classified into two groups: 1) The primary
functions including an issue of notes, regulation and supervision of the
financial system, bankers’ bank, lender of the last resort, banker to
Government, and conduct of monetary policy. 2) The secondary
functions including the agency function like management of public debt,
management of foreign exchange, etc., and other functions like advising
the government on policy matters and maintaining close relationships
with international financial institutions.
The non-traditional or promotional functions, performed by the State
Bank include the development of a financial framework,
institutionalization of savings and investment, provision of training
facilities to bankers, and provision of credit to priority sectors. The State
Bank also has been playing an active part in the process of Islamization
of the banking system.
The Bank is active in promoting financial inclusion policy and is a leading
member of the Alliance for Financial Inclusion. It is also one of the
original 17 regulatory institutions to make specific national commitments
to financial inclusion under the Maya Declaration[4] during the
2011 Global Policy Forum held in Mexico.
Regulation of liquidity
The State Bank of Pakistan has also been entrusted with the
responsibility to carry out monetary and credit policy in accordance
with Government targets for growth and inflation with the
recommendations of the Monetary and Fiscal Policies Co-ordination
Board without trying to effect the macroeconomic policy objectives.
The state bank also regulates the volume and the direction of flow of
credit to different uses and sectors, the state bank makes use of both
direct and indirect instruments of monetary management. During the
1980s, Pakistan embarked upon a program of financial sector reforms,
which lead to a number of fundamental changes. Due to these changed
the conduct of monetary management which brought about changes to
the administrative controls and quantitative restrictions to market based
monetary management. A reserve money management programme has
been developed, for intermediate target of M2, that would be achieved
by observing the desired path of reserve money – the operating target.
State Bank of Pakistan has changed the format and designs of many
bank notes which are currently in circulation in Pakistan. These steps
were taken to overcome the problems of fraudulent activities.
The State Bank of Pakistan looks into many ranges of banking to deal
with changes in the economic climate and different purchasing and
buying powers. Here are some of the banking areas that the bank looks
into:

 State Bank’s Shariah Board approves essentials

and model agreements for Islamic modes of
financing
 Procedure for submitting claims with SBP in
respect of unclaimed deposits surrendered by
banks/DFIs
 Banking sector supervision in Pakistan
 Microfinance
 Small and medium enterprises (SMEs)
 Minimum capital requirements for Banks
 Remittance facilities in Pakistan
  Opening of foreign currency accounts with
banks in Pakistan under new scheme
 Handbook of corporate governance
 Guidelines on risk management
 Guidelines on commercial paper
 Guidelines on securitization
 SBP Scheme for agricultural financing

Bank assets and liabilities[edit]

This is a chart of trend of major assets and liabilities reported by
scheduled commercial banks to the State Bank of Pakistan with figures
in millions of Pakistani rupees.[5][6][7]

Year Deposits Advances Investments

2002 1,466,019 932,059 559,542

2006 2,806,645 2,189,368 799,285

 Legal services
 Library
 Payment system
 Real time gross settlement system (RTGS
system)
 Small and medium enterprises
 Training and Development Department (TDD)
 Treasury operations
 Strategic and corporate planning
 Microfinance
 Pakistan remittance initiative
 Remittances
  Information Systems and Technology
Department
 Risk Management Department

Governor
Main article: Governor of the State Bank of Pakistan
The principal officer of the SBP is the Governor. Since 7 July 2017, Tariq
Bajwa has been the Governor

Board of Directors
The Board (previously known as the Central Board) consists of ten
members: the Governor (who is Chairman), the Secretary, Finance
Division, Government of Pakistan – and eight Directors, including one
Director from each Province, to be nominated by the Federal
Government. The Directors (and the Governor) are appointed for a term
of three years. Traditionally, these directors (other than Secretary,
Finance Division) are re-appointed for a second term, though this is not
a requirement of the law, and there have been a few exceptions to this
practice.
The current Board of Directors consists of the following (there being two
vacancies)

 Tariq Bajwa (Governor SBP)

 Arif Ahmed Khan (Secretary Finance)
 Tariq Hassan
 Hafiz Mohammad Yousaf
 Zubyr Soomro
 Khawaja Iqbal Hassan
 Ardeshir Khursheed Marker
 Bairum Khan
 Sarmad Amin

Museum
Main article: State Bank of Pakistan Museum & Art Gallery
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it. (March 2018)

 Governor of State Bank of Pakistan

 National Bank of Pakistan
 Zarai Taraqiati Bank Limited
 Pakistani Rupee
 Banking in Pakistan

Non-bank financial institution

A non-banking financial institution (NBFI) or non-bank financial
company (NBFC) is a financial institution that does not have a full
banking license or is not supervised by a national or international
banking regulatory agency. NBFI facilitate bank-related financial
services, such as investment, risk pooling, contractual savings,
and market brokering.[1] Examples of these include insurance
firms, pawn shops, cashier's check issuers, check
cashing locations, payday lending, currency exchanges, and microloan
organizations.[2][3] Alan Greenspan has identified the role of NBFIs in
strengthening an economy, as they provide "multiple alternatives to
transform an economy's savings into capital investment which act as
backup facilities should the primary form of intermediation fail." [4]
Operations of non-bank financial institutions are often still covered under
a country's banking regulations.[5]

Role in financial system

NBFIs supplement banks by providing the infrastructure to allocate
surplus resources to individuals and companies with deficits.
Additionally, NBFIs also introduces competition in the provision of
financial services. While banks may offer a set of financial services as a
packaged deal, NBFIs unbundle and tailor these service to meet the
needs of specific clients. Additionally, individual NBFIs may specialize in
one particular sector and develop an informational advantage. Through
the process of unbundling, targeting, and specializing, NBFIs enhances
competition within the financial services industry. [6]
Non-bank financial companies (NBFCs) offer most sorts of banking
services, such as loans and credit facilities, private education funding,
retirement planning, trading in money markets, underwriting stocks and
shares, TFCs(Term Finance Certificate) and other obligations. These
institutions also provide wealth management such as managing
portfolios of stocks and shares, discounting services e.g. discounting of
instruments and advice on merger and acquisition activities. The number
of non-banking financial companies has expanded greatly in the last
several years as venture capital companies, retail and industrial
companies have entered the lending business. Non-bank institutions
also frequently support investments in property and prepare feasibility,
market or industry studies for companies. However they are typically not
allowed to take deposits from the general public and have to find other
means of funding their operations such as issuing debt instruments.

Growth
Some research suggests a high correlation between a financial
development and economic growth. Generally, a market-based financial
system has better-developed NBFIs than a bank-based system, which is
conducive for economic growth.[7][8]
Stability
A multi-faceted financial system that includes non-bank financial
institutions can protect economies from financial shocks and enable
speedy recovery when these shocks happen. NBFIs provide “multiple
alternatives to transform an economy's savings into capital investment,
[which] serve as backup facilities should the primary form of
intermediation fail.”[9]
However, in the absence of effective financial regulations, non-bank
financial institutions can actually exacerbate the fragility of the financial
system.
Since not all NBFIs are heavily regulated, the shadow banking
system constituted by these institutions could wreak potential instability.
In particular, CIVs, hedge funds, and structured investment vehicles, up
until the 2007-2012 global financial crisis, were entities that focused
NBFI supervision on pension funds and insurance companies, but were
largely overlooked by regulators.
Because these NBFIs operate without a banking license, in some
countries their activities are largely unsupervised, both by government
regulators and credit reporting agencies. Thus, a large NBFI market
share of total financial assets can easily destabilize the entire financial
system. A prime example would be the 1997 Asian financial crisis, where
a lack of NBFI regulation fueled a credit bubble and asset overheating.
When the asset prices collapsed and loan defaults skyrocketed, the
resulting credit crunch led to the 1997 Asian financial crisis that left most
of Southeast Asia and Japan with devalued currencies and a rise in
private debt.[10]
Due to increased competition, established lenders are often reluctant to
include NBFIs into existing credit-information sharing arrangements.
Additionally, NBFIs often lack the technological capabilities necessary to
participate in information sharing networks. In general, NBFIs also
contribute less information to credit-reporting agencies than do banks. [11]

Types
Risk-pooling institutions
Main article: Insurance company
Insurance companies underwrite economic risks associated with illness,
death, damage and other risks of loss. In return to collecting an
insurance premium, insurance companies provide a contingent promise
of economic protection in the case of loss. There are two main types of
insurance companies: general insurance and life insurance. General
insurance tends to be short-term, while life insurance is a longer-term
contract, which terminates at the death of the insured. Both types of
insurance, life and general, are available to all sectors of the community.
Although insurance companies do not have banking licenses, in most
countries insurance has a separate form of regulation specific to the
insurance business and may well be covered by the same financial
regulator that also covers banks. There have also been a number of
instances where insurance companies and banks have merged thus
creating insurance companies that do have banking licenses.
Contractual savings institutions
Contractual savings institutions (also called institutional investors) give
individuals the opportunity to invest in collective investment vehicles
(CIV) as a fiduciary rather than a principal role. Collective investment
vehicles pool resources from individuals and firms into various financial
instruments including equity, debt, and derivatives. Note that the
individual holds equity in the CIV itself rather what the CIV invests in
specifically. The two most popular examples of contractual savings
institutions are pension funds and mutual funds.
The two main types of mutual funds are open-end and closed-end funds.
Open-end funds generate new investments by allowing the public to
purchase new shares at any time, and shareholders can liquidate their
holding by selling the shares back to the open-end fund at the net asset
value. Closed-end funds issue a fixed number of shares in an IPO. In
this case, the shareholders capitalize on the value of their assets by
selling their shares in a stock exchange.
Mutual funds are usually distinguished by the nature of their
investments. For example, some funds specialize in high risk, high return
investments, while others focus on tax-exempt securities. There are also
mutual funds specializing in speculative trading (i.e. hedge funds), a
specific sector, or cross-border investments.
Pension funds are mutual funds that limit the investor’s ability to access
their investments until a certain date. In return, pension funds are
granted large tax breaks in order to incentivize the working population to
set aside a portion of their current income for a later date after they exit
the labor force (retirement income).
Market makers
Market makers are broker-dealer institutions that quote a buy and sell
price and facilitate transactions for financial assets. Such assets include
equities, government and corporate debt, derivatives, and foreign
currencies. After receiving an order, the market maker immediately sells
from its inventory or makes a purchase to offset the loss in inventory.
The differential between the buying and selling quotes, or the bid–offer
spread, is how the market-maker makes a profit. A major contribution of
the market makers is improving the liquidity of financial assets in the
market.
Specialized sectorial financiers
They provide a limited range of financial services to a targeted sector.
For example, real estate financiers channel capital to prospective
homeowners, leasing companies provide financing for equipment
and payday lending companies that provide short term loans to
individuals that are Underbanked or have limited resources. for example
Uganda Development Bank
Financial service providers
Financial service providers include brokers (both securities and
mortgage), management consultants, and financial advisors, and they
operate on a fee-for-service basis. Their services include: improving
informational efficiency for the investors and, in the case of brokers,
offering a transactions service by which an investor can liquidate existing
assets.
In Asia
According to the World Bank, approximately 30% total assets of South
Korea's financial system was held in NBFIs as of 1997. [12] In this report,
the lack of regulation in this area was claimed to be one reason for
the 1997 Asian Financial Crisis.
In Europe
For European NCs the Payment Services Directive (PSD) is a regulatory
initiative from the European Commission to regulate payment services
and payment service providers throughout the European Union (EU) and
European Economic Area (EEA). The PSD describes which type of
organisations can provide payment services in Europe (credit institutions
(i.e. banks)) and certain authorities (e.g. Central Banks, government
bodies), Electronic Money Institutions (EMI), and also creates the new
category of Payment Institutions). Organisations that are not credit
institutions or EMI, can apply for an authorisation as Payment Institution
in any EU country of their URL choice (where they are established) and
then passport their payment services into other Member States across
the EU.
Classification
Based on their Liability Structure, NBFCs have been divided into two
categories. 1. Category ‘A’ companies (NBFCs accepting public deposits
or NBFCs-D), and 2. Category ‘B’ companies (NBFCs not raising public
deposits or NBFCs-ND).
NBFCs-D are subject to requirements of Capital adequacy, Liquid assets
maintenance, Exposure norms (including restrictions on exposure to
investments in land, building and unquoted shares), ALM discipline and
reporting requirements; In contrast, until 2006 NBFCs-ND were subject
to minimal regulation. Since April 1, 2007, non-deposit taking NBFCs
with assets of `1 billion and above are being classified as Systemically
Important Non-Deposit taking NBFCs (NBFCs-ND-SI), and prudential
regulations, such as capital adequacy requirements and exposure norms
along with reporting requirements, have been made applicable to them.
The asset liability management (ALM) reporting and disclosure norms
have also been made applicable to them at different points of time.
Depending upon their nature of activities, non- banking finance
companies can be classified into the following categories, these are also
known as Notified Entities:

1. Development finance institutions

2. Leasing companies
3. Investment companies
4. Modaraba companies
5. House finance companies
6. Venture capital companies
7. Discount & guarantee houses
8. Corporate development companies

In the United States

In 1996, the NBFI sector accounted for approximately $200 billion in
transactions in the United States.[13]


OVERVIEW

The non­banking financial institutions (NBFIs) in Pakistan, play a vital role in 
broadening access to financial services and support the expansion of the 
financial base; complementary to the banking system. In a two­part series, BR 
Research presents an overview of the NBFI sector; its evolution and current 
state in the country. Today's Brief Recordings are the first of this two­part 
series; and focuses on the leasing segment among NBFIs.

The NBFIs enhance the efficiency of investments and savings and also help to 
broaden the base of the financial markets. A strong NBFI sector not only offers 
a diversified range of asset classes to investors; but also provides alternative 
fund raising opportunities to the participants of the financial system and assists 
growth of capital and debt markets.

The financial sector in Pakistan is comprised of commercial banks, 
development finance institutions (DFIs); microfinance banks (MFBs), non­
banking finance companies (NBFCs), leasing companies, investment banks, 
discount houses, housing finance companies, venture capital companies, mutual 
funds, and modarabas. Under the prevailing legislative structure the supervisory
responsibilities in case of banks, DFIs, and MFBs fall within the legal ambit of 
the State Bank of Pakistan (SBP) while the rest of the financial institutions are 
monitored by Securities and Exchange Commission of Pakistan (SECP).

The banks are the dominant segment within the financial sector, in Pakistan. 
This dependence on the banks makes leads to vulnerabilities due to a lack of 
diversification and also restricts the scope of product innovation. It is imperative
to strengthen the financial sector through the promotion of institutions other 
than banks. This will strengthen the risk management capacities and provide 
different asset classes to cater specific needs of prospective customers through 
diversification, product innovation and market penetration.

Leasing: an introduction

 Leasing is considered the quickest means to obtain equipment finance; without 
lengthy and time­consuming procedures. It allows conservation of working 
capital that can be utilized for other productive business purposes. It is a Shariah
compliant mode for financing given certain changes in processes and rental 
payment which may be charged as a tax deductible expenses to the borrower's 
balance sheet.

Leasing activities in country started as an organized sector in the mid­eighties 
with the establishment of the first leasing company in 1984. The National 
Development Leasing Corporation Limited (NDLC) was established as a joint 
venture between Asian Development Bank (ADB), International Finance 
Corporation (IFC), National Development Finance Corporation (NDFC) and 
local sponsors. It was established under the supervision of SBP and enjoyed the 
status of a DFI.

Since then the sector has witnessed constant growth. The enviable growth of the
sector can be judged from the fact that at one time, the number of leasing 
companies in the country rose to 41. Leasing; while an alternate source of 
financing for medium­ and long­term; is different from conventional lending. 
As such, it requires specialized knowledge and skills. It is not a simple straight 
forward lending activity.

Core business areas

 The core business of most of the leasing companies in the country is 
machineries, equipment and vehicle leasing while other products have been 
added to expand the overall business. Today, the products being offered by 
leasing companies include:

­­ Corporate Lease

­­ Consumer Auto Lease

­­ Operating Lease for various equipment.

­­ Commercial Vehicle Lease.

­­ Leasing to SME sector.

The leasing sector has remained an essential component of the financial 
industry and plays a vital role for promotion and development of the industrial 
sector through capital assets financing. Over the years, the sector has registered 
progressive growth; both in number of firms and business volumes, until it was 
hit by the liquidity crisis of 2008­09. Despite of that crisis, some of the leasing 
companies have improved their performance in terms of profits and generation 
of business volumes, as compared to losses posted in the preceding years. The 
year ended June 30, 2014; showed that the total assets of the leasing sector 
exceeded Rs 36.5 billion and total equity stood at Rs 6.5 billion; while the 
sector booked a profit of Rs 585 million.

The core activity of leasing company is financing of assets for different sectors. 
The categories of assets are industrial machinery, equipment, agriculture 
farming machineries, commercial and private vehicles, etc. According to 
regulations, 70% of the business should be in the core business ie leasing 
financing in long­ and medium­term. Leasing companies also place funds in 
other investment conduits such as the equity market and government bonds.

Market composition

 Currently there are ten leasing companies operating in the country. The total 
assets of the leasing sector as of June 30, 2014 are Rs 36.57 billion. Total assets 
of ORIX Leasing Pakistan Limited alone stood at Rs 24.45 billion which 
represents about 66% of the assets under management of this sector.

Similarly, total equity of the leasing sector was reported at Rs 6.51 billion; of 
which ORIX Leasing Pakistan Limited's share is roughly 47%. Sindh Leasing 
constitutes 15.7% of this tally while 14.7% is attributable to Standard Chartered 
Leasing.

As such, the sector is driven by a few, major companies who have larger assets 
size. The large assets share is with Orix Leasing due to its wide branch network 
strong market penetration at country level. If we review the performance of the 
major companies such as Orix; it is apparent that the individual performance is 
outstanding. All the key indicators of such companies are very progressive and 
satisfactory. However, few leasing companies continue to struggle due to 
liquidity crunch and shortage of capital.

The number of leasing companies has dropped from more than 33 to 13, by the 
end of 2014. In the late 1990s; the commercial banking sector entered into 
leasing business activities. Since the banks have access to relatively low­cost 
funds; particularly from current and savings account deposits; they were able to 
capture a large portion of the lease financing market. The leasing companies; 
with their small equity base, could not compete with commercial banks and 
their performance was gradually diluted.

At that time, the Leasing Association of Pakistan (LAP) raised concerns on 
behalf of leasing companies. They argued that the banks had been allowed to 
encroach on their business and suggested that the activities of the commercial 
banks should be restricted. It was suggested that the banks should be mandated 
to enter this market, through subsidiaries; not directly. However, this suggestion
did not garner approval from the central bank and other key stakeholders and 
commercial banks remain entrenched in this business segment. Other prominent
factors that have led to shrinkage in the leasing sector include:

­­ Non­availability of long­term funds at low costs

­­ Withdrawal of credit lines by the banks after the financial crisis of 2008

­­ Inability of some companies to meet minimum equity requirement

­­ High non­performing loans in the sector's cumulative portfolio
­­ Slowdown in economic activities and investment opportunities

Each of these reasons has impacted leasing companies in the country; directly or
indirectly. Consequently, the sector's profitability, return to shareholders and 
growth; have been stunted. This has not only diluted the confidence of 
investors; but also discouraged new entrants from the market.

However, after the gap of several years, a new entity has entered the sector, last 
year. The Sindh Leasing Company Limited, has emerged with paid­up capital of
Rs 1 billion. The company declared net profit within its first year of operations.

Revenue drivers The major contributions to the sector's revenues are from 
lease financing activities. The rest of the revenues are attributable to income 
from rental activities of equipment leasing; mainly generator sets. As per 
published accounts of leasing companies for the period ended June 30, 2014; 
gross revenue was Rs 5.3 billion. Out of this tally, Rs 3.82 billion was 
contributed by ORIX Leasing Pakistan Limited which corresponds to 72%. 
Similarly, the profitability of the sector stood at Rs 584 million; out of which 
ORIX's share was 88%.

Normally, both borrowing and financing are linked with floating interest rates 
which are reviewed on quarterly/semi­annual basis. However, few companies 
offer Certificate of Investment (COIs) on long­term basis. These long­term 
deposits are hedged through long­term assets, booked on fixed­rate basis.

The declining rate scenario can affect profitability to some extent for such 
companies that are less leveraged and have booked their financing assets 
through equity. Within the last six months, the discount rate has been slashed by
almost 300 bps. On the other hand, falling interest rates also bring opportunities 
for credit off­take. According to current statistics, financing in banking sector is 
gradually picking up due to reduction of finance cost.
There are also chances of potential growth of consumer financing particularly in
car financing. However, the sustainability of low interest rates is uncertain and 
any upswing in rates will deteriorate repayment capacity of borrowers and 
ultimately lead to higher non­performing loans.

Sustained low interest rates can be a great incentive for the economic uplift of 
the country through financing of micro and SME sectors. There is a great need 
for the encouragement of "asset based financing" through the leasing sector.

Key challenge

 One of the major and oft­repeated complaints of NBFIs is that their ability to 
mobilize funds is constrained due to lack of investment opportunities beyond 
debt and equity markets. This challenge is particularly compounded for Shariah 
compliant companies.

The leasing companies also experience tough competition from commercial 
banks because of the latter's access to cheaper funds and larger risk­carrying 
ability given their relative size advantage over leasing companies. This is one 
reason for the consolidation in leasing industry and the disappearance of smaller
players from that industry.

Minimum equity requirements have been raised gradually over the years and 
this has been a peeve for some participants in the sector. However, the regulator
is reportedly in the midst of changing these requirements to facilitate the sector.

Leasing companies have lodged an appeal in court against the levy of Federal 
Excise Duty (FED). The introduction of a new tax levy on leasing sector ie 
Alternate Corporate Tax; has also diluted their profitability. Insurance 
companies and banks were exempted from this tax in the previous budget 
however it is applied on leasing companies.

Key opportunities

 In recent years, leasing has re­emerged as a significant financial industry, 
globally. In Pakistan, the sector has risen in earlier periods. Back in the 1990s, 
the number of participants in the industry had increased considerably. Now, 
with interest rates at historical lows and global commodity prices weak; there is 
a window of opportunity for NBFI including leasing companies, to resurrect 
their markets.

The sector can take advantage of certain niches such as the financing needs of 
small and medium enterprises which constitute the vast majority of businesses 
in the country. Appetite of the consumer segment is also on the rise. As such, 
vehicle leasing stands to benefit from rising incidence of vehicle ownership.

 Regulatory environment  

The SECP has finalized draft regulations for the sector and relevant notification 
is expected soon. According to new regulations, NBFCs have been segregated 
between deposit­taking and non­deposit taking entities. Minimum capital 
requirement for non­deposit taking entity is expected to be reduced drastically 
in order to encourage such companies. Leasing sector representatives believe 
this move will create impetus for the industry's growth.

The NBFI and Modaraba Association of Pakistan, is a representative forum of 
leasing and modaraba companies in the country. It functions as a platform 
interaction between industry participants; undertakes research, participates in 
national and international conferences and provides training to the human 
resource of member companies. This association also engages with SECP, on 
behalf of its member companies.
The non­banking financial

The non­banking financial institutions (NBFIs) in Pakistan, play a vital role in 
broadening access to financial services and support the expansion of the 
financial base; complementary to the banking system. In a two­part series, BR 
Research presents an overview of the NBFI sector; its evolution and current 
state in the country. Today's Brief Recordings are the first of this two­part 
series; and focuses on the leasing segment among NBFIs.

The NBFIs enhance the efficiency of investments and savings and also help to 
broaden the base of the financial markets. A strong NBFI sector not only offers 
a diversified range of asset classes to investors; but also provides alternative 
fund raising opportunities to the participants of the financial system and assists 
growth of capital and debt markets.

The financial sector in Pakistan is comprised of commercial banks, 
development finance institutions (DFIs); microfinance banks (MFBs), non­
banking finance companies (NBFCs), leasing companies, investment banks, 
discount houses, housing finance companies, venture capital companies, mutual 
funds, and modarabas. Under the prevailing legislative structure the supervisory
responsibilities in case of banks, DFIs, and MFBs fall within the legal ambit of 
the State Bank of Pakistan (SBP) while the rest of the financial institutions are 
monitored by Securities and Exchange Commission of Pakistan (SECP).

The banks are the dominant segment within the financial sector, in Pakistan. 
This dependence on the banks makes leads to vulnerabilities due to a lack of 
diversification and also restricts the scope of product innovation. It is imperative
to strengthen the financial sector through the promotion of institutions other 
than banks. This will strengthen the risk management capacities and provide 
different asset classes to cater specific needs of prospective customers through 
diversification, product innovation and market penetration.

Leasing: an introduction Leasing is considered the quickest means to obtain 
equipment finance; without lengthy and time­consuming procedures. It allows 
conservation of working capital that can be utilized for other productive 
business purposes. It is a Shariah compliant mode for financing given certain 
changes in processes and rental payment which may be charged as a tax 
deductible expenses to the borrower's balance sheet.

Leasing activities in country started as an organized sector in the mid­eighties 
with the establishment of the first leasing company in 1984. The National 
Development Leasing Corporation Limited (NDLC) was established as a joint 
venture between Asian Development Bank (ADB), International Finance 
Corporation (IFC), National Development Finance Corporation (NDFC) and 
local sponsors. It was established under the supervision of SBP and enjoyed the 
status of a DFI.

Since then the sector has witnessed constant growth. The enviable growth of the
sector can be judged from the fact that at one time, the number of leasing 
companies in the country rose to 41. Leasing; while an alternate source of 
financing for medium­ and long­term; is different from conventional lending. 
As such, it requires specialized knowledge and skills. It is not a simple straight 
forward lending activity.

Core business areas The core business of most of the leasing companies in the 
country is machineries, equipment and vehicle leasing while other products 
have been added to expand the overall business. Today, the products being 
offered by leasing companies include:

­­ Corporate Lease
­­ Consumer Auto Lease

­­ Operating Lease for various equipment.

­­ Commercial Vehicle Lease.

­­ Leasing to SME sector.

The leasing sector has remained an essential component of the financial 
industry and plays a vital role for promotion and development of the industrial 
sector through capital assets financing. Over the years, the sector has registered 
progressive growth; both in number of firms and business volumes, until it was 
hit by the liquidity crisis of 2008­09. Despite of that crisis, some of the leasing 
companies have improved their performance in terms of profits and generation 
of business volumes, as compared to losses posted in the preceding years. The 
year ended June 30, 2014; showed that the total assets of the leasing sector 
exceeded Rs 36.5 billion and total equity stood at Rs 6.5 billion; while the 
sector booked a profit of Rs 585 million.

The core activity of leasing company is financing of assets for different sectors. 
The categories of assets are industrial machinery, equipment, agriculture 
farming machineries, commercial and private vehicles, etc. According to 
regulations, 70% of the business should be in the core business ie leasing 
financing in long­ and medium­term. Leasing companies also place funds in 
other investment conduits such as the equity market and government bonds.

Market composition Currently there are ten leasing companies operating in the
country. The total assets of the leasing sector as of June 30, 2014 are Rs 36.57 
billion. Total assets of ORIX Leasing Pakistan Limited alone stood at Rs 24.45 
billion which represents about 66% of the assets under management of this 
sector.

Similarly, total equity of the leasing sector was reported at Rs 6.51 billion; of 
which ORIX Leasing Pakistan Limited's share is roughly 47%. Sindh Leasing 
constitutes 15.7% of this tally while 14.7% is attributable to Standard Chartered 
Leasing.

As such, the sector is driven by a few, major companies who have larger assets 
size. The large assets share is with Orix Leasing due to its wide branch network 
strong market penetration at country level. If we review the performance of the 
major companies such as Orix; it is apparent that the individual performance is 
outstanding. All the key indicators of such companies are very progressive and 
satisfactory. However, few leasing companies continue to struggle due to 
liquidity crunch and shortage of capital.

The number of leasing companies has dropped from more than 33 to 13, by the 
end of 2014. In the late 1990s; the commercial banking sector entered into 
leasing business activities. Since the banks have access to relatively low­cost 
funds; particularly from current and savings account deposits; they were able to 
capture a large portion of the lease financing market. The leasing companies; 
with their small equity base, could not compete with commercial banks and 
their performance was gradually diluted.

At that time, the Leasing Association of Pakistan (LAP) raised concerns on 
behalf of leasing companies. They argued that the banks had been allowed to 
encroach on their business and suggested that the activities of the commercial 
banks should be restricted. It was suggested that the banks should be mandated 
to enter this market, through subsidiaries; not directly. However, this suggestion
did not garner approval from the central bank and other key stakeholders and 
commercial banks remain entrenched in this business segment. Other prominent
factors that have led to shrinkage in the leasing sector include:
­­ Non­availability of long­term funds at low costs

­­ Withdrawal of credit lines by the banks after the financial crisis of 2008

­­ Inability of some companies to meet minimum equity requirement

­­ High non­performing loans in the sector's cumulative portfolio

­­ Slowdown in economic activities and investment opportunities

Each of these reasons has impacted leasing companies in the country; directly or
indirectly. Consequently, the sector's profitability, return to shareholders and 
growth; have been stunted. This has not only diluted the confidence of 
investors; but also discouraged new entrants from the market.

However, after the gap of several years, a new entity has entered the sector, last 
year. The Sindh Leasing Company Limited, has emerged with paid­up capital of
Rs 1 billion. The company declared net profit within its first year of operations.

 Revenue drivers  

The major contributions to the sector's revenues are from lease financing 
activities. The rest of the revenues are attributable to income from rental 
activities of equipment leasing; mainly generator sets. As per published 
accounts of leasing companies for the period ended June 30, 2014; gross 
revenue was Rs 5.3 billion. Out of this tally, Rs 3.82 billion was contributed by 
ORIX Leasing Pakistan Limited which corresponds to 72%. Similarly, the 
profitability of the sector stood at Rs 584 million; out of which ORIX's share 
was 88%.

Normally, both borrowing and financing are linked with floating interest rates 
which are reviewed on quarterly/semi­annual basis. However, few companies 
offer Certificate of Investment (COIs) on long­term basis. These long­term 
deposits are hedged through long­term assets, booked on fixed­rate basis.

The declining rate scenario can affect profitability to some extent for such 
companies that are less leveraged and have booked their financing assets 
through equity. Within the last six months, the discount rate has been slashed by
almost 300 bps. On the other hand, falling interest rates also bring opportunities 
for credit off­take. According to current statistics, financing in banking sector is 
gradually picking up due to reduction of finance cost.

There are also chances of potential growth of consumer financing particularly in
car financing. However, the sustainability of low interest rates is uncertain and 
any upswing in rates will deteriorate repayment capacity of borrowers and 
ultimately lead to higher non­performing loans.

Sustained low interest rates can be a great incentive for the economic uplift of 
the country through financing of micro and SME sectors. There is a great need 
for the encouragement of "asset based financing" through the leasing sector.

 Key challenges  

One of the major and oft­repeated complaints of NBFIs is that their ability to 
mobilize funds is constrained due to lack of investment opportunities beyond 
debt and equity markets. This challenge is particularly compounded for Shariah 
compliant companies.

The leasing companies also experience tough competition from commercial 
banks because of the latter's access to cheaper funds and larger risk­carrying 
ability given their relative size advantage over leasing companies. This is one 
reason for the consolidation in leasing industry and the disappearance of smaller
players from that industry.

Minimum equity requirements have been raised gradually over the years and 
this has been a peeve for some participants in the sector. However, the regulator
is reportedly in the midst of changing these requirements to facilitate the sector.

Leasing companies have lodged an appeal in court against the levy of Federal 
Excise Duty (FED). The introduction of a new tax levy on leasing sector ie 
Alternate Corporate Tax; has also diluted their profitability. Insurance 
companies and banks were exempted from this tax in the previous budget 
however it is applied on leasing companies.

Key opportunities In recent years, leasing has re­emerged as a significant 
financial industry, globally. In Pakistan, the sector has risen in earlier periods. 
Back in the 1990s, the number of participants in the industry had increased 
considerably. Now, with interest rates at historical lows and global commodity 
prices weak; there is a window of opportunity for NBFI including leasing 
companies, to resurrect their markets.

The sector can take advantage of certain niches such as the financing needs of 
small and medium enterprises which constitute the vast majority of businesses 
in the country. Appetite of the consumer segment is also on the rise. As such, 
vehicle leasing stands to benefit from rising incidence of vehicle ownership.

 Regulatory environment  

The SECP has finalized draft regulations for the sector and relevant notification 
is expected soon. According to new regulations, NBFCs have been segregated 
between deposit­taking and non­deposit taking entities. Minimum capital 
requirement for non­deposit taking entity is expected to be reduced drastically 
in order to encourage such companies. Leasing sector representatives believe 
this move will create impetus for the industry's growth.

The NBFI and Modaraba Association of Pakistan, is a representative forum of 
leasing and modaraba companies in the country. It functions as a platform 
interaction between industry participants; undertakes research, participates in 
national and international conferences and provides training to the human 
resource of member companies. This association also engages with SECP, on 
behalf of its member companies.
• Explore the different types of permitted services and exclusions • Identify the
requirements for being granted a license by the Central Bank of Cyprus •
Provide an overview of how Deloitte can support its clients Definition Financial
Leasing is an alternative way of financing whereby a licensed leasing company
(the “Lessor’) purchases an asset on behalf of its customer (the “Lessee”) in
return for a contractually agreed series of payments which usually include an
element of interest. The lessor maintains ownership of the asset while the
lessee enjoys the use of the asset for the duration of the lease agreement,
usually accompanied by an option to buy the asset at the end of the contract.
The lessee bears all costs and risks associated with the use of the leased asset.
Applications of the Law Under the current rules, leasing services, in Cyprus,
may be provided to the public by any of the following: • Leasing companies
registered in the Republic of Cyprus and licensed by the Central Bank of Cyprus
for the provision of such services • Credit institutions registered in the Republic
of Cyprus and licensed by the Central Bank of Cyprus for the provision of
leasing services • Credit institutions registered in other EU/EEA member states
and licensed by their respective regulatory authority for the provision of
leasing services. These services can only be provided in Cyprus through a
branch or on a cross-border basis • Financial leasing companies which are
subsidiaries of credit institutions registered in an EU/EEA member state and
provide leasing services in Cyprus through a branch or on a cross-border basis
Financial leasing companies registered and operating in Cyprus may set up and
operate branches and provide leasing services in other EU/EEA members states
provided they meet the relevant regulatory requirements and obtain the
consent of the Central Bank of Cyprus The provision of leasing services without
the necessary license is punishable by a fine of up to €200,000 and/or
imprisonment of up to four years. The regulatory authority in Cyprus is the
Central Bank of Cyprus. Exclusions According to section 3(2) of the Law, the

following are exempt from the provisions of the Financial Leasing Law •

Financial leasing services

Financial leasing services not addressed to the public and include among
others the provision of leasing services from legal entities exclusively to their
holding or subsidiary companies, or to other subsidiaries of their own holding
company • Individuals or legal entities whose primary business activity is the
sale of movable property and which provide leasing services for the sale of
movable property up to the amount of €5,000 per asset, exclusively to the
extent required for the exercise of their main business activities • In cases
where the lease has a duration of less than three months Banking and Financial
Services | Finance Leasing 04 Permitted services The following lease types may
be provided: • Simple financial leasing A lease arrangement under which the
lessee chooses the asset leased and the lessor buys and leases it to the lessee
for an agreed series of payments • Hire-purchase A type of lease which gives
the lessee (hirer) the option to purchase the asset. Ownership of the asset is
transferred immediately after the last payment is made • Leveraged
(Participatory) leasing A lease that is partially financed by the lessor through a
third-party financial institution. The lending institution holds the title of the
asset and the loan is serviced through the lease payments. The lessor collects
the payments from the lessee. • Leaseback (Reverse leasing) A lease
arrangement under which the lessee transfers the full ownership of the asset
to the lessor and at the same time the lessor leases it back to the lessee • Joint
(Syndicated) leasing
A lease agreement between one lessee and multiple lessors, usually in cases
where the cost of the asset is too high for a single lessor. This type of lease
shares the same characteristics of a syndicated loan • Leasing with a sub-lease
A lease agreement which between the original lessee and a new lessee. The
new lessee enjoys the use of the asset for the duration of the sublease while
the original lessee maintains the obligation to make the agreed payments and
the right to buy the asset at the end of the contract In cases where the asset
falls in the category of immovable property, the lease duration must be at least
ten years irrespective of any provisions to extend. In addition to the above, the
following services may also be provided by a financial leasing company: •
Operating leasing services • Negotiation and purchase of movable or
immovable property for the purpose of leasing or leaseback • Maintenance
and safekeeping services for leased assets and assets available for leasing •
Assignment of construction, maintenance and improvement works for
buildings or premises, for leasing purposes • Any other services specified by
the Central Bank of Cyprus Key elements of leasing license The Financial
Leasing Law, and subsequent Central Bank Directive, set out the minimum
requirements for the consideration of an application for the provision of
leasing services. • A report indicating the persons who hold or plan to hold a
qualifying holding in the share capital of the leasing company or its twenty
largest shareholders. A questionnaire for each shareholder should be
appended to the report. • For each of the members of the management team
and senior management, a duly completed and signed questionnaire • A
detailed business plan, including a baseline and extreme scenario, which
includes the budget for the first three financial years • The applicant company
must demonstrate thatit will have adequate resources (financial and technical)
to employ appropriate systems and procedures to ensure its sound operation.
In addition, the company must show that it has an adequately skilled and
trained employee base and a capable management team • Calculation of the
cost of investment (including methodology) • Source of funds • A description
of the accounting system, the Information Technology system and the
management information system to be employed • A complaint handling
procedure • A description of the systems that will be implemented for the
collection of statistical and supervisory data Banking and Financial Services |
Finance Leasing 05 • The internal control mechanisms for ensuring compliance
with the requirements of the Prevention and Suppression of Money Laundering
Activities Law of 2007 to 2016. The above must be accompanied by a
confirmation from an independent audit firm that the company has: • The
minimum initial capital required - Issued and paid share capital and retained
earnings of the company is at least €200,000 • Any amount of additional
capital required on the basis of the submitted business plan (as per the bands
of minimum level of total capital in the following section) • In the event that a
shareholder does not wish to pay the necessary capital before the approval of
the application, a confirmation letter must be submitted to the Central Bank
from a credit institution, confirming that the relevant amount has been
deposited and will remain blocked throughout the course of the application
and evaluation process and that the company will be able to have the funds
upon approval. Monitoring and supervision Registration of leases The following
leased asset types must be disclosed in the appropriate Government registers:
• Aircrafts

– Cyprus Aircraft Register of the Department of Civil Aviation • Motor vehicles

– Central Register of the Road Transport Department • Immovable property –
Register of the Department of Land and Surveys Ongoing obligations A financial
leasing company must continue to comply with the following: • Maintenance
of minimum capital in line with the value of their assets as below: Total level of
assets Minimum level of total capital Up to €5m €200,000 Over €5m and up to
€25m €1,000,000 Over €25m and up to €50m €2,000,000 Over €50m
€5,000,000 • Submission of Balance sheet and Profit and loss within six months
of the end of each financial year In addition to the above, the following need to
be adhered to: • Any additional share capital should be issued in agreement
with the Central Bank of Cyprus • A reduction of share capital is not allowed,
unless an approval certificate of the Central Bank of Cyprus is obtained • In
case the paid share capital falls below the minimum threshold of €200,000,
then the Central Bank will not renew the institutions license The license can be
revoked by the Central Bank of Cyprus in case of violations. Termination of a
lease A financial lease is terminated when: • The contract concludes and the
lessee does not exercise his/her right to extend the lease or purchase the asset
• The lessee exercises his/her right to purchase the leased asset • The payment
obligations are not met by the lessee (subject to the clauses of the contract and
adherence to local law) • Any of the clauses stipulated in the lease agreement
are violated by either party Banking and Financial Services | Finance Leasing 06
Tax Considerations Direct Tax The basic premise for assessing the Direct Tax
implications of entering into Finance Leasing transactions is that the standard
rules apply. Depending on the type of asset subject to Finance Leasing, special
rules may apply. Examples include immovable property whereby: • Lease
payments payable in respect of a financial lease, with the right of purchase of
the property by the lessee, do not constitute rent and are therefore not subject
to special contribution for defence • Simple financial leasing and reverse
financial leasing are generally exempt from capital gains tax Advice therefore
needs to be sought before entering into such trading activities. Our Direct Tax
experts can help you structure your affairs and advice you on how best to
address any tax implications. Indirect Tax The activities of all finance leasing
companies registered under the above mentioned legislation, are subject to
VAT. As with Direct Taxation, advice should be sought in each case depending
on the type of assets subject to Finance Leasing. Our VAT Specialists should be
able to advise you on the VAT implications of such activities. How Deloitte can
help you Our experienced team of leasing experts can support your
organisation through: Regulatory compliance • Assisting you in all stages of
setting up of your of your financial leasing entity • Preparation and submission
of your application for authorisation by the Central Bank of Cyprus (incl.
Business Plan preparation and estimation of Cost of Investment) • Liaising with
the relevant authorities to ensure license evaluation and granting •
Governance – designing and implementing a Directives compliant framework
for your organisation in order to obtain the necessary licensing • Policies and
procedures – designing of a functional operating model and supporting
processes and procedures (including AML and Complaints’ handling process) •
Evaluation of Board members and Senior Management • Provision of
independent assurance services to confirm the requirements of the Central
Bank of Cyprus in regards to: • Minimum initial capital requirements • Any
additional capital requirements as defined in Article 6 (2) of the Leasing Law of
2016 • Presence of necessary blocked funds and initial capital for the purposes
of the evaluation of the application Legal contracts’ review • Our Deloitte Legal
team can review or even draft your contracts including, among others, lease
terms, renewal options and payment terms Accounting and Financial Reporting
• Review and determine whether the new Finance Leasing law and legal
contract clauses may create accounting classification constraints under the
relevant IFRS Standards: IAS 37 and the new IFRS 16 (for which a separate
publication has been prepared by Deloitte and its published on our website). •
Advice on accounting implications of new Finance Leasing law on your
company’s Financial Statements and covenants IT Systems and Data • Advisory
services on accounting and operating systems’ required for the acquisition of
licensing for the provision of Leasing services • Assisting with installation and
maintenance of software Tax • Tax structuring – advising you in your tax
planning and compliance both for Direct and Indirect tax matters Training •
Role specific training • Finance or non-finance staff • Business or accounting
oriented Banking and Financial Services | Finance Leasing 07 Contacts If you
require any further information on any of the issues mentioned in this material
and on how Deloitte can help you address the challenges ahead, please do not
hesitate to contact Alexis Agathocleous Financial Services Leader
alagathocleous@deloitte.com Direct line: +357 25 868710 Pieris Markou Tax
and Legal Services Leader pmarkou@deloitte.com Direct line: +357 22 360607
Christos Papamarkides Indirect Tax Services Leader
cpapamarkides@deloitte.com Direct line: +357 22 360420 Clea Evagorou
Director | Risk Advisory clevagorou@deloitte.com Direct line: +357 22 360600
Panicos G. Papamichael Risk Advisory Partner ppapamichael@deloitte.com
Direct line: +357 22 360805 Kypros Ioannides Partner, Deloitte Legal
kioannides@deloitte.com Direct line: +357 22 818280 Deloitte refers to one or
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of DTTL and its member firms. Deloitte Limited is the Cyprus member firm of
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providing audit, tax, consulting and financial advisory services through over
600 people in Nicosia, Limassol and Larnaca. For more information, please visit
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