At present one of the most popular modes of financing in the corporate sector of Pakistan is the instrument of leasing. Consequent upon the announcement made by the Federal Finance Minister in his budget speech on the 14th June, 1984, that interest would be completely eliminated from fresh domestic banking operations in the country from 1st July 1985 the State Bank of Pakistan issued a number of operational directives to the banks and DFI's on various aspects of financing under non-interest modes. According to these instructions, modes allowed for industrial financing included "Equity Participation, FTC's Modaraba Certificates, Leasing, Hire, Purchase or mark-up."

Leasing is not a new concept. In law the word leasing is historically associated with land. Property can be either free-hold property or leasehold property. Free-hold property becomes the owned property of the holder, while lease-hold property is available Jfor use by the lessee for a fixed duration only, the ownership remaining with the government or some other agency or individual. The concept of leasing or lending of goods for the benefit of other people goes back to at least five thousand years. In the old Sumerian cities of Southern Mesopotamia, all the land was owned by the rulers and leased out to villagers for farming.

Nowadays governments usually lease their lands to the public upto 99 years, the extensive use of leasing in business and industry first started in the United States of America, from the end of 1940s. These techniques were then borrowed by the financial institutions of UK, who introduced leasing as an alternative to hire-purchase and loan facilities. According to the Equipment Leasing Association of UK, "having over the past few years been the fastest growing forms of medium term industrial finance in the U.K., leasing now accounts for some 30 percent of externally funded investment; more than 12 percent of the total investment in plant and machinery".

In recent years leasing has become very popular in the developed as well as developing countries. In Japan leasing started in the early sixties. The business of leasing is increasing at an average annual rate of 23 percent, but of the new leasing items, office machines including computers share 46 percent and industrial machinery accounted for share of 24 per cent of the total. There are, at present, 200 companies which are members of the Japan Leasing Association. Leasing in Hong Kong, is at an initial stage. In Taiwan leasing started in the later part of the seventies. There are seven major leasing companies, and more are coming up. Leasing in Indonesia has tremendous growth. The Indonesian tax climate is favourable to leasing, as it helps to lower the tax bracket due to tax rebates. In Indonesia big ticket leasing is also done. The leasing is not only a favourable medium of financing in developed countries, it also suits for the developing countries.

Among the new financing techniques, the one that is being increasingly used by DFI's is "Leasing." It is in a way a substitute for long term finance. The underlying principle in leasing, is that the financier (Lessor) retains ownership of the equipment being financed while the right of use is vested with the borrower (Lessee). Leasing may be done on operating lease basis or on financial lease basis. In an operating lease, the lessor purchases the equipment and leases it out to the user, at a rate which does not enable the lessor (financier) to recover the full cost and interest within the lease period. To recover the full cost, the asset has to be leased further either to the same lessee or to a different lessee(or lessees). Common examples of equipment given on operating leiase, now-a-days are computers, office equipment and construction equipment. A financial lease may be regarded as an alternate means of financing acquisition of assets. The financing DFI is the legal owner of the asset and has recourse to it, if the lessee fails to pay his rentals but all the risks and rewards incidental to ownership of the assets are transferred to the lessee in a financial lease. The lessee can select the equipment and DPI acts as leasing company, taking responsibility for the technical suitability of the equipment. The maintenance and repairs of the equipment are undertaken by the lessee. The main advantage of the technique of leasing, besides its being in consonance with the tenets of Islam, is that while loaning of plant and equipment is usually limited to around 70 percent (or so) of cost of equipment, lease financing covers the cost upto hundred per cent. The period of the lease can be mutually agreed upon between the lessor and the lessee. The rental payment by the lessee can be fixed on a uniform basis or graduated with lower rentals in the initial period of operations. Lease financing is also more convenient. To obtain lease finance, the entrepreneur has simply to select the plant and equipment to be acquired arrange for the purchase of plant and equipment selected by the lesse. The lessee can be required to start payment of the agreed rentals after the plant goes into opertaion. The DFI's can always structure the leases so as to meet the individual needs of the lessees. The lessees can be allowed to arrange insurance cover with the prior approval of the lessor. DFIs can arrange with the lessee that payment for the machinery and equipment would be made by the DFIs by issuing L/Cs, on behalf of the lessee.

TYPES OF LEASES

There are five well known forms of leasing. They include (i) Finance Lease;(ii) Operating lease; (iii) Sales-aid lease;(iv) Contract-hire; and (v) Rental, Hiring, Plant Hire.

FINANCE LEASE: is based on a contract between the lessor and the lessee for hire of a specific asset selected from a manufacturer or vendor of such assets by the lessee. The lessor retains the ownership of the asset and the lessee has possession and use of asset on payment of specified rentals over a period. Though the lessor is the legal owner, the lessee is given the exclusive rights to the use of the assets for the duration of the contract. The rentals during the fixed "primary" period are sufficient to amortise the capital outlay of the leasing company and provide an element of profit. The primary period is closely related to the estimated useful life of the asset and the lessee is normally responsible for all operating costs, such as maintenance and insurance. The lessee has also the option for a "secondary" period of lease, in which the rentals are reduced to a nominal amount. The period of lease, usually ranges from 5 to 15 years, depending on the useful life of the assets.

OPERATING LEASE: is more akin to short-term hire purchase arrangement and is also referred to as "non-ful pay-out" lease, as rentals are insufficient to enable the lessor to recover fully the initial capital outlay. The residual value is recovered, through disposal or releasing the equipment to other users. Operating leasing has mainly been confined to specific kinds of equipment, such as computers, motor cars, photo copiers and similar items.

SALES-AID LEASE: In sales-aid leasing, usually, the manufacturer offers a package deal with lease facilities to lessor. There is a direct link between the manufacturer and the lessor. It is helpful to those manfuacturers, who want to expand the sale of their product. Sales-aid leasing may be used in finance leases as well as in operating leases.

CONTRACT-HIRE: Contract-hire is a form of lease. It is used mostly in the West for fleets of motor vehicles, which may be used by a lessee. In such leases the lessor contracts to provide not the use of specific vehicles, but the use of an agreed number of the specified type of vehicles for a period generally shorter than the life of each of the vehicle. In such a lease the lessor usually provides the repair, maintenance, servicing and the replacement of vehicles and in some cases, payment of road tax as well. However, in certain cases the maintenance, road tax etc, are borne by the lessee.

RENTING, HIRING, PLANT-HIRE: These leases are used for smaller plants or machinery or other such items. These are usually pre-purchased by the lessor, and are then let out on a short term basis to different users. The items included in this category are usually consumer goods and highly specialised machinss required for infrequent use. Television freezers, excavators, cranes and tractors, are usually leased on this basis. Leasing is versatile in its nature because of the flexibility of financing. The selection of any particular form, depends on the individual circumstances of the lessee. Usually the equipment is selected by the user, who then approaches a financial institution for negotiating a lease.

OPERATION OF LEASING COMPANIES

The banks in Pakistan, may provide medium and long term finance either directly or through their leasing subsidiaries to firms under leasing arrangements. This method would be less risky and ensure to the bank a reasonable profit margin, without having to look into the accounts of the firms. However, as against the practice currently in vogue, the cost of insurance of the assets will have to be borne by the lessor, in order to make this method conform to the principles of Sharia.

The National Envelopment Leasing Corporation, which started operations in January, 1985, continued to expand its activities during 1986-87. It concentrated its operations, on leasing of plant and machinery for balancing, modernisation and replacement of existing units. Leasing of locally fabricated machinery remained a priority area, with the Corporation. Its approvals as well as actual execution of leases showed marked expansion in 1986-87. The Corporation approved leases amounting to Rs. 408.6 million in 1986-87, compared with Rs 288.3 million in the preceding year. Its disbursements rose from Rs. 167.1 million in 1985-86 to Rs. 217.7 million during the year 1986-87.

Leasing adds a new dimension to modern management. It is the basic concept of leasing, that profits are earned through use — not ownership of equipment which is; vested in the leasing company (lessor) and in return for rental payments the lessee has virtually unrestricted use of the equipment. Leasing is a medium to long-term rental of assets. It effectively increases a company's total availability of capital and leaves other sources of funds available for more profitable use.

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* The author is asaociated with the Research department of IDBP.