Growth of Lease Financing in Bangladesh

+
Faculty of Business Studies
Term Paper Report On
“Growth of Lease Financing in Bangladesh”
Submitted to,
Ms.Fatema Afreen
Lecturer
Department Of Finance
Faculty of Business Administration
Premier University
Submitted By,
Md Ariful Islam Saimon Chy
ID-1022114412
Finance-A
22st Batch
Session: April2010
Premier University
Date of Submission:
Premier University
Chittagong City Corporation

Letter of Transmittal
Ms.Fatema Afreen
Supervisor of the term paper
Faculty of Business studies
Premier University Chittagong
Subject: Submission of Term Paper Report.
Dear Madam,
I am very glad to submit a Term Paper Report titled as “Growth of Lease Financing in
Bangladesh” The qualitative report is submitted as a partial fulfillment as a part of BBA
course. the preparation of the report has give me insightful experience and in-depth
knowledge about the role of Capital market in Bangladesh
I have tried my best to gain practical experience in Capital Market in Chittagong stock
exchange and also tried to reflect the same in report with my limited scope and knowledge. I
have gathered about realistic awareness throughout this report preparation. I hope that I have
been able to fulfill our academic necessities.
I wish your hearty consideration, if there is any deviation in my report and also thank you for
your friendly cooperation.
Yours sincerely
__________
ID-1022114412
Finance-A
22st Batch
Session: April2010
Premier University

Acknowledgement
It really was a great challenge for us to prepare the term paper. First of all, we present our due
regards to the Almighty, who has provided us the brilliant opportunity to build and complete
this Term paper report successfully with good health & sound mind. Our course
instructor, Ms.Fatema Afreen
Lecturer, Department of Finance, Premier University helped us all the way through. He
also gave proper guideline about this term paper and also by not getting irritated with
our unlimited questions. We really want to express our gratitude to him for giving valuable
advice and time, which helped immensely in preparing this term paper.

Letter of Transmittal
Supervisor of the term paper
Faculty of Business studies
Premier University Chittagong
Subject: Submission of Term Paper Report.
Dear Madam,
I am very glad to submit a Term Paper Report titled as “Growth of Lease Financing in
Bangladesh” The qualitative report is submitted as a partial fulfilment as a part of BBA
course. The preparation of the report has give me insightful experience and in-depth
knowledge about Lease financing Bangladesh
I have tried my best to gain practical experience in Lease Financing and also tried to reflect
the same in report with my limited scope and knowledge. I have gathered about realistic
awareness throughout this report preparation. I hope that I have been able to fulfill our
academic necessities.
I wish your hearty consideration, if there is any deviation in my report and also thank you
for your friendly cooperation.
Yours sincerely

Executive Summary:
The emergence of the leasing companies, since inception successfully created public
awareness about lease financing and definitely made significant progress with the
objective of assisting the development of productive enterprises. In this study, I tried to
highlight operational and financial aspects and overall status of leasing Company in
Bangladesh, and to have an insight about the role of leasing company in Bangladesh.
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.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.
Lease financing, as organized in Bangladesh, operates with the following objectives: to
assist the development and promotion of productive enterprises by providing equipment
lease financing and related services; to assist in balancing, modernization, replacement
and expansion of existing enterprises; to extend financial support to small and medium
scale enterprises; to provide finance for various agriculture equipment; and to activate
the capital market by operating as managers to the issue, underwriters, or portfolio
managers.
This report is emphasizes on lease financing in Bangladesh. In this regard IDLC Finance
Limited has been taken as the sample organization, its, services, rules and regulation,
corporate governance is also taken into consideration.

Acknowledgement
First of all I would like to Thank Almighty Allah who give me the strength and the
patient to work on this paper
Then I would like to thank my honourable term paper supervisor from () for
providing me such an opportunity to prepare the term paper on “The Growth of
Lease financing in Bangladesh ". Without helpful guidance, the completion of
this project was unthinkable.
Then I would like to place my gratitude to the respective officials to give there
valuable time and help me by giving the needed information for my paper. Then I
must be thankful to my classmate and friends who always support me and help
me to complete this paper

CHAPTER ONE:INTODUCTORY ASPECT
INTRODUCTION:
Leasing business is gaining increased importance in the economy of Bangladesh with its
gradual transformation from an agrarian to industrial one. The government periodically
revises the trade and industrial policy to create a liberal business environment both for
domestic and foreign investment. Increased investment in the energy sector as well as in
power, transport, telecommunications, water and sanitation, and safe disposal of wastes
is expected to bring further opportunities for leasing industries.
Lease financing was first introduced in Bangladesh in the early 1980s. Industrial
Development Leasing Company of Bangladesh Ltd. (idlc), the first leasing company of the
country, was established in 1986 under the regulatory framework of Bangladesh Bank. It
was a joint venture of the Industrial Promotion and Development Company of
Bangladesh Ltd. (ipdc), International Finance Corporation, and Korea Development
Leasing Corporation. Another leasing firm, the united leasing 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.
Commercial banks and development finance institutions (DFIs) have been the traditional
lending institutions in Bangladesh. In fact, the concept of lease financing is a relatively
new one in the country. Initially, leasing companies had to adopt the role of educators to
make Bangladeshi entrepreneurs aware of the benefits of leasing. However, as DFIs
demonstrated poor recovery and fund recycling performances, leasing got the
opportunity to develop as an alternative source of funding. A few other factors also
contributed to development of the leasing business in the country. For example, the
commercial banks have been keener in providing trade financing and Foreign Exchange
dealings rather than long-term loans because of the risks involved and their longer
gestation period. The selection of lease proposals is relatively free from extraneous
pressure and is subject to a quality level appraisal. Under lease agreements in the private
sector, projects are sanctioned and implemented expeditiously, resulting in benefits in
time and cost savings. Private leasing companies also attract clients by providing
relatively better services. The down payments in leasing are not high and the gestation
period is low. Also, in case of lease financing, incidental costs incurred in the process of

import clearing, installation, and commercial production are capitalized, which
substantially reduce the initial investment.
Leasing companies, however, face some problems in conducting their business in the
country. The relatively slow growth of the demand side compared to the fast growth of
the lease business is one such problem. This leads many leasing companies to operate in
partial capacity. The culture of loan default that prevails in the country is also a
deterrent. Leasing companies often find it difficult to raise funds through short- or long-
term borrowing from money and capital markets. They are hard pressed to deal with the
financial assets because of the present laws of the country, which are also not fully
enforceable.
Objective of the Study
Main Objective: Primary objective of this study is to analysis of the growth of lease
financing in Bangladesh.
Supporting objectives:
1. To find the organization involved in lease financing in Bangladesh;
2. To know the function of lease financing.
3. To analyse the Performance of organization providing lease Financing ;
4. To find problems of lease financing in Bangladesh;
5. To find Some recommendation for improving the lease financing in Bangladesh;

Methodology
The methodology of the study including sample selection, data collection is being detailed in
below,
 Primary Source: Primary sources of information are-
o Practical desk work.
o Face to face conversation with the officers.
o Direct observations.
o Face to Face conversation with the employees
 Secondary Sources: In order to make the Report more meaningful and presentable,
mainly secondary source of data and information have been used widely. Secondary sources
are-
o Annual report of Biman Bangladesh
o Different Articles .
o Books
o Official Websites etc
Limitations of the study
There are some limitations in our study. We faced some problems during the study which is
mentioned below
i) Lack of time: The time period of this study is very short. We had only 4 weeks in my hand
to complete this report, which was not enough. So we could not go in depth of the study.
Sometimes the officials were busy and were busy and were not able to give me much time.
ii) Insufficient data: Some desired information could not be collected due to confidentially of
business.
iii) Lack of monitory support: Few officers sometime felt disturbed, as they were busy in
their job. Sometime they didn’t want to supervise me out of their official work.
iv) Others limitation: As we are newcomer, there is a lack of previous experience in this
concern. And many practical matters have been written from my own observation that may
vary from person to person.

Literature Review
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 of time, 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).
1. The lease must have the following basic characteristics viz.:
2. A contract of commercial nature between the lessor (owner) and the lessee (the user);
3. The contract should provide for periodical payment of rentals for using the asset for a
fixed term by the lessee;
4. 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 together will provide the definition of lease (Verma, 1995, p.
31).

Lease financing was originated in the advanced culture of Middle East with the offering
uncultivated land to the Summation people, as stated earlier, in the southern part of what is
now called Iraq, about 5000 years ago and the concept of lease financing was developed.
For the first time, an agreement was signed giving lease a status through the bank leasing in
370 BC in Athens. Greece was also a pioneer in the development of mine lease. All mines in
the state of Attic belong to the state and were leased through a single authority.
Lease financing enables leasing or renting the services of an asset rather than buying it. It is
a contract whereby the owner of an asset (the lessor) grants to another party (the lessee)
the exclusive right to use the asset, usually for an agreed period of time, in return for the
payment of rent.
The term lease finance is used in the sense of leasing business assets such as computers,
manufacturing plants, ships, aircraft, cars, trucks; etc. This enables a business firm to use the
services of an asset without buying it. Lease finance also covers the immovable I property
like buildings, factory sheds, office space, land, etc.

CHAPTER TWO: Theoretical Aspect
Concept and Definition of Lease and Lease Financing
Lease is a contract between the owner and the user of assets for a certain time period
during which the second party uses an asset in exchange of making periodic rental
payments to the first party without purchasing it. Under lease financing, the lessee
regularly pays the fixed lease rent over a period of time at the beginning or at the end of
a month, 3 months, 6 months or a year. At the end of the lease contract the asset
reverts to the real owner.
However, in case of long-term lease contracts, the lessee is generally given the option to
buy the leased asset or renew the lease contract. The three major types of leases are the
operating lease, financial/capital lease and the direct financing lease. The operating
lease is a short-term lease contract where the lessor bears all operating and repairing
costs of the asset and the lessee pays periodic rental payments to the lessor, and where
the lease is cancellable, and there is no bargain purchase option. Financial/capital lease
is a long-term lease contract where the lessee bears all operating, repairing and
maintenance costs, and makes periodic rental payments to the lessor. The lease is not
cancellable and the lessee has the option for bargain purchase or renewal of lease
contract at the end of the original lease period. In a direct financing lease, the lessor
leases the asset by manufacturing or by purchasing from the manufacturer to the lessee
directly and the lessee makes regular rental payments to the lessor. The lessor holds the
ownership of the asset until the end of the lease period and the lessee holds the
possession of the asset. In addition to these major types, there are some other types of
lease such as sale and lease and leveraged lease.
A “financial lease” is defined as a transaction in which the lessor purchases leased
property selected by the lessee; the lessee has the right to possession and use of the
leased property in exchange for payment of rent; and upon expiration of the lease, the
lessee may renew the lease, exercise an option to buy the leased property or return it to
the lessor. Or
“An agreement where the leaser receives lease payments to cover its ownership cost.
The lessee is responsible for maintenance, insurance, and taxes. Some finance leases
are conditional sales or hire purchase agreements”.

Researchers have examined the features of leasing from economic, legal, fiscal and
accounting angles. While no universally accepted definition can be said to have evolved,
various bodies have formulated their own definition of the word. The European Leasing
Association, the association of leasing companies in Europe, defines leasing as:
“A contract between a lessor and a lessee, for the hire of a specific asset, selected from
a manufacturer or vendor of such asset by the lessee. The lessee has possession and
use of the asset on payment of specified rentals over a period.”
Legally, others define a leasing company as one, having the business of hiring plants or
equipment or of financing their hire. The International Finance Corporation promotes
leasing as a method of financing industrial development in the developing countries as a
part of its Capital Market development strategies.
Under lease financing, the lessee regularly pays the fixed lease rent over a period of time
at the beginning or at the end of a month, 3 months, 6 months or a year. At the end of
the lease contract the asset reverts to the real owner. However, in case of long-term
lease contracts, the lessee is generally given the option to buy the leased asset or renew
the lease contract.
Where as Leasing, one of the financing techniques, allows a company to use some of its
operating fixed assets (i.e. buildings, plant and other fixed assets) under a rental system.
In certain cases, the company may purchase the asset at the end of the contract for a
pre-determined and usually very low amount. A leasing transaction is called a lease.
In accordance with the Law, financial leasing is a form of investment activity, in which a
lessor is obligated to transfer a leased asset acquired from a supplier, held in ownership
by the lessor, and agreed upon with the lessee, to a lessee for an agreed upon fee and
terms for temporary use and possession for commercial purposes for a period of no less
than three years. The transfer of the lease asset in the lease agreement must meet at
least one of these following conditions:
 The transfer of the leased asset to the lessee’s ownership and/or the lessee’s right to
acquire the leased asset at a fixed price are stipulated by the lease agreement;
 The term of the lease agreement shall exceed 75% of the useful life of the leased asset;
 The current (discounted) amount of the lease payments over the length of the lease
agreement shall exceed 90% of the price of the transferred leased asset.

Background of Leasing in Bangladesh:
Lease financing was first introduced in Bangladesh in the early 1980s. Industrial Development
Leasing Company of Bangladesh Ltd. (idlc), the first leasing company of the country, was established
in 1986 under the regulatory framework of BANGLADESH BANK. It was a joint venture of the
Industrial Promotion and Development Company of Bangladesh Ltd. (ipdc), International Finance
Corporation, and Korea Development Leasing Corporation. Another leasing firm, the UNITED
LEASING COMPANY Ltd. started its operations in 1989. The number of leasing companies grew
quickly after 1994 and by the year 2000, rose to 16. The leasing business became competitive with
the increase in the number of companies and wider distribution of their market share. There are,
however, 6 other companies conducting leasing business in the country, although they do not use
the word leasing in their names. In terms of money value, the leasing business in Bangladesh
increased from Tk 41.44 million in 1988 to Tk 3.16 billion in 2000.
Lease financing, as organised in Bangladesh, operates with the following objectives: (a) to assist the
development and promotion of productive enterprises by providing equipment lease financing and
related services; (b) to assist in balancing, modernisation, replacement and expansion of existing
enterprises; (c) to extend financial support to small and medium scale enterprises; (d) to provide
finance for various agriculture equipment; and (e) to activate the capital market by operating as
managers to the issue, underwriters, or portfolio managers.
The functions of a lease business include lease financing, short-term financing, house building
financing, and merchant banking and corporate financing. In this last group of functions, the leasing
business in Bangladesh moved away from regular leasing activities and is now involved in stock-
market related activities such as issue management, underwriting, trust management, private
placement, portfolio management, and mutual fund operation. Broad capital market operations of
the lease financing institutions include bridge financing, corporate counseling, mergers and
acquisition, capital restructuring, financial engineering, and lease syndication. Prominent among
Leasing companies, however, face some problems in conducting their business in the country. The
relatively slow growth of the demand side compared to the fast growth of the lease business is one
such problem. This leads many leasing companies to operate in partial capacity. The culture of loan
default that prevails in the country is also a deterrent. Leasing companies often find it difficult to
raise funds through short- or long-term borrowing from money and capital markets. They are hard
pressed to deal with the financial assets because of the present laws of the country, which are also
not fully enforceable.

Leasing business is gaining increased importance in the economy of Bangladesh with its gradual
transformation from an agrarian to industrial one. The government periodically revises the trade and
industrial policy to create a liberal business environment both for domestic and foreign investment.
Increased investment in the energy sector as well as in power, transport, telecommunications, water
and sanitation, and safe disposal of wastes is expected to bring further opportunities for leasing
industries.
Term Uses in Leasing
Lessor
The lessor’s business license must have a scope of business that includes financial leasing
operations.
Lessee
The “lessee” is defined as any natural person or enterprise/company that enters into a financial
leasing contract with the lessor to obtain funds to finance the acquisition of the leased property,
and to obtain the right of possession and usage by paying the rent on the agreed terms.
Leased Property
The “leased property” is defined as any real property and movable durable property (including
the accessory technologies), other than natural resources. Examples include (i) equipment,
machinery and instruments; and (ii) vehicle, vessels, aircraft and space shuttles. The Outline
does not distinguish between commercial and consumer leases, although other consumer
protection laws are also under consideration. These laws could affect financial leases with
consumers.
Registration of Leased Property
Leased property (other than real property, aircraft, vessels and motor vehicles) must be
registered at the State Administration of Industry and Commerce, the government authority in
charge of registration of mortgage or security interests of movable assets, or with any industry
association authorized thereby. Such registration is needed to protect the parties’ interests
against bona fide purchasers or creditors.
Nature of the Rights to Leased Property

The financially leased property is excluded from the bankruptcy estate of the lessee. If the
lessee fails or delays in making a rental payment, the lessor may terminate the contract and
repossess the leased property.
Term
In general, the financial lease term should be shorter than the permissible period for
depreciation for the leased property, but in no event less than 20% of the depreciation period.
Rent
The financial lease rent shall be determined by the cost of the leased property, plus the
reasonable profit of the lessor, unless otherwise agreed by the parties.
Acceleration and Repossession
If the cumulative past-due rent is more than one-fifth of the rent under the financial lease or the
number of defaults in making the rental payments exceeds one-fifth of the total number of the
rental payments, the lessor may demand immediate payment of all the rental payments or
terminate the financial lease repossess the leased property and recover damages including
expenses. However, the total amount of the compensation cannot exceed one-fifth of the total
rent under the financial lease .The lessee may not prevent the lessor from exercising its right of
repossession or resist the lessor in this regard.
Risk Assumption
When the lessee possesses the leased property, unless otherwise agreed upon by the parties,
any damages, losses and risks to the leased property shall be the sole responsibility of the
lessee.
What are the Types of Leases and How Do They Work?
The three main types of leasing are:
( I) The Financial Lease
Financial/capital lease is a long-term lease contract where the lessee bears all operating,
repairing and maintenance costs, and makes periodic rental payments to the lessor. The
lease is not cancelable and the lessee has the option for bargain purchase or renewal of
lease contract at the end of the original lease period. In a direct financing lease, the
lessor leases the asset by manufacturing or by purchasing from the manufacturer to the
lessee directly and the lessee makes regular rental payments to the lessor. The lessor

holds the ownership of the asset until the end of the lease period and the lessee holds
the possession of the asset.
 A long-term lease over the expected life of the equipment, usually three years or
more, after which you pay a nominal rent or can sell or scrap the equipment – the
leasing company will not want it anymore.
 The leasing company recovers the full cost of the equipment, plus charges, over the
period of the lease.
 Although you don’t own the equipment, you are responsible for maintaining and
insuring it.
 You must show the leased asset on your balance sheet as a capital item, or an item
that has been bought by the company.
(ii) The Operating Lease
The operating lease is a short-term lease contract where the lessor bears all operating
and repairing costs of the asset and the lessee pays periodic rental payments to the
lessor, and where the lease is cancelable, and there is no bargain purchase option.
Under an operating lease, the risk and rewards incident to ownership of an asset remain
with the lessor. Also the value of the asset is not fully amortized in the lessor’s book
during lease period.
 A good idea if you don’t need the equipment for its whole working life.
 The leasing company will take the asset back at the end of the lease.
 The leasing company is responsible for maintenance and insurance.
 You don’t have to show the asset on your balance sheet.
(iii) Contract hire
This offers you an opportunity to have the use of a piece of equipment, often tied in
with a maintenance contract, for the duration of the agreement. Ownership remains
with the finance company and you will pay a set fee over a period to use that
equipment. The contract will outline a residual value at which the finance company will
take back the equipment at the end of the contract.
 Often used for company vehicles.
 The leasing company takes some responsibility for management and maintenance,
such as car repairs and servicing.
Essentially, there are two types of leases – finance lease and operating lease.
The other types of lease are:

(iv) Sale and Lease Back
A sale and lease back transaction involves the sale of an asset by the vendor and the
leasing of the same asset back to the vendor. The rentals and the sale price are usually
interdependent as they are negotiated as a package and need not represent fair values.
(v) Full and Partial Payoff Lease
A lease, which seeks to recover the investment in lease along with interest and profit
from a single lessee. This is also equivalent to the finance lease. It is quite possible for
the lessors to sign non-cancelable leases for part of the useful life of the asset, to
recover part of the investment. The recovery of the remaining investment through
subsequent leases or through the sale of the asset at the end of the first contract. Such
leases are called partial payoff leases.
(vi) Domestic and International Leases
A lease is called a domestic lease if all the major participants in the arrangement, the
lessor the lessee and the equipment supplier have one nationality. Hence, the funds
deployed in acquiring the asset are usually from local sources.
An international lease transaction takes place when one of the parties to the lease is
situated in a different country.
Activities of Leasing in Bangladesh
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.
Who or what is a leasing company?

Leasing in Bangladesh is a “financial business” and cannot be carried on except in terms
of a license granted by Bangladesh Bank.
Sec. 4 of the Financial Institutions Act prohibits any person or institution from carrying
any “financial business” in Bangladesh except in accordance with a license granted by
the Bank.
Sec. 2 (1) defines “financial business” as the business carried on by a financial institution.
“Financial institution” as defined in sec. 2 (2) includes a leasing company.
“Leasing company” is defined in sec. 2 (17) of the Act as a company, which carries on as
its business or part of its business hiring of plant or equipment, or the financing of such
hiring business.
A first look at the definition suggests that even if a company, otherwise engaged in a
manufacturing or non-financial activity, carries on a leasing activity as a part of its
business, such company would be treated as a “financial institution” under the Act. This,
however, could not be intent of the lawmaker as demonstrated later. The use of the
words “part of its business” in sec. 2 (17), not found in definitions of other varieties of
financial institutions in the Act, seems to be a surpluses and cannot lead to a technical
extension whereby even a single lease transaction by a non-leasing company would
bring such company under the fold of the Act.
The central definition in the Act is the definition of “financial institution” in sec. 2 (2). It
is defined as “such non-banking financial institution, which is engaged in…..”.
Apparently, what sec. 2 (2) enumerates are categories of financial activities such as
lending or giving of advances, merchant banking, venture capital, leasing, Investment
Company, etc. The definition is not divested of the element of principality of such
business in order to characterize a company as a financial institution. For example,
giving of loans or advances is a financial business. But that cannot be taken to mean that
a manufacturing company, which in case of a short-term surplus in its business, grants a
loan to someone, will be treated as a “financial institution”. In other words, the principal
business of an entity should be one of the several financial businesses listed in sec. 2 (2).
This would mean that the ban under sec. 4 of the Act on carrying any “financial
business” should be understood as a ban on carrying such business as a principal

business. Such an understanding is very important, since there are ample opportunities
to extend leasing activities to non-leasing or unlicensed entities as follows:
In many markets, leasing has flourished because of its tax appeal: leasing has been
organized for high-net worth individuals to shelter against their taxes. That is, a high net
worth individual may do one lease transaction, not as his principal business, and shelter
his taxes. In many cases, an individual may participate in a lease syndicate organized by
a leasing company.
Restricting leasing to only leasing companies would eliminate any possibility of leasing
activities being carried, on a one-off basis, by manufacturing or non-financial companies.
This is a common practice in many countries. A non-leasing company, say a hotel, would
carry one lease transaction and shelter against its taxes.
As leasing markets develop, leasing by vendors or manufacturers would become
common. That is, the manufacturer of capital goods will be prepared to provide his own
product on lease, instead of selling it directly. Obviously, such manufacturer cannot be
treated as a “financial institution.”
Securitisation of lease receivables is a very important development in leasing markets. In
strict sense, securitisation means participation in leasing transaction by the participants
in the securitised portfolio. A literal ban on “financing of a leasing transaction” would
inherently imply a ban on participation in a securitised portfolio as well.

Functions Of Leasing Companies:
The functions of a lease business include lease financing, short-term financing, house
building financing, and merchant banking and corporate financing. In this last group of
functions, the leasing business in Bangladesh moved away from regular leasing activities
and is now involved in stock-market related activities such as issue management,
underwriting, trust management, private placement, portfolio management, and mutual
fund operation. Broad capital market operations of the lease financing institutions
include bridge financing, corporate counseling, mergers and acquisition, capital
restructuring, financial engineering, and lease syndication. Prominent among the sectors
of the economy that now receive lease financing services are textiles, apparels and
accessories, transport, construction and engineering, paper and printing,
pharmaceuticals, food and beverage, chemicals, agro-based industries,
telecommunications, and leather and leather products.
1. Lease Financing,
2. Short-term Financing,
3. House building financing,
4. Merchant Banking
5. Corporate Financing.
6. Issue Management
7. Underwriting
8. Trust Management.
9. Private Placement
10. Portfolio Management.
11. Mutual Fund Operation.
12.Bridge Financing,
13. Corporate Counseling
14. Mergers and Acquisition,
15. Capital Restructuring,
16. Financial Engineering,
17. Lease Syndication.
Advantages of lease financing

Lease financing is one of the better known business strategy followed by most of the groups
we can easily found the plans which are ideal to go with. Lease finance is more useful for
the small and big company for the daily routine transaction. Lease finance we have to give
back after some period, and on that lease finance business have to pay interest. So we can
used lease finance and get more and more benefit. Also we get some other advantages and
they are,
 It offers fixed rate financing; lessee has pay at the same rate monthly.
 Leasing is inflation friendly. As the costs go up over five years, lessee still pay the
same rate as when he began the lease, therefore making his dollar stretch farther.
(In addition, the lease is not connected to the success of the business. Therefore, no
matter how well the business does, the lease rate never changes.)
 There is less upfront cash outlay; lessee does not need to make large cash payments
for the purchase of needed equipment.
 Leasing better utilizes equipment; lessee leases and pays for equipment only for the
time he needs it. There is typically an option to buy equipment at end of lease term.
 Lessee can keep upgrading; as new equipment becomes available he can upgrade to
the latest models each time your lease ends.
 Typically, it is easier to obtain lease financing than loans from commercial lenders.
 Small upfront deposit and the option of a balloon payment.
 Finance lease payments can be offset against tax. It offers potential tax benefits
depending on how the lease is structured
 User can decide when to cancel contract but will incur early termination charges.
CHAPTER THREE: PRACTICAL ASPECT
Leasing Company Scenario in Bangladesh

For last few years, the leasing industry experienced average growth rate of around 30
percent, although the market penetration remains very low range of 3-4 percent of medium
term financing. With the new leasing companies and active participation of commercial
banks in the leasing business, the overall competition level has increased substantially
during the year. Withdrawal of initial depreciation allowance on asset in 1998 continues to
adversely affect the profitability of leasing companies. However, among visible non-
functioning of development financial institutions (DFIs), ailing capital market and lack of
interest of commercial banks in term financing, the leasing industry remains only vibrant
financial intermediaries for the medium term financing with less than 5.0 percent non-
performing loans.
During the year, the weak of constant demand and persuasion by the NBFIs for their
increased cost of fund for huge amount of non operational fund tied up in the form of FDRs
to meet the Statutory Liquidity Requirement (SLR), the Central Bank has reduced the SLR
rate from 10 percent of total liabilities to 5 percent, a welcome supportive move for the
industry as a whole.
Leasing Company In Bangladesh
The leasing companies now operating in the country are:
 Government-owned (1)
1. Infrastructure Development Company Limited (IDCOL)
 Completely local and privately owned (11)
2. Phoenix Leasing Company Limited (PLC)
3. Prime Finance and Investment Limited (PFIL)
4. Bay Leasing and Investment Limited (BLIL)
5. National Housing Finance and Investment Limited (NHL)
6. Peoples Leasing and Financial Services Limited (PLFSL)
7. Union Capital Limited (UCL)
8. First Lease International Limited (FLIL)
9. Midas Financing Limited (MIDAS)
10. Bangladesh Finance and Investment Limited (BFIL)

11. Industrial and Infrastructure Development Finance Company Limited
(IIDFCL)
12. Islamic Finance and Investment Limited (IFIL)
 Established Under Joint venture (13)
o Bangladesh Government and Foreign Government (2)
13. The UAE- Investment Company Limited (UAEBIC)
14. Saudi Bangladesh Industrial and Agricultural Investment Company
Limited (SABINCO)
o Bangladesh Government/company and foreign Government/company
(11)
15. Uttara Finance and Investment Limited (UFIL)
16. United Leasing Company Limited (ULCL)
17. Industrial Promotion and Development Company of Bangladesh
Limited (IPDC)
18. Industrial Development Leasing Company of Bangladesh Limited
(IDLC)
19. Vanik Limited (VANIK)
20. International leasing and Financial Services Limited (ILFS)
21. GSP Finance Company (Bangladesh) Limited (GSP-FCL)
22. Bangladesh Industrial Finance Company Limited (BIFCL)
23. BahrainBangladesh Finance and Investment Company Limited
(BBFIL)
24. Delta Brac Housing Finance Corporation Limited(DBH)
25. Fidality Assets (FA)
Analysis of data
Growth of Leasing Business in Bangladesh

Leasing sector in Bangladesh achieved an excellent growth rate of its business over the
years. Following tables shows this fact. There are 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 the 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: ecnne 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 fact that entry of more leasing companies 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.
Following table 1 shows the growth in leasing companies and their amount of investment in
lease financing
Year No of leasing
companies
Amount
(In Million)
Index Growth Rate
(%)

1996 1 733 100 -
1997 1 1261 172 72.03
1998 1 1637 223 29.65
1999 3 320326 276 23.76
2000 3 31357 431 56.16
2001 3 4244 579 34.33
2002 3 4825 658 13.64
2003 4 5887 803 22.00
2004 4 7718 1053 31.13
2005 6 12530 1709 62.29
2006 11 20223 2759 61.43
2007 14 25174 3434 24.46
2008 16 24508 3343 2.65
2009 16 31887 4350 30.12
2010 17 41737 5694 30.89
2011 17 51800 7066 24.06
2012 22 58000 8059 28.01
Table 1: The growth in leasing companies and their amount of investment
Leasing has been growing in popularity since 2000 as an alternative form of financing. The
following Table-2 & figure-1 shows the growth of leasing contracts over the years.
Year Contract(Tk. Million) Growth (%)
2000 365 -
2001 415 13.7

2002 525 26.4
2003 741 41.2
2004 1254 69.20
2005 2083 66.25
2006 2617 25.6
2007 3331 27.3
2008 4187 25.7
2009 5005 19.5
2010 6500 23
2011 7500 15
2012 11291 50
Table 2: Growth of Contract
Figure1: Growth in Leasing contract
Following Table 3 & Figure 2 shows the leasing execution in Bangladesh for 13 years
Year Contract
Execution(Tk.
Million)
Growth (%)
2000 248 -
2001 397 59.8
2002 472 19.1
0
2000
4000
6000
8000
10000
12000
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
Amount (Tk. In
million)

2003 599 26.8
2004 1027 71.6
2005 1756 70.9
2006 2389 36
2007 2794 17
2008 3669 31.3
2009 4950 34.9
2010 6180 24.8
2011 8000 29.8
2012 9750 21.8
Table3: Growth of Contract Execution
Figure 2: Growth in Leasing Execution
Market Share of Leasing Companies of Bangladesh
The countries leasing industry grew in the year 2009 at an estimated growth rate of >4.2%
over the previous year mainly due to expansion of the market following the aggressive
operation of the new leasing companies. With the arrival of more leasing companies as well
as banks offering similar service, the market is becoming much more competitive and the
former concentration of market share is being spread over the companies. The tight
availability of operation funds in the backdrop of increasing cost of found in the market as
well as increasing competition in making it difficult for the companies to operate smoothly.
0
2000
4000
6000
8000
10000
12000
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
Amount (Tk. In
million)

The overall market share of existing leasing companies of Bangladesh in 2009and 2010 are
shown separately in pie charts in Figure-3. A comparative study of lease market share of
existing leasing companies (participating in lease financing) is also shown in Table -4 as
follows.
SL No. Name Of
Leasing
Company
Lease Market Share (%) Composite
Position In
the Lease
Market Share
2011 2012 Composite Z
1 IDLC 29 23.4 26.2 1st
2 ULC 22 19.9 20.95 2nd
3 PLC 10 9.1 9.55 3rd
4 IPDC 9 5.1 7.05 6th
5 GSPFCL 8 6.1 7.05 4th
6 IFLSL 6 7.1 6.55 5th
7 OTHERS 16 29.3 22.65
Total 100 100 100
Table 4. Market Share of Leasing Companies of Bangladesh in 2011 and 2012

From the above table it is clear that the lease market share of leasing companies, presently
participating in lease financing, the highest market share was captured by IDLC (29.00% in
2011 and 23.40 in 2012).
IDLC's market share in 2012 was 23.4%, which is greater than ULC by 3.5%. Accordingly, in
2012 ULC, PLC, ILFSL, GSPFCL, IPDC captured the 2nd, 3rd, 4th, 5th, and 6th position in lease
market share whereas, in 2011 ULC, PLC, IPDC, GSPFCL, ILFSL got that positions respectively.
However, a composite lease market share of leasing companies is developed by calculating
the simple average of 2012 and 2011 Lease market share of the respective market players
(leasing companies) to see their overall lease market position in the leasing industry. This
composite lease market share of a company is relatively stable than its market share of a
particular year. In the composite lease market share, as shown in the Table- 4 above, IDLC
stood 1st. And the 2nd, 3rd, 4th and the position are captured by ULC, PLC, and ILFSL and so
on.
Motivational Factor for growth of Leasing
The motivational factor behind the growth and development of leasing finance concept in
developing countries with respect to particular lessor and lessee interests, which are
summarized below:
· Increased competitiveness for financial institutions;
· Increased competitiveness for suppliers and manufacturers;
· Profit of the "independent" leasing companies;
· Attraction of lower ultimate cost or increased financial flexibility for lessee;
· Tax laws benefits;
· Better planning for development of leasing industry
35%
27%
12%
9%
9%
8%
Composit
IDLC ULC PLC IPDC GSPFCL LFSL

CHAPTER FOUR: CONCLUSIONARY ASPECT
Problems of Leasing
Leasing has great 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: 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.
2. Lack of Qualified Personnel: 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.
5. Delayed Payment and Bad Debts: 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.

Recommendation
From above discussions and basic understandings while working in the organization
following recommendation can be formulated for the organizations.
 By adopting the principles of good governance at all decision making levels,
organizations must show that corporate governance is a management enhancement
tool. This is one of the factors that can give confidence to business partners and
facilitates co operation with parties in international financial centres, which already
adopts such principles.
 Organizations should maintain their products and services quality by ensuring
comfortable environment to invest in the share market.
 Organizations should more clearly define respective responsibilities of staffs,
managers, board of directors and shareholders in the attainment of goals and
establish a procedure of sanction attached to these responsibilities.
 They need to give the authority to the branch manager to provide the cheque and
issue the cheque. That means decentralization of authority.
 They should improve more on management control systems comply religiously with
corporate governance principles and the international financial standards especially
aspects that impact on assessment & management of risks, transparency &
capability.
 To secure their financial stability Company should frequently research the share and
money market.
 In order to increase the profitability & reduce the risk, organizations should maintain
a well-balanced portfolio. The more diversified the portfolio, the lesser the risk of
losses
 To secure their financial stability both the Company should frequently research the
share and money market.
 Ensuring comfortable environment for foreign portfolio investments because it’s
very significant for the capital market. If foreign investor can invest easily it will be a
great opportunity for Bangladesh.
 They should use the upgraded software for the internal activities. So that error rate
becomes lower.

 In case of signing the trade confirmation they can use the online confirmation.
Customer will confirm the buy-sell through the email. If they do not complain within
7 days. Then it will decide as a confirmed way.
 Organizations should improve their recruitment and selection process and arrange
some special training programme to develop the skills of their employees.
 Government should relaxed their policy so that organization can develope their
organization
Conclusion
Leasing industry is a prosperous sector in Bangladesh. The leasing companies on the average
are doing pretty well since inception in this country. Leasing has gained its popularity for
several reasons. The first and most important of all is that leasing can be thought of as an
alternative source of fund which is most of the cases cheaper, and for the companies which
don’t have a high credit rating or a visible positive past track record, this may be the main
source of financing. Another thing is, lease is an alternative to investment. If you need a
particular asset for running or expanding your business, you may choose to lease it rather
than purchase it. And you can cancel the lease options in the face of changing
macroeconomic factors, such as obsolescence, new technologies, changing business needs
or market conditions etc. Lease is nowadays treated by the developed markets as a provider
of 100% financing and they have a notion that lease displaces debt. Leasing actually reduces
the leverage needs of a firm. We can understand that the leasing market is still very small in
Bangladesh and the actual potential market is highly untapped. Since people are not well
aware of different types of lease products, they look for other alternative before leasing.
But now it’s time for us to break away from tradition and utilize leasing in our businesses
fully so that we can realize its benefits. We believe that leasing sector in Bangladesh will
grow, as people become more knowledgeable and more willing to look for alternative
sources of financing.

References
1. Altman, Edward Handbook of Corporate Finance, John Wily and Sons, New York,
1986 pp11-41.
2. Choudhury, A. Quadir, “Leasing in Bangladesh- An Overview”, The Bangladesh
Observer, 1999, December 03, Dhaka.
3. Anderson, Paul, F. and Martin J. D. “Lease vs. Purchase Decision: A Survey of Current
Practices”, Financial Management, Vol.6, Spring, pp.1979, 41-47.
4. Choudhury, T. A. “An evaluation of the performance of commercial banks in
Bangladesh”, Ph.D. thesis. 1990.
5. Clark, T. M. Leasing, McGraw Hill, London, 1976.
6. Cooper, R. A. and A. J. Weeks, Data Models and Statistical Analysis, Haritage Publish,
New Delhi, India, 1983, P-400.
7. Fabozzi, Frank J. Equipment Leasing –A Comprehensive Guide for Executives, Dow
Jones – Irwin Inc., USA, 1981, P-248.
8. International Journal of Economics, Finance and Management Sciences 2014; 2(1):
33-42
9. Calculated from the records of Bangladesh Bank as well as annual reports of leasing
companies.
10. Annual Report (2000-2012), Industrial Development Leasing Company of Bangladesh
Ltd.
11. Annual Report (2000-2012) Bay Leasing & Investment Ltd.
12. Annual Report (2000-2012) International Leasing & Financial Services Ltd.
13. Annual Report (2000-2012) United Leasing Company Ltd.,
14. Annual Report (2000-2012) Peoples. Leasing &Financial Services Ltd.
15. http://www.idlc.com/
16. http://www.idlc.com/capital_market.html
17. http://www.idlc.com/idlc_securities_ltd.html
18. Bangladesh Leasing and Finance Companies Association (BLFCA) Year Book (Various
Issues)

Growth of Lease Financing in Bangladesh

Recommended

Recommended

More Related Content

Similar to Growth of Lease Financing in Bangladesh

Similar to Growth of Lease Financing in Bangladesh (20)

More from Ariful Saimon

More from Ariful Saimon (20)

Recently uploaded

Recently uploaded (20)

Growth of Lease Financing in Bangladesh