Leasing In Pakistan

DefinitionLeasing is a transfer of a right to

enjoy such property for a certain time , express or limited, in consideration of a price paid or promised, or of money, share of crops, services of any thing value, to be rendered periodically or on specified occasion to the transfer, by the transfer who accept the transfer on such terms.

History National Development Leasing Corporation Limited

was established in 1985.

During 1985-1991 periods, only six companies were established whereas during 1992-97, as many as, 27 leasing companies entered the market.

Initially leasing companies could start business with a capital of Rs 50 million. This limit was raised to Rs 100 million in 1992 and further enhanced to Rs 200 million.

At present 32 leasing and 8 Modaraba companies are members of Leasing Association of Pakistan.

Main types of LeaseFinance LeaseOperating LeaseSale and Lease BackLeveraged LeaseCapital Lease (N/A in Pakistan)

Finance Lease

Under finance lease all risks and rewards of ownership of asset are transferred to lessee. The ownership or title may or may not be transferred. A finance lease is somewhat like a hire purchase agreement. Under finance lease the lessee after paying agreed number of installments, is entitled to exercise an option to become the owner of asset.

Operating Lease

The operating lease is one which is not a finance lease. Under operating lease, the lessor gives the right to lessee to use the asset or property for a specified period of time, but risks and rewards of ownership are retained by the lesser.

Sale and Lease Back

Under sale and lease back agreement, an asset is first sold to the financial institution. The sale is made at the genuine market value. After that the asset is taken back on a lease. This type of leasing is advantageous for those companies which do not want to show high debt balances in their financial statement.

Leveraged LeaseThis type of leasing involves three

parties including a lender, a lessor and a lessee. The lender and lessor join hands to accumulate funds to buy the asset. The asset purchased is then given on the lease to lessee. The lessee makes periodic payments to the lessor who in turn makes payment to the lender.

Terms In Leasing

Lessee

The lessee (customer or borrower) who selects an asset (equipment, vehicle, software) to be borrowed

Lessor

The lessor (finance company) will purchase that asset for the purpose of leasing.

Bargain Purchase OptionIt is a provision in a lease giving

the lessee the right to purchase the leased property for a price less than its anticipated fair market value.

GuarantorA person or business promising

to perform all of the lessee's obligations - including making payments should the lessee fail to do so.

Lease FactorThe rate used to determine a

monthly payment for a given equipment cost - usually expressed as a decimal fraction which is multiplied by the equipment cost.

Letter of CreditA specific arrangement between

a lessee and one of its banks. The bank agrees in the event of a defined event, the lessor can look to the bank to make payment instead of the lessee.

DefaultIf a lessee does not comply with

the terms of the lease, a default occurs. Generally, after a default, the lessor can exercise all of its rights under the lease to repossess the property and seek money damages.

Balloon PaymentA large payment made at the end

of a lease. Use of a balloon payment in a lease will have the effect of reducing the periodic payment during the lease term.

Acceleration ClauseThis is a provision of a lease that

allows the lessor, upon default by the lessee, to require all payments due in the future to be made immediately.

Certificate of AcceptanceA written verification by the

lessee that they have received the property to be leased. Most leases begin after the date stated on the certificate of acceptance.