View with images and charts A Case Study on United Leasing Company
Executive Summary The financial sector in Bangladesh comprises the money and capital markets, insurance and pensions, and microfinance. As the development process in financial sector proceeds, NonBank Financial Institutions (NBFIs) became prominent alongside the banking. The major business of most NBFIs in Bangladesh is leasing. Leasing in Bangladesh, like in many of the peer countries plays vital role in economic development. At present there are twenty nine leasing companies are in operation of leasing business in Bangladesh. In order to analysis the overall leasing sector in Bangladesh we have chosen United Leasing Company Limited one of the oldest leasing companies of Bangladesh with wide range of lease financing related product and services. In this study we have tried to analyze the overall leasing sector of Bangladesh by using our selected company as a sample of the overall leasing sector. Here we have focused on certain issues regarding leasing business in Bangladesh which includes: Overview of the overall sector, company background, product & services offered by this company, performance analysis, cost of fund, sources of fund, corporate governance structure, major problem identification & ways to solve this problem. Finally we have recommended some measures to extend lease financing & thereby improve performance & profitability. To conduct this study we have collected required information from companyâ&#x20AC;&#x2122;s annual report, website and finally meeting with company personnel. From our study we have found that ULC collects necessary funds from sources like bank borrowing, public deposit, brac bank ltd, redeemable cumulative preference shares foreign funding, refinancing from Bangladesh bank, zero coupon bond and asset backed security. The cost of equity of ULC is 19.63430795, and the cost of debt is 13.7 %( after tax). From this analysis we find that cost of capital is higher this is because the structure of cost of fund for leasing companies does not follow any unique trend. Weighted average cost of fund for the leasing companies is always positioned much higher than that of banks. Moreover according to the central bank regulation, leasing companies has the restriction to collect public deposits for less than one year, which creates uneven competition with banks.
The major problem for this company in extending leasing business like any other leasing business includes: sources of funds Problem, high Cost of fund, and low profit margin compared to banking sector, asset-liability mismatch, investment in high risk portfolio, lack in product diversification, competition with banks, lack of human resource, weak legal system, and lack of a secondary market. Moreover it also has to face the problem of time to time regulatory reforms. Analyzing the problem associated with providing lease financing here we have suggested some recommendation which includes: Exploring Alternative Sources of Funds, Competition and Product Diversification, Enhancing Capital Market Activities, Issues of Taxation and Market Segmentation. OBJECTIVES OF THE REPORT We have prepared the report for some definite purposes. Those purposes are photographed beneath as, To find out the leasing policies of United Leasing Company (ULC), To evaluate the performance of United Leasing Company (ULC), To give focus of their current cost of fund and focus on reduction of cost of fund To develop any alternate source of funding To recommend specific measures in order to improve leasing strategies of ULC by analyzing the Strength, Weakness, Opportunities and Threats (SWOT) To highlight on the products that can take them on the driving seat in the competition with banks and other financial institutions
METHODOLOGY Tabulation system - to describe corporate information, different products and features of the company Ordinal level of measurement Graphs- to show the company’s ratio analysis LIMITATIONS Lack of information due to the policy of the company of keeping all the information confidential, Inadequate knowledge on contemporary leasing terms of the company’s business representatives. Insufficient time due to the congested corporate schedule and exam schedule, Lack of knowledge about the real life leasing business, Insufficient published information and reluctance about providing those by the company. SCOPE
We have limited knowledge on Leasing Business. So, we applied all kind of work to know about Leasing Business in Bangladesh. For this, we read different types of article from different books. We discussed this with our senior brothers and sisters who know it very well. They helped us with the information what they actually know about it. To know information about Leasing Business we must know about what the Leasing Business is and what is the historical background of Leasing Business in Bangladesh. 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 ď&#x192;ˇ ď&#x192;ˇ ď&#x192;ˇ
Operating lease, Financial/capital lease 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 cancelable, 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 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. In addition to these major types, there are some other types of lease such as sale and lease and leveraged lease. Legally, a leasing company is defined as one having the business of hiring plants or equipment or of financing their hire by others. 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.
HISTORY LEASE FINANCING 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. (ULC) 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. The leasing companies now operating in the country are Industrial Development Leasing Company of Bangladesh, United Leasing Company, GSP Finance Company (Bangladesh), Uttara Finance and Investments, Bay Leasing and Investment, Phoenix Leasing Company, Prime Finance and Investment, International Leasing and Financial Services, Union Capital, Vanik Bangladesh, Peoples Leasing and Financial Services, Bangladesh Industrial Finance
Company, UAE-Bangladesh Investment Company, Bangladesh Finance and Investment Company, and First Lease International. INDUSTRY OVERVIEW The financial sector in Bangladesh comprises the money and capital markets, insurance and pensions, and microfinance. In addition to the Bangladesh Bankâ&#x20AC;&#x201D;the central bank of Bangladeshâ&#x20AC;&#x201D;there are 4 state-owned commercial banks (SCBs), 5 state-owned specialized banks, 30 domestic private commercial banks (PCBs), 9 foreign commercial banks, and 29 nonbank financial institutions (NBFIs) as of 2008.
Financial Sector in Bangladesh
Insurance and Pension and Provident Funds
1. Bangladesh Bank
1. Securities and Exchange
1. Controller of Insurance
1. Non government
2. All banks
2. General and life
3. Nonbank financial
2. Stock exchanges: Dhaka Stock
Exchange and Chittagong Stock
3. Government Pension
2. Palli Karma Shahayak
5. Credit rating agencies
3. Investment Corporation of
4 Central Provident Fund
3. Grameen Bank
5. Private sector pension
4. Bangladesh Rural
4. Merchant banks
funds (typically small
Development Board and other nongovernment organizations,
As leasing business is the major business of NBFIs and most of the NBFIs are multi product financial intermediaries, our industry analysis focusing on the performance of NBFIs of Bangladesh and through NBFIs we highlights leasing business of Bangladesh. The operations of NBFIs in Bangladesh are regulated by the BANGLADESH BANK. Nonbank financial institutions (NBFIs) are licensed and controlled by the Financial Institutions Act of 1993. These institutions
give loans and advances for industry, commerce, agriculture, or housing; carry on the business of underwriting or acquisition of, or the investment or reinvestment in, shares, stocks, bonds, debentures, or securities issued by the government or any local authority;
engage in hire-purchase transactions, including leasing of machinery or equipment;
finance venture capital;
provide loans for house building and property purchases; and
use their capital to invest in companies.
There were 29 NBFIs operating in Bangladesh as of 2008. Of these institutions, 1 is government owned, 15 are local (private), and the other 13 are established under jointventure arrangements with foreign institutions. The minimum capital requirement of NBFIs is Tk250 million. The major business of most NBFIs is leasing, although some are also engaged in merchant banking and housing finance. Investment Portfolio Mix of Nonbank Financial Institutions, 2002–2006 (10 million taka) Investment Portfolio
(Shares and Equities) Total Outstanding
In a market with considerable competitive pressures from banks and other financial institutions, the leasing industry has shown significant resilience. Its total assets grew at an annual average rate of 34% during 2002–2006. Lease financing constitutes 54.5% of the total long-term assets in the country’s financial sector, with the rest consisting mainly of term financing. Leasing companies
offer their services to industries such as textiles, chemicals, services, pharmaceuticals, transport, food and beverage, leather products, and construction and engineering. Some leasing companies are also diversifying into other lines of business, such as merchant banking, equity financing, term lending, and house financing. Total number of NBFIs and their year of commencement are given below. The listing of NBFIs
Name of Non-Bank Financial Institution Industrial Promotion and Development Company of Bangladesh Ltd (IPDC) 1 Saudi-Bangladesh Industrial and Agricultural Investment Company Ltd (SABINCO)
Year of Commencement 1981 1984
2 Industrial Development leasing Company of Bangladesh Ltd (IDLC) 3 The UAE Bangladesh Investment Company Ltd
United Leasing Company Ltd (ULCL)
Phoenix Leasing Company Ltd
Uttara Finance and Investment Ltd
International Leasing and Financial Services Ltd (ILFSL)
GSP Finance Company (Bangladesh) Ltd.
Prime Finance and Investment Ltd.
Oman Bangladesh Leasing and Investment Company Ltd
4 5 6 7 8 9 10 11 Bay Leasing and Investment Ltd 12 Peoples Leasing and Financial Services Ltd.
First Lease International Ltd
13 14 Delta BRAC Housing Finance Corporation Ltd (DBH) 15 LankaBangla Finance Ltd.
Infrastructure Development Company Ltd (IDCOL)
Bangladesh Industrial Finance Company Ltd (BIFC)
Union Capital Ltd (UCL)
16 17 18 19
National Housing Finance and Investments Ltd
Midas Financing Ltd (MFL)
Bangladesh Finance and Industrial Company Ltd (BFIC)
Industrial and Infrastructure Development Finance Company Ltd (IIDFCL)
Islamic Finance and Investment Ltd (IFIL)
20 21 22 23 24 Fidelity Assets and Securities Company Ltd 25 Fareast Finance and Investment Ltd
Premier Leasing International Ltd
Self Employment Finance Ltd
Ahsania-Malaysia Hajj Investment and Finance Company Limited
26 27 28 29
INTRODUCTION OF ULC United Leasing Company Limited a joint venture non-bank financial institution engaged mainly in lease finance business and bills discounting. It was incorporated on 27 April 1989 as a public limited company under the companyâ&#x20AC;&#x2122;s act 1994 with an authorized capital of Tk 1,000 million. On 31 December 2000, its paid up capital was Tk 70 million, of which foreign and domestic sponsors held 40.29% and 33.57% respectively and the remaining 26.14% was held by institutional shareholders (19.46%) and the general public (6.68%). Foreign sponsors of the company are Asian Development Bank (ADB), Commonwealth Development Corporation and Lawrie Group Plc of the UK. Sponsors in Bangladesh are Duncan Brothers (Bangladesh) Ltd, Shaw Wallace Bangladesh Ltd, National Brokers Limited, Octavius Steel & Co. of Bangladesh Limited and the United Insurance Company Limited. The company is listed with the Dhaka Stock Exchange Ltd.
On 31 December 2000, the total assets of the company were valued at Tk 1,482.11 million, 76.98% of which accrued to leased assets. Liabilities of the company included capital and reserve funds Tk 434.22 million, long-term loans from local and foreign sources Tk 867.63 million, and lease deposits Tk 180.26 million. Sources of funds of the company are mainly commercial banks. The company is eligible to receive fund from the World Bank sponsored Financial Institutions Development Project (FIDP) at concessionary interest rates. Number of lease contracts made and executed upto 31 December 2000 was 373 with total monetary involvement of Tk 1,119 million. The company performed relatively well in terms of profitability and it paid dividend @ 30% in 2000.
MISSION ď&#x192;ˇ Devote continuous effort to improve products and services for sustaining competitive edge. ď&#x192;ˇ Ensure service excellence by leveraging motivated human resource and technology. ď&#x192;ˇ Manage risks and costs to ensure sound financial performance and adequate return on all investments. VISION To be the leading high quality service provider in the markets we serve. GOALS
Ensure that our service quality exceeds customer expectation in terms of timely delivery, fairness in treatment and value addition. Risk Management: Proactively manage risks and adhere to international best practices. Shareholders: Maximize growth in earning per share. Employees: Provide a stimulating and challenging yet congenial work environment, invest in training to harness full potential and compensate on performance basis. CORPORATE GOVERNANCE Our Management Syed Ehsan Quadir
M. A. Azim
Deputy Managing Director
M. Ataul Hoque
Head of Accounts
Jamal Mahmud Choudhury
Head of Collection & Special Asset Management
Head of Channel Financing
Mohiuddin Rasti Morshed
Head of Corporate & Syndicate Financing
Quazi Nizam Ahmed
Head of Small Enterprises
Shahidul Islam Mazumder
Head of Information & Communication Technology
Head of Enterprise Financing
Head of Human Resource
Md. Abul Ahsan
Head of Credit
Sharmi Noor Nahar
Head of Board & Secretarial
Head of Operation
A N Baset Osmany
Head of Investment Marketing
Head of Treasury
Khandaker Tanbir Islam
Head of Credit Risk Administration
Head of Marketing Services
Mohammad Neazur Rahman
Head of Internal Compliance & Control
PERFORMANCE ANALYSIS Current ratio: It measures a companyâ&#x20AC;&#x2122;s liquidity and short term debt paying ability. United leasing company also needs some liquidity position for operating the business. Year
The trend of the company shows that current ratio is always in a stable position. Firm always maintain required liquidity. Debt to Equity Ratio: debt to equity ratio measures total debt financing from the creditors relatives to the equity of the firm.
Here we find that debt is relatively higher in last two years. Return on Equity: Return on equity measures the profitability of the firm from common stock holderâ&#x20AC;&#x2122;s view. This ratio show how many taka of net income were earned for each dolled invested by the owner.
Return on equity is higher in the beginning of the year and it gradually reducing and in 2008 the ROE is 14%. Expenses Per Taka Profit (profit after tax): Here the expenses for profit is increasing day by day. In year 2004 was only 2.2, but in the year 2008 it become 5.6.
Financial Expenses Coverage: Financial expenses coverage ratio shows how many times it needs to recover the financial expenses taken by the firm. Financial expenses coverage ratio is decreasing from 2004 to 2008. That means it takes lower time to cover financial expanses than previous. That is good for the company.
Net Asset Value Per Share: The increase of the value of the share shows the good condition of the firm. Increase in net asset value shows that the price of the share is increasing relative to the asset of the firm. The net asset value is increasing yearly which shows good condition of the firm.
Earning Per Share: It measures the net income earned on each share of common stock. It is computed by dividing net income by the number of weighted average common shares outstanding during the year. EPS in 2008 is 66 taka which is relatively high in comparison to2007 and 2006 but low in compression to 2005 and 2004.
Cash Dividend: Every year firm provide some cash dividend to its share holderd, which is relatively same over the last 5 years, this cash dividend is an important indicator of the good condition of the firm.
Debt to Total Asset Ratio: it measures the percentage of the total assets provided by the creditors. We get it by dividing total debt by total assets. This ratio indicates the companyâ&#x20AC;&#x2122;s degree of leverage. 2008
From this graph we see that the debt to asset ratio of the firm is increasing day by day. In every year the ratio is increasing with a significant percentage. so it become more leverage. FINANCIAL PERFORMANCE OVERVIEW
Taka in Million
Financial expenses coverage (times)
Net asset value per share
Return on equity(%) Expenses per taka profit after tax (Taka)
EPS (Taka) Cash dividend (Taka per share) Stock dividend (Bonus share)
Debt to asset ratio (%)
PROGRESS AT A GLANCE Total Investment Portfolio (Taka in million)
8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0
Revenue and Profit After Tax (Taka in million) 1000 900 800 700 600 500 400 300 200 100 0
755 Revenue Profit after Tax
Earning Per Share and Cash Dividend Taka Per Share (Taka in million) 20
Earning per share
SOURCES OF FUND 1. BANK BORROWING: The Company can borrow from the following banks its necessary funds. i. Uttara Bank Limited. ii. Pubali Bank Limited. iii. Trust Bank Limited iv. The City Bank Limited.
v. vi. vii. viii. ix. x. xi.
Commercial Bank of Ceylon Plc. Sonali Bank Limited. Standard Chartered Bank. Bank Alfalah Limited. City Bank N.A. Basic Bank Limited. Mercantile Bank Limited
2. PUBLIC DEPOSIT: ULC Ltd. collects public funds as a means of Share Capital. Composition of Shareholding is as Follow No. of Shares
i. Sponsors – Foreign
Companies – Foreign - Domestic
31.35 iii. General Public – Domestic
A range distribution schedule of the above shares as at December 31, 2008 is given below as required by Regulation 37 of the listing Regulation of Dhaka Stock Exchange Limited: No. of Shares
No. of Shareholders
of Percentage of Total
Less than 500
500 to 5,000
5,001 to 10,000
20,001 to 30,000
30,001 to 40,000
40,001 to 50,000
50,001 to 100,000 100,001 to 1,000,000
Brac Bank Ltd.
The Company subscribed 500,000 redeemable cumulative preference shares @ Tk. 100 per share bearing 9% dividend issued by BRAC Bank Limited as per share subscription agreement made on January 31, 2006 between United Leasing Company Limited and BRAC Bank Limited. Energypac Confidence Power Venture Ltd.
The company subscribed 500,000 redeemable cumulative preference shares @ Tk. 100 per share bearing 12.75% dividend issued by Energypac Confidence Power Venture Limited as per share subscription agreement made on May 29, 2008 between United Leasing Company Limited and Energypac Confidence Power Venture Limited. 3. FOREIGN FUNDING: ULC Ltd. collects fund from foreign investors. Investors from abroad make crucial funding for the company and gives the chance to operate smoothly. 4. REFINANCING FROM BANGLADESH BANK: The Company gets refinancing facility from Bangladesh Bank by investing in SME, Women Development Projects and Agricultural Sectors 5. ZERO COUPON BOND: Sometimes issue zero coupon bonds for raising necessary funds. As per Trust deed dated February 7, 2005 between United Leasing Company Limited (ULC) and Investment Corporation of Bangladesh (ICB) a Trust in the name of â&#x20AC;&#x153;ULC Securitization Trust 2005- Aâ&#x20AC;? was formed and ULC sold lease receivable of Tk. 400 million to the Trustee (ICB) to issue Asset Backed Zero-Coupon Bonds. Thereafter the Trustee issued 37 Class A and 3 Class B Bonds of Tk.10 million each of which ULC purchased 3 class B Bonds as credit enhancement to secure the interest of class A bond holders. Any loss due to non-collection of lease receivable in respect
of class-A bonds held by the investors will be adjusted against the amount of class B bonds held by United Leasing Company Limited. All Class A Bonds have been redeemed by January 2009. The redemption of the Class B Bond starts from February 2009. 6. ASSET BACKED SECURITY: Formerly ULC Ltd. collected fund from asset backed securities but now it has stopped doing it. COST OF FUND WAYS TO REDUCE COST OF FUND As ULC Ltd. has to maintain CRR of 2.5% with Bangladesh Bank on 100% borrowing and give commission to depository assistance of 13.75-13.85%, it is not easy to reduce cost of fund for the company. Reducing costs for United Leasing Company Limited. solely depends on the overall conditions of the market. If market runs well that is gives loan in low interest and other conditions of the markets favors only in that time ULC Ltd. can reduce its cost of fund. Except the condition of market the company can reduces costs by following ways – 1. Arbitrage By arbitraging the company can reduce cost of fund. By definition we know that arbitrage is a discrepancy in relative values that is taking of positions in two or more markets in order to exploit pricing aberration among them. The academic definition of arbitrage demands that the strategy not require any of the arbitrager’s own funds and that it be entirely risk less. And United Leasing Company makes temporal arbitrage for reducing cost of funds. By this the company involves buying an asset for immediate delivery and selling it for later delivery in order to exploit a price discrepancy between the cash price and the forward price. 2. Long Term Deposit By increasing the volume of Long Term deposit and reducing short term deposit volume, it can reduce cost. Because the company has to give more interest for short term deposits than long term. 3. Refinance Having increased volume of refinance from Bangladesh bank, the company can reduce cost of funds. Because when the company makes much financing in the SME, Women Development Projects and Agricultural Sectors, it can claim more money as refinance from Bangladesh Bank 4. Long Term Product Development ULC Ltd. can reduce cost by increasing the volume of long term product such as introducing MILLIONARIE SCHEME. They are going to offer another scheme called “Lakhopoty Scheme”. These long term products can reduce their cost.
ALTERNATIVE SOURCES OF FUNDING United Leasing Company Ltd. may make funding from the following sources: 1. Bond Issue: The company presently does not issue bond expect it has issued zero coupon bond. But it may raise it fund through issuing corporate, perpetual and discounted bond to the general investors of Bangladesh and get necessary fund to make smooth operation. 2. Debenture Issue: The Company may issue debenture for raising fund. In a days debenture has become one of the easiest source of funding for many leasing companies and it is a non collateral long term mechanism to raise necessary fund. So ULC Ltd. may issue debentures to get funds.
MULTI PRODUCTS TO COMPETE WITH BANKS/ FINANCIAL INSTITUTIONS United Leasing Company Limited a joint venture non-bank financial institution engaged mainly in lease finance business and bills discounting. It was incorporated on 27 April 1989 as a public limited company under the companies act 1994 with an authorized capital of Tk 1,000 million. On 31 December 2000, its paid up capital was Tk 70 million, of which foreign and domestic sponsors held 40.29% and 33.57% respectively and the remaining 26.14% was held by institutional shareholders (19.46%) and the general public (6.68%). Foreign sponsors of the company are Asian Development Bank (ADB), Commonwealth Development Corporation and Lawrie Group Plc of the UK. Sponsors in Bangladesh are Duncan Brothers (Bangladesh) Ltd, Shaw Wallace Bangladesh Ltd, National Brokers Limited, Octavius Steel & Co. of Bangladesh Limited and the United Insurance Company Limited. The company is listed with the Dhaka Stock Exchange Ltd. On 31 December 2000, the total assets of the company were valued at Tk 1,482.11 million, 76.98% of which accrued to leased assets. Liabilities of the company included capital and reserve funds Tk 434.22 million, long-term loans from local and foreign sources Tk 867.63 million, and lease deposits Tk 180.26 million. Sources of funds of the company are mainly commercial banks. The company is eligible to receive fund from the World Bank sponsored Financial Institutions Development Project (FIDP) at concessionary interest rates. Number of lease contracts made and executed upto 31 December 2000 was 373 with total monetary involvement of Tk 1,119 million. The company performed relatively well in terms of profitability and it paid dividend @ 30% in 2000. The management of the company is vested in a 9-member board of directors including its chief executive, the managing director assisted by a team of 35 executives. It addition to the head office at Dhaka, the company has a branch in Chittagong. PRODUCTS & SERVICES OF ULC
Products / Services of UCL
United Leasing Company
Insurance ucts provided by united leasing company
2. General and life insurance
1. Lease Product
Under Lease finance United Leasing Company provides:
Pension Scheme Industrial machinery and motor vehicles at concessionary term. 4 Central Machinery and Furniture for Hospital use. Truck or Bus for Transportation. Provident Fund Equipment or Furniture for Official use.
Benefits from the Lease product
5. Private sector pension funds (typically small
Conserving Capital: United Leasing Company provide 80%-100% lease financing for a period of 3-5 years. Thereby, customers can avoid capital investment and utilize fund elsewhere. Payment Flexibility: Customer’s lease rentals can be structured as monthly, quarterly, semi-annually or annually to match with the cash flow generation. Customize Service:
Lease financing at ULC are customized into number of facilities like, lease local, sale & lease back and lease foreign. That allows customers to lease new or existing asset from local or foreign vendor. Ownership Transfer: As ULC is providing capital or financial lease, at the termination of contracts customer will have the opportunity to renew the lease or purchase the asset with a minimum transfer price. Prepayment Facility: Customers can prepay and adjust full or partial amount with receivable only after adjustment of first six installments. Reducing Balance Method: Construction of repayment schedule using this method allows customer to pay lower interest as principal payments are gradually adjusted with receivables. Tax Benefits: Lease rentals are treated as revenue expenditure and are entirely deductible for tax purposes. This provides a greater tax benefit for customers in comparison to borrowing. 2. Term Loan: Term loan services of ULC offers you 3 (three) types of facility; Long Term Loan; is suitable for customer, if cash flow resources are sufficient for longer tenure obligation, profitability and expansion plan. Short Term Loan; enables customers to take advantage of transactions to be completed in short period. Revolving Loan; enables customer to meet continuous working capital requirement. Collateral Free Term Loan: Typically small and medium-sized enterprises are unable to raise finance in the conventional way due to lack of security. To meet their requirement United Leasing Company further customizes their facility into collateral free long term loan. Facilities under this service are; Product Name
Loan Amount (up to)
Tk 5.00 lacs
Tk 5.00 lacs
Can be Structured
Applicant's Income (min)
Taka 3.50 lakh
Taka 2.50 lakh
Loan Amount (up to)
Tk 6.00 lacs
Tk 12.00 lacs
Applicant's Income (min)
Taka 2.50 lakh
Taka 2.50 lakh
3. Home Loan: Home loan services of ULC helps customers in: Purchase/construction of house/apartments. Renovation/extension of existing house/apartments (for individual). Renovation/extension of existing office chamber/space (for professionals). Construction/purchase of commercial building. Construction of commercially viable project like school, hotel, hospital etc. Construction of industrial building like factory, godown, warehouse etc. Loan Information Loan Amount: Maximum loan amount is Tk 50 lacs or 70% of the purchase price/cost, whichever is lower. Repayment Term: 1. Individual loan:15 years for normal facility and 20 years in case of Bangladesh Bank refinancing scheme, but not beyond the 60th birthday of the applicant.
2. Commercial loan: Maximum term is 7 years. Interest Rate: United Leasing Company offer customers a competitive interest rate and low fees on the basis of their financial status, amount borrowed and repayment terms. Repayment: customers will repay the entire loan by Equated Monthly Installments (EMI) comprises of principal and interest calculated on the basis of monthly rests at the rate of interest applicable and is rounded off to the next taka. Disbursement: Loan will be disbursed to customers in one trench or in suitable installments to be decided by ULC with reference to the need or progress of construction/ renovation/ extension of the house. Security: Registered mortgage of the property financed will be the prime security. Other security may also be taken on the discretion of the Management. Prepayment: Customer loan can be prepaid partially or in full, at any time before its maturity date. Insurance: Customer will be vigilant and the property is duly insured against fire, earthquake and other hazards, ULC being the sole beneficiary under the policy, for a value as required by ULC. Premium will be paid by him with loan installment amount. 4. Deposit Scheme Deposit scheme of ULC offers customers; ď&#x192;ˇ Annual Term Deposit: A fixed return investment allowing them to withdraw or reinvest profit or principal at maturity. ď&#x192;ˇ Earn Ahead Term Deposit: This scheme offers customer an opportunity to benefit from their investment at the time of opening account. Also allows them to reinvest withdrawal amount for further benefit. ď&#x192;ˇ Monthly & Quarterly Earner Deposit: This scheme allows them to withdraw profit after each month or each quarter.
Cumulative Term Deposit: Under this scheme profit from customers invested amount has been capitalized at the end of each year (after AIT deduction), creating a new principal. Profit for next year will then be calculated on the full amount. Double money return: Due to attractive profit, customer’s investment becomes double at maturity. Triple money return: To secure children’s marriage, education, retirement/financial solvency this scheme triples investment at maturity. Benefits from the deposit scheme: Safe investment: United Leasing Company determined to deliver the profit and investment of the customers duly. Attractive profit: UCL is providing better profit under various savings scheme which will enhance the investment at maturity. Best consumer service: To serve customer with care is the main principal of UCL. From opening of the account, till maturity UCL always ready to support the customer. Loan facility: Considering the necessity UCL is providing quick loan facility. Customers can avail loan up to 80%-90% of investment amount. 5. Channel Financing Services Channel financing services of ULC offers; 1) Factoring of Accounts Receivable 2) Work Order Financing 3) Distributor Financing 4) Assignment Discounting Benefits of Channel financing Services:
Reduced Investment in Receivables: Customers receive payments right before or after the delivery therefore their funds are no longer tied up in receivables. Expansion of Business: As cash flows improve, customer can increase business by delivering higher volume to existing customers and also expand business to new ones. ] Sales Ledger Administration: ULC will administer the sales ledger for the assigned customers. Collection of Receivables: ULC will monitor and collect the receivable on due time from the customers. High Quality Reports: ULC provides detail report on the performance of the customers that will help them direct in sales efforts. Scope for Additional Financing: When the customer utilizes factoring facility properly, it will help ULC support them with other services. Deposit rate (effective from April 27, 2009) Investment Type
2 to 5 years
2 years & above
2 years & above
Double Money Program
7 years & 2 months
Triple Money Program
11 years & 3 months
Easy Millionaire Scheme
Conditions: 1) Minimum investment amount is Tk20,000/- and deposits cannot be encashed before 1 year. 2) The profit is subject to deduction of 10% as Advance Income Tax (AIT). 3) 0.10% higher profit rate will be given on Earn Ahead Scheme, subject to investment of the earned profit to any of Annual Profit, Cumulative Term, Fixed Term Investment Schemes (Double Money, Triple Money and Millionaire Scheme). 4) Senior Citizens (individual aged 57+ years) will get 0.25% higher profit rate under any of the above schemes except Fixed Term Investment Scheme (Double Money, Triple Money and Millionaire Scheme). Disclaimer: Profit rates are subject to change at any time without prior notice and are not applicable for Banks or Financial Institutions. INNOVATIVE PRODUCTS 1. Ship Building Finance: The ship building industry is a thriving business sector of Bangladesh and it has already shown tremendous potential. In this industry, new companies are coming and are trying to position themselves and as the industry is in its infantry level, there are scopes for the financing companies to invest their money here and reap some profits. The start-up advantages here will provide them with huge feedbacks hopefully. The companies which are coming here are mainly from the already-existing and oligopolistic ship-breaking companies. But, if the investment companies show their interest to nurture this sector, then some newbie can feel interested and the company can be a very competitive one and can produce a huge turnover for the whole economy. 2. Power and Energy Empowering: Bangladesh is just in the deep whole of energy shortage and this shortage is so substantial that the overall productivity and development of the economy is getting highly hampered. This sector of utility should be scoured and it should be scoured immediately. And in order to do that the private sector should also come forward beside the government enterprises as this is a highly capital intensive sector. The government also permits the private enterprises now. So there is huge scope for the capital intensive and investing companies like ULC. If it alone canâ&#x20AC;&#x2122;t go for a sole companyâ&#x20AC;&#x2122;s sponsorship it can go for loan syndication. The profit possibility is high because of its huge demand.
There are two broadly definable areas in the energy sector: a. Renewable Energy: Windmills, solar energy, bio-fuel â&#x20AC;&#x201C; these sectors are totally administered by the NGOs here as pilot projects. And these projects are already successful and have ensured its future prospect. So now the investment companies can go for huge projects covering a huge area locally and reap profit from operations there. b. Non-renewable Energy: Gas and oil backed power plants and burges are the sectors here where the companies can go for investment as a private or a conglomerate. The annual report of 2007 shows that the company already invested 2.27% in this sector. Evaluating its possibilities, the company should go for more and more investment in this sector and this can go up to 10%. 3. Cement Industry Financing: This sector is already a highly profitable and established one. The banks are investing a lot here. ULC can go for some share of the capitalization here. But as this sectorâ&#x20AC;&#x2122;s investment market is already a very competitive field and the banks are the major players here, so if ULC wants to position itself in the market it must go with some competitive rates and advantages. Once the bond is made strong with the cement companies, they can go for some long term investment decisions and machineries leasing and increase their profits. Here the profit will take times to come but it will surely come. 4. House Financing People are no longer to be tenant. They have a dream to own a house. But building of houses is so costly to be borne by the people; mainly middle income people. What could be the solution? One easy way to solve this is to take loan on easy terms and conditions. Commercial Banks hardly pay loan to the people to build house because it is long term. Leasing companies come forward to solve the problem. They, not all, provide long term loan to the customers for the purpose of building houses. ULC, as a leasing company has not yet provide any loan for house building. Moreover, competition among the lease companies yet not so acute. ULC can take the chance to enter in the housing financing sector. 5. Top - Up Loans This product offers an existing resident customer a loan against the mortgage of the existing property. It helps in encasing the investment in a house without having to dispose it off to fund various needs related to Higher Education, Purchase of Furniture, Business Requirements, etc. The maximum loan amount under this product may be 60 % of the market value of the property less the outstanding loan and is subject to the current loan eligibility. 6. Home Conversion Loans
Existing borrowers can avail of a Home Conversion Loan to acquire another dwelling unit, through sale of the existing dwelling unit. The existing loan can be transferred to the new property with an increase in loan amount based on the current eligibility.This saves the customer from the hassle of prepaying the first loan and availing of new loan thus saving them prepayment charges and processing charges to the extent of loan conversion. 7. Adjustable-Rate-Home-Loan Loan under Adjustable Rate is linked to comany's Retail Prime Lending Rate (RPLR). The rate on the loan will be revised every three or ,acoording to company’s term, months from the date of first disbursement, if there is a change in RPLR, the interest rate on the loan may change. However, the EMI on the home equity loan disbursed will not change*. If the interest rate increases, the interest component in an EMI will increase and the principal component will reduce resulting in an extension of term of the loan, and vice versa when the interest rate decreases. Conditions may be Applied to this loan Fixed Rate Maximum Loan
- Balance of ≥60% of the market value and present loan outstanding New Customers - ≥50% of the market value of the property (including the cost of the land)
Subject to - Minimum Market Value of the property being Tk.700,000 for Residential property and Tk.10 Lacs for Non Residential Property
- Repayment Capacity of the customer Maximum Term Property Type
No. Of Years
8. Tranche Based EMI Customers purchasing an under construction property need to pay interest ( on the loan amount drawn based on level of construction) till the property is ready . To help customer save this interest, we have introduced a special facility of tranche Based EMI. Customers can fix the installments they wish to pay till the property is ready. The minimum amount payable is the interest on the loan amount drawn. Anything over and above the interest paid by the customer goes towards Principal repayment. The customer benefits by starting EMI and hence repays the loan faster. 9. Flexible Loan Installment Plan Often customers, parents and their children, wish to purchase properties together. The parent is nearing retirement and their children have just started working. This option helps such customers combine the incomes and take a long term home loan where in the installment reduces upon retirement of the earning parent. 10. Accelerated Repayment Scheme Accelerated Repayment Scheme offers you a great oppourtunity to repay the loan faster by increasing the EMI. Whenever you get an increment, increase in your disposable income or have lumpsum funds for loan prepayment, you can benefit by: Increase in EMI means faster loan repayment 2) Saving of interest because of faster loan repayment 1)
Customers can invest lumpsum funds rather than use it for loan prepayment. The return from the investments also gives you the comfort of paying the increased EMI. REGULATORY REFORM Though United Leasing Company is running quiet well in Bangladesh, it is facing some problems with current leasing facilities of Bangladesh. It is facing some problems in the following sectors: ď&#x192;ˇ Bindings in Women Entrepreneur ď&#x192;ˇ Absence of short term fixed deposit facility Bindings in Women Entrepreneur There is a binding of Bangladesh Bank that every leasing company will have to keep a good sum of amount for women entrepreneur in our country. For that case leasing company will get a facility of refinancing from Bangladesh Bank. But it is really difficult for leasing companies to find out real woman entrepreneur. If Bangladesh Bank would change this rule then ULC could invest that amount to any other sector. Absence of short term fixed deposit facility
There is no facility of short term fixed deposit as Bangladesh bank has a regulation that leasing companies can not take fixed deposit with tenure less than one year. It creates an obstacle of collection of fund. Though lease companies do not provide lease with such short time, if they had the opportunity then they could use that in case of any need. Short term fixed deposit, such as 6 months or 3 months, is a bit expensive. But if there is an option of short term fixed deposit leasing companies can use it in case of shortage of liquidity. MAJOR PROBLEMS Sources of Funds Problem: Leasing companies collect funds from a wide range of sources including financial instruments, loans from banks, financial institutions, insurance companies and international agencies as well as deposits from institutions and the public. Line of credit from banks constitutes the major portion of total funds for leasing companies. Deposit from public is another important source of fund for them, which has been increasing over the years. Leasing companies are allowed to take deposits directly from the public as well as institutions. According to the central bank regulation, leasing companies has the restriction to collect public deposits for less than one year, which creates uneven competition with banks as banks are also exploring the business opportunities created by leasing companies with their lower cost of fund. Although recent reduction of the minimum tenure of the term deposit from one year to six months for institutional investor has had a positive impact on their deposit mobilization capacity. High Cost of Fund: The structure of cost of fund for leasing companies does not follow any unique trend. Weighted average cost of fund for the leasing companies is always positioned much higher than that of banks. Cost of funds for leasing companies varied between 8.4 to 15.3 percent while that of banks was between 8.5 to 9.5 percent. About 15 percent of the deposit of the banking sector was reported to be demand deposits, which are interest free while 35 percent constituted low cost saving deposits having an average of 4 to 5 percent interest rate and the rest were fixed deposits bearing an average of 9 percent interest rate. Thus the weighted average cost of fund for banks would be at best 7 to 8 percent, which is almost half of that of leasing companies. Low Profit Margin compared to banking sector: Leasing companies face comparative disadvantage in collecting funds compared to the banks because they cannot collect short term (less than one year) deposits from individuals due to the central bankâ&#x20AC;&#x2122;s restriction, and again deposits in leasing companies are perceived to be less safe to the public. As a result they have to offer higher rates on deposits, which are sometimes as expensive as bank borrowing. Again, excessive dependence on bank loan and deposit has had an adverse impact on the overall industry. Due to the liquidity crisis, when interest rate goes up, the average rate of interest on bank credit lines and deposit rate also
increases, which causes significant rise in the cost of fund for leasing companies. The high cost of fund for leasing companies compels them to operate on a relatively low profit margin. Asset-Liability Mismatch: Asset-liability mismatch is another cause of concern for leasing companies. Demand for funds to meet the increasing lending requirements has increased many times. But the availability of funds has become inadequate as leasing companies are mostly dependent on loan from commercial banks. International Finance Corporation (1996) observed that leasing companies are in a great dilemma while managing the mismatch between their asset and liability. According to IFC, the average weighted life of the companyâ&#x20AC;&#x2122;s business portfolio should be less than the average weighted life of its deposits and borrowing in its operating guidelines for a leasing company. Only one company in Bangladesh was successful in maintaining the above guideline which is IDLC Finance Ltd. Investment in High Risk Portfolio: It is already mentioned that cost of funds for leasing companies (NBFIs) are higher than that of banks. In order to sustain the high cost of borrowing, they may be inclined to invest in the high return segments, which can expose them to commensurately higher risks. Moreover, fierce competition among competitors may also force many leasing companies to reduce the margin at the expense of quality of the asset portfolio. This strategy may eventually create the possibility of an increase in the non-performing accounts. Unless adequate risk management capabilities are developed, the growth prospects of leasing companies (NBFIs) would not only be hindered but it might also be misapprehended. Lack in Product Diversification: Leasing companies (NBFIs) emerged primarily to fill in the gaps in the supply of financial services which were not generally provided by the banking sector, and also to complement the banking sector in meeting the financing requirements of the evolving economy. NBFIs are permitted to undertake a wide array of activities and should therefore not confine themselves to a limited number of products only. Leasing, no doubt, presents a good alternative form of term financing. Even in leasing, investments were not always made in the real sector and non-conventional manufacturing sector. Almost all the leasing companies concentrated on equipment leases to BMRE (Balancing, Modernization, Replacement and Expansion) units only. New industrial units were hardly brought under the purview of leasing facilities. This implies that the new customer base has not been created and the growth of industrial entrepreneurship could not be facilitated through NBFI financing packages. Diversifying the product range is a strategic challenge for NBFIs in order to become competitive in the rapidly growing market. Competition with Banks:
With the advent of new leasing companies (NBFIs), the market share is being spread over the competing firms and the demand facing each firm is becoming more elastic. Active participation of commercial banks in the non-bank financing activities has further increased the level of competition in the industry. Leasing was considered as a non-bank financing activity until recently. But a large number of banks has also shown their interest in the leasing business and has already penetrated the market. For banks, public deposit is one major source of funds which they can collect with relatively lower cost. Thus the business environment for leasing companies (NBFIs) has become more challenging as they have to face uneven competition with banks in terms of collecting funds. Lack of Human Resource: Skilled and trained human resource is considered as an important component for the development of any institution. Due to the recent growth of leasing companies (NBFIs), availability of experienced manpower is a challenge for this industry. The supply shortage of efficient resource personnel has been leading to a significant increase in the compensation package, which is also a cause of concern for NBFIs. The industry experts believe that although there exists enormous growth opportunity the market is still quite small and scope of work for skilled personnel is very limited compared to that of banks. This makes the competent personnel to switch from leasing companies (NBFIs) to other institutions after a certain period implying low retention rate of skilled human resource. Weak Legal System: Although the default culture has not yet infected NBFIs to any major extent, they face difficulties in recovering the leased assets in case of a default. Moreover delays in court procedures create another cause of concern. The situation cannot be improved only by making the legal system stronger through enactment of new laws rather ensuring proper implementation existing ones is more of concern. Lack of a Secondary Market: Even in cases when the defaulted asset is recovered, the disposal of the same becomes difficult because of lack of an established secondary market. For the promotion of a secondary market, NBFIs may consider initiating the concept of operating lease instead of the prevalent mode of finance lease in case of these recovered assets to create a demand for second hand or used machinery and equipment. RECOMMENDATION Exploring Alternative Sources of Funds: The finance and leasing companies across the world are using different sources for collecting funds. NBFIs in Bangladesh may also explore the possibilities of gaining access to new sources of funds like issuance of commercial paper and discounting or sale of lease receivables. However, in releasing such new products, some regulatory changes have to be
made. Another innovative and promising source of funds may be the securitization of assets. This new instrument emerged as an important tool and added a new dimension in the financial market. The core attraction of this scheme was the tax benefit made available to investors. Competition and Product Diversification: Leasing companies in Bangladesh are operating in a highly competitive environment. The competition for leasing companies (NBFIs) is even more challenging as they have to compete with banks. Given the changes in the business environment, the need for product diversification is very important. At present, lease financing constitutes 55 percent of the total long term assets of NBFIs. The remaining part concentrates mainly on term financing and housing finance. Some of NBFIs are primarily engaged in leasing, some are also diversifying into other lines of business like merchant banking, equity financing etc. Currently, 22 NBFIs (out of 29) specialize in lease financing. Leasing companies are permitted to undertake a wide array of activities and therefore should not confine themselves to one or two types of product only. Leasing, no doubt, presents a good alternative form of term financing but NBFIs should also venture into diversified use of their funds such as merchant banking, venture capital financing, factoring, etc. for a healthy growth of the capital market. Enhancing Capital Market Activities: NBFIs around the world carry out a significant role in the development of the capital market. Strong institutional support is necessary for a vibrant capital market which is the core of economic development in any market based economic system. NBFIs through their merchant banking wing can act in this regard. A total of 30 companies are now listed as merchant banks in Bangladesh, of which 23 are full-fledged, 6 are issue managers, and only one is a portfolio manager. Only nine NBFIs have registered with SEC for performing merchant banking activities. But their activities in the capital market are rather limited. Active participation of merchant banks is essential to accelerate the capital market activities which can expedite the economic growth of the country. The success of merchant banking operations is largely linked to the development of the security market. So NBFIs should concentrate more on their opportunities in the capital market. Issues of Taxation The financing mode of lending and leasing are totally different from one another. The concept and procedure particularly the accounting and taxation system are also quite different. So it is advisable not to mix up the two different operations, otherwise it might distort the basic financial norms. As the tax treatment is totally different in leasing business, mixing up of lending and leasing in the same business portfolio might create the possibility of tax evasion. Market Segmentation
It has been discussed earlier that though banks and NBFIs compete with each other they can also perform complementary functions. Banks wishing to enter in the leasing business, which is essentially a core operation of NBFIs, should do so through opening subsidiaries so that a level playing field for NBFIs can be maintained. This is needed as banks have access to lower cost funds compared to NBFIs, which puts the former in an advantageous position. Alternatively, banks can go for joint financing under syndication arrangements with leasing companies on any project proposal. Again, banks can concentrate on working capital finance and foreign exchange operations, which matches more with their asset-liability management. Long term investment like financing capital machineries can be done by NBFIs and in the event when banks want to engage in such activities they can place their funds with an NBFI to extend lease facility for those machineries. This is important for two reasons: â&#x20AC;&#x153;first, in case of lease facility, the machineries will remain under the ownership of leasing companies, who will have absolute authority and control on their assets. Second, machineries will be imported in the name of a leasing company and letter of credit will be opened against its name. So, over invoicing or under invoicing may be averted and thereby more transparency will be ensured and tax evasion may be pluggedâ&#x20AC;?. CONCLUSION United Leasing Company is one of the oldest leasing companies in our country and contributing a lot in economic development by providing lease financing facilities since its inauguration. But like many other leasing companies it faces some problems in providing and extending lease financing. On the basis of our overall analysis we can conclude that ULC can solve the problems it faces in proving lease financing by exploring alternative sources of funds, competition and product diversification and enhancing capital market activities. Moreover the government of Bangladesh has to come forward in facilitating such a prospective financial sector.