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MGT604 - Management of Financial Institutions - Lecture Handout 33

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Leasing Companies

  1. A lease or tenancy is a contract that transfers the right to possess specific property. In law, there are two types of property: historically, land is the more important because, under normal circumstances, it holds the highest value in economically developed societies. Ownership of land is an aspect of the system of real property or realty in common law systems.
  2. When structured as an operating lease, this is a form of financing that avoids the down payment usually required for the purchase of equipment. Because leased equipment is not owned by the company, it does not appear on the balance sheet. A financing lease does appear on the balance sheet.
  3. Don't be intimidated! For most people, leasing is an unfamiliar concept and therefore a little scary, but leasing isn't any more difficult than purchasing a car. Fully understanding how the leasing process works is the first step toward a positive leasing experience.

Leasing a vehicle is similar to renting a car, just for a longer time period. Like renting a car, a person who leases pays a pre-determined rate to drive a vehicle for a pre-determined amount of time. You never own the vehicle and return it when your lease is up. A person who leases enjoys the benefits of driving a car without assuming the up-front costs, and many of the risks of ownership.

Basic Purpose of Leasing

Bargain Purchase Option

A lease provision allowing the lessee, at its option, to purchase the equipment for a price predetermined at lease inception that is substantially lower than the expected fair market value at the date the option can be exercised.

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MGT604 - Management of Financial Institutions - Lecture Handout 18

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ROLE OF COMMERCIAL BANKS

Asset composition

Assets of banking sector, as per cent of GDP, have been on the decline. Slowdown in asset growth was also accompanied by changing share of different groups. Negative growth in the assets of foreign banks during 1998 and 1999 was the prime reason behind declining growth in overall assets of the banking sector. Share of NCBs have been decreasing since private
banks were allowed to operate in 1992. In terms of asset share, private banks are now as large as foreign banks.

Problem bank management

The central bank is the sole authority to supervise, monitor and regulate financial institutions. It is also responsible to safeguard the interest of depositors and shareholders of these institutions. Lately, SBP took actions against two private banks which became a threat to viability of the financial system in the country. These were Indus Bank and Prudential
Commercial Bank. On the basis of detailed investigations, the license of Indus Bank was cancelled on September 11, 2000. After successful negotiations, management and control of Prudential Bank handed over to Saudi-Pak group.

Outlook

Commercial banks have been going through the process of restructuring. There are efforts to reduce lending rates. The SBP has been successful in implementing its policies. Most of the banks have been able to adjust to new working environment. The proposed increase in capital base will provide further impetus to financial system in the country.
In the post September 11 era, the GoP borrowing from SBP and commercial banks is expected to come down substantially and private sector borrowing to increase. However, a temporary decline in repayment ability of borrowers may increase provisioning for the year 2001. The situation is expected to improve in year 2002. Unless efforts are made by banks to shrink spread, depositors will not be able to get return which corresponds with the rate of inflation in the country. Privatization of NCBs is expected to be delayed due to external factors. However, it is an opportunity for the banks to further clean their slate. Pakistan’s banking sector like many other developing countries had been faced with several problems and difficulties such as:
Most of the financial assets and deposits were owned by nationalized commercial banks (NCBs) which suffered from a highly bureaucratic approach, overstaffing, unprofitable branches and poor customer service.

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