Today’s Topic of discussion: Performance evaluation of lease financing as an instrument of the financial market in Bangladesh
Performance evaluation of lease financing as an instrument of the financial market in Bangladesh
Lease financing is becoming increasingly important and getting prominence as a mode of finance with the expansion of the economy of Bangladesh. Lease financing has some unique features that might be more favorable than other types of financing. Lease financing can support the expansion of the SME sector which is considered to be the engine of growth in Bangladesh.
Lease financing has given SMEs the opportunity to accumulate funds in easy terms and conditions. Large organizations in Bangladesh are also utilizing lease financing as a mode of finance. The leasing companies in Bangladesh are providing leasing activities and also they are involved in stock market-related activities such as underwriting, issue management, private placement, trust management, portfolio investment, and mutual fund operation.
Leasing companies in Bangladesh are facing competition with banks and they have some problems and limitations to compete with banks. This research has attempted to find out the reasons behind the competition between banks and leasing companies in Bangladesh. It is also important to reveal whether leasing is the substitute for term financing in Bangladesh at present or not. This research has also attempted to know why some of the borrowers in Bangladesh prefer lease financing to term loans.
Banks and leasing companies are not providing operating leases in Bangladesh. It is also essential to identify the reasons behind the absence of operating leases in Bangladesh and the prospect of operating leases in the country. The thesis has started with the introduction chapter. Lease financing in Bangladesh has been described in this chapter.
This chapter also includes a problem statement and research issues. research objectives, scope of the study, sampling design, and the benefit of the study. The second chapter is ‘Financial Market and The Economy of Bangladesh’. Descriptions of the financial market of Bangladesh and its components have been included in the chapter.
he economic sectors of Bangladesh have also been described in this chapter. The third chapter is Literature Review. Summaries of different articles are included in this chapter. The methodology of the research study has been spelled out in the fourth chapter. The study has used several inferential statistical tools and techniques including Data Envelopment Analysis (DEA) and Factor Analysis Model.
Data Envelopment Analysis (DEA) has been used to measure the allocative efficiencies, technical efficiencies, and cost efficiencies as well of leasing companies from 2006 to 2011. Factor Analysis has also been used to identify the reasons for preference of leasing over term financing by borrowers in Bangladesh. Whether leasing is a substitution of term financing for different types of firms has also been tested in the context of Bangladesh.
Reasons and problems of competition have been measured by key informants’ interviews and lending institutional surveys. Key informants interviews have been used to identify the reasons behind the absence of operating leases in Bangladesh and the prospects of operating leases in Bangladesh. Herfindhal-Hirschman Index (H.H.I) has been used to measure the degree of competition and concentration of the banks and leasing companies.
The weighted Average Cost of Capital (W.A.C.C) of leasing companies and banks has been estimated to reflect the cost of capital being used by these institutions. The fifth chapter is about the Competition between banks and leasing companies in Bangladesh. It describes the reasons behind the competition between banks and leasing companies in Bangladesh.
Banks are providing term loans as well as lease financing. For that reason, competition exists between banks and leasing companies. Banks can provide short-term loans but leasing companies are prohibited to provide short-term loans. It has been found that both banks and leasing companies have increased their marketing expenses. Marketing expenses have increased the demand for the products of both banks and leasing companies. Leasing companies can provide faster service for financial solutions than banks.
Technological advancement has increased the competition between banks and leasing companies. Transaction costs have been minimized by both banks and leasing companies. The flexibility of terms and conditions of loans and leases has increased the competition between banks and leasing companies. Competition in the banking sector and as well as leasing sector can be measured by using Herfindhal-Hirschman Index (H.H.I). H.H.I can be found by squaring the market share of each firm competing in the market, and then summing the resulting number.
High concentration means less competition. It has been found by H.H.I. that banks have more competition among themselves than leasing companies in Bangladesh. Banks can collect short-term deposits but leasing companies cannot collect short-term deposits. As a result, the cost of capital of banks is low as compared to leasing companies. Leasing companies have less qualified personnel than banks. The high cost of capital is the most challenging issue for leasing companies in Bangladesh.
The leased asset recovery problem is another challenging issue for leasing companies. There is a risk of capital losses due to obsolesce of the equipment or machines. Leasing companies have to pay high interest for commercial loans to banks. Due to manpower shortage, the leasing companies in Bangladesh are facing challenges. It has been observed that the WACC of leasing companies is higher than the WACC of banks. Banks can collect demand deposits but leasing companies cannot collect demand deposits.
As a result, the WACC of banks is lower than the WACC of leasing companies. The banks can utilize the low cost of funds by investing more in profitable sectors. Different profitable sectors should be identified and invested by the banks as their cost of funds is low compared to leasing companies. Banks should try to motivate their employees. The transaction cost of banks could be minimized to utilize the low cost of funds and to increase profit.
The sixth chapter is the Efficiency analysis of leasing companies in Bangladesh through D.E.A. Data Envelopment Analysis (DEA) is a nonparametric method for the estimation of production frontiers. DEA is a linear programming methodology to calculate the efficiency of different firms from multiple inputs and outputs of firms. Utilizing the selected variables, such as unit cost and output, DEA software searches for the points with the lowest unit cost for a given output and can form the efficiency frontier. Any company which is not on the frontier is considered inefficient.
A numerical coefficient is given to each firm, defining its relative efficiency. Data Envelopment Analysis (D.E.A) has been used to measure the technical efficiencies, allocative efficiencies, and as well as cost efficiencies of 17 leasing companies for the period of 2006 to 2011 assuming variable return to scale and constant return to scale. The optimum level of inputs for efficient production assuming both variable return to scale and constant return to scale have been identified in this research study.
Technical Efficiencies and their decompositions have been identified from 2006 to 2011. Output slacks and input slacks have also been identified in the study. Output slacks are created when the hypothetical firm on the efficient frontier belongs in a position that the firm can increase its output by the slack quantity without increasing inputs. Input slacks can also be explained as output slacks. The firms are compared to a hypothetical firm that belongs to the efficient frontier.
When a hypothetical firm belongs in a position on the production frontier the firm yet can reduce the inputs by the slack quaintly without reducing outputs. The seventh chapter is a comparison between lease financing and term financing in Bangladesh.
Lease financing has some advantages some borrowers prefer lease financing to term loans in Bangladesh. Leasing companies face some problems to conduct their business in Bangladesh. Though lease financing has some advantages, it has some disadvantages also. Provision of collateral, no third-party guarantee for the lease, faster service, less documentation, etc. are the advantages of lease financing.
Higher interest rates, restrictions on equipment use, loss of residual value, etc. are the disadvantages of lease financing. 50 firms’ capital structure for 5 years that have taken lease financing from banks or leasing companies has been collected. From the capital structure of these firms, the proportion of loans and the proportion of leases have been analyzed. The proportion test has been used to find out whether there is any significant difference between the proportion of loans and the proportion of leases of 50 firms for 5 years or not.
It has been found that the Z value for the proportion of loans and proportion of leases is 2.386 which is more than the critical value of 1.96. Based on the Z value, it has been observed that the proportion of loans and leases of 50 firms have significant differences at a 5 percent level of significance.
Depending on Z value, it can be said that lease financing is not the substitution for term loans at present in Bangladesh. The eighth chapter is about the preference for lease financing over term loans in Bangladesh. Different high official interviews from banks and leasing companies have been taken to detect the reasons for preference for lease financing over term loans by some of the borrowers in Bangladesh.
Provision of collateral, the time of lease repayment, E.M.I (Equal Monthly Installment) for lease, the longer grace period for lease, no secondary security for lease, no third party guarantee for lease, lack of funds to choose lease financing, faster service for lease financing, less procedural complexity for lease financing, fewer documentation and submission of documents in one package, avoidance of many restrictive covenants, lease financing for low-cost assets, sale and leaseback arrangements and total financing for lease are the reasons for the preference of lease financing over term loan by some of the borrowers in Bangladesh.
Factor analysis has been used to detect different factors and their correlated variables. From the overall factor analysis ( Borrowers who take leases from banks as well as leasing companies) it has been revealed that under the first factor, the correlated variables are less procedural complexity for lease financing, less documentation, and submission of documents in one package, and avoidance of many restrictive covenants. The percentage of variation is 14.10.
It means that these three variables explain 14.10 percent of the total influencing variables. The ninth chapter is about operating leases in Bangladesh. In chapter nine, causes for the absence of an operating lease and the prospects of an operating lease have been described.
The operating lease is not much popular in Bangladesh. The culture of using operating leases has not been developed yet in Bangladesh. Because of low technological development, the risk of becoming obsolete equipment or machine is comparatively low in Bangladesh. People can easily handle and use financial leases for a long period.
Operating leases should be handled by professional persons. A workshop/service center is needed for the after-sale service of leased assets. Proper maintenance, Pools of assets, skilled operators, and service centers are essential for operating a lease. In Bangladesh, there is a lack of proper setup for operating leases. The weak legal framework is another problem for operating leases to be developed in the country. Operating lease is becoming popular day by day in the context of Bangladesh.
Bangladesh is moving towards industrial development. Infrastructural development is taking place within the country. Power backup, truck, escalators, etc. are needed for the expansion of infrastructure. Those organizations which are involved in the infrastructural development process like operating lease assets for shorter periods.
For that reason, there is a chance for the development of operating leases in Bangladesh. Because of the expansion of the economy, operating lease has a prospective future in Bangladesh. The summary, recommendations, and conclusion have been described in the tenth chapter. Finally, the future scope of research has been described in the eleventh chapter.
Description:
This thesis was submitted to Dhaka University in conformity with the requirements for the degree of Doctor of Philosophy in Finance.
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