Real Estate Business in Bangladesh:Problems and Prospects

Introduction :

Real estate sector is one of the fastest growing and thrustingsectors in Bangladesh. Infrastructural development is highlyimportant for a country to rise as a developed nation and toensure housing facilities for the citizens of the country.

Real Estate Sector at a Glance

Real estate sector is one of the most attractive sectors ofinvestment now in Bangladesh. RapidUrbanization has become an acute problem for the country. Therate of urbanization is estimated to be 5-6% annually forBangladesh (REHAB, 2004). About 25% of the people of Bangladeshis now living in urban areas and 34% will be living by 2015(REHAB, 2004) and 50% by 2025 (Singh D., 2001). There is acuteshortage of housing supply in all urban areas and it’s increasingwith current demand of 600,000 to 800,000 units all over thecountry. Particularly in Dhaka this demand is estimated to be60,000 units of real estate apartments combined with 200,000units of replacement plus backlogs (REHAB, 2004). Dhaka iscurrently growing very fast compared to other cities inBangladesh.Thus there exists a high demand of plot and flat units. This hugeand unfulfilled demand is highly attractive for the investors.The Real Estate and Housing Association of Bangladesh (REHAB) isthe sole organization of the real estate agents, developers andbuilders. It had more than 450 members registered in 2009.Moreover, around 350 non-registered real estate developers are

doing business in this sector (Amen S., 2008). According to REHABthey are currently supplying Housing Real Estate Sector inBangladesh 241 only around 8,000 to 10,000 units of housingapartments against the abovementioned huge demand. Theapproximate turnover in the real estate sector has been Tk. 20billion, which contributes revenue of around Tk. 2 billion a yearto the government. The real estate developers and builders havealready supplied approximately 60,000 units to this sector marketin the past 20 years. The sector now employs about 2 millionpeople, which consists of architects, engineers, managementofficials, direct and indirect labors. The average contributionto GDP of this sector in the last five years was 12-14%. In 2007-08 . The growth rate of this sector fell to 5.93% from 7.01% of2006-07 (Amen S., 2008). It drastically dropped from the previousyears.

(Graph-1) (REHAB, 2004).

Real Estate to Real Economy in Bangladesh

From 1994-95, over the last 10 years, Bangladesh real estatesector grew at an average of 3.64% reaching the peak at 3.83% in1999-00. Though it had a fall in2000-01, there was recovery in 2001-02. For the last 5 years thissector grew impressively and showed a smooth rising trend. Thecomparative scenario of GDP shows a steady 6% growth forBangladesh. According to the real estate experts, as GDP ofBangladesh is still below that of other South Asian Countries,Bangladesh has more to grow which can be fostered by continuousincrease in the share and growth of real estate sector in thecountry. This contribution of real estate and construction in GDPof Bangladesh was 16.20% in 1994-95, which became 16.69% in 2000-01 and 17.22% in 2004-05. This share slowed down 8 % in FY 2008(Graph-2). It was probably due to the high price barrier forlarger portion of population to buy real estate apartments. Itwas also almost saturation of the already existing high endpopulation market. The housing real estate business’s untappedpotential is quite evident from the real estate apartmentpenetration in the neighboring countries of Bangladesh (Graph-3).Islam M. S. and Hussein A. (2008) depicted the value addition of

the overall housing sector inclusive of the real estate’s fallsin different areas. As explained by Islam M. S. and Hussein A.(2008), among the 21 subsectors under the housing industry, Steel(29%), Work Force Labor (20%) and Cement (11%) are the highestcontributing subsectors. Thus the real estate being the mostcrucial housing facilitating private channel is extremely vitaland it has to have a large backward supply chain for itssustenance.

A Positive Notion for Bangladesh Market

The positive trend of global expansion in the real estate sectorin the neighboring countries also shows a possibility of such

growth Bangladesh. According to the above graph and past recordofINDIA and USA, we see that the real estate sector marketexperiences an average annual rise of5-10% if it starts once. In Bangladesh, before 1985, people inDhaka city never thought of buying an apartment for living.Before 1995, people thought twice before buying an apartment. Butin the last couple of years, interest in buying apartment hasincreased rapidly. The boom in Bangladesh real estate market tookplace between 1988 and 1991. But it faced fall in 1991-1992gaining rise again in 1993-1994. From 1995-1998 there has beennot so high growth but the market was stable. From 1999 to 2004it has been growing rapidly caused by huge household demand, lackof enough land, rapid urbanization etc. in Dhaka City. Thepresent rate of urbanization is 5-6% annually. About 25% of thepeople of Bangladesh is now living in urban areas and 34% will beliving by 2015. Only 40% of the people of Dhaka city havestandard or below standard housing facilities. Thus from thecomparative analysis, experts assume that according in the trendof the global market and in the neighboring countries, the growthof housing demand will stay for the next couple of years. Themain reasons for positive expectation have been presentedevidently in the following points.

Increasing Urbanization

Statistics & studies show that in 2000-2015, urban growth rate isexpected to be at an average of 3.7% for Bangladesh. India, oneof the most attractive markets of global real estate, isexpecting 4.9% growth of urbanization. Moreover which India isestimated to have 36% people living in urban areas by 2015,Bangladesh is expected to have 34%. The scenario is furtherevident by the per square kilometer population density growth inGraph-4.

Thus in South Asia, Bangladesh holds the second position in termsof urbanization rate and proportion of urban population. Thisscenario tells that, as India is a rapidly growing real estatemarket in the world, Bangladesh also may attract more real estatethan before. By 2010, Dhaka is estimated to have about 20 millionpeople that show about 55% growth from 2000 (Table-2). With thisamount of people Dhaka is estimated to be the 5th largest city inthe world by 2015. This fast urbanization needs enoughaccommodation and housing supply, which is expected to create ahuge market for the real estate sector in Bangladesh.

High Rate of House Rent Inflation

House rent has been increasing in Bangladesh since 1990 at a highrate. Although inflation rate is declining in the long term

(Graph-5), the rate of increase in house rent is still higherwhen compared with the real income growth especially of themiddle income group inBangladesh. In 1990 and 1995 the inflation rate in house rent wasaround 25%. The declining inflation rate in house rent can be theresult of increased supply by the private real estate suppliers,government initiatives, and self housing schemes. Though in therecent times this inflation has been a little bit lower, still in2004, statistics shows an increase of house rent at about 10% inthe country (Graph-5). According to the real estate participants,the inflation in the house rent is encouraging people to buyapartments not bearing the increasing expenditure of house rent.A recent study conducted by Consumers Association of Bangladesh(CAB) shows that house rentals in Dhaka have more than doubled(249.62 percent) in the last 17 years. The rentals in Dhakawitnessed a jump in 1991 by over 23% and it continued for someyears, finds the study. The increase was around 17% in 2007 and16% in 2006iii. Recent estimates indicate that over 70% ofhousing is rented in Dhaka and there is requirement of over60,000 new homes per annum (Kerned R. S., 2004). Tenants who arefrom upper middle, middle, lower middle and lower income groupsare the worst victims of the rising trend of house rentals. Thissection of the population spends nearly 50% of their monthlyincome in house rentals alone.

Growing Easy and Available Financing

Financing the apartment purchase for individual has become easiermore and available. In 1952Bangladesh House Building Finance Corporation (BHBFC), the firstof its kind was established a government organization to financethe middle-income household civil servants. Now there are anumber of private specialized housing finance institutions,financial institutions and banks, which provide housing, financefacility up to 70% to 80% of the value of the house or apartment.Interest rate is competitive ranging from 12% to 16%. Maximumamount that can be financed is BDT 5 million to 6 million withmaximum 20 years repayment option, which varies with thedifferent financing institutions. Loans can be taken to buyapartments or for construction purpose in any part of thecountry.

Inadequate and costly land

Researches indicate that only 30% population in Dhaka city hasoccupied already more than 80% of residential areas with humansettlements and supportive infrastructure. Economists and realestate experts state it as highly significant because in this way

land is becoming increasingly inadequate to provide individualhousing solutions. Moreover, land is quite unavailable in Dhakaat suitable location for individual housing fulfillment. For hugedemand and inadequacy of land, price of land is very high in theurban area according to the real estate participants. This ismaking more people inclined to build and share apartments.

Targeting the middle class

Studies reveal, only in Dhaka city 5% of the population belongsto the high-income group. Thus45% of the total population falls into the middle-income groupand the rest 50% in the low-income groups. Economists and realestate participants see the middle-income group as a huge marketfor the real estate sector. Builders have started buildingapartments for middle-income class of 600-900 stave. The largeunsatisfied middle-income class is expected to be boosting marketfor the real estate business.

Encouraging Remittance Flow

The Government of Bangladesh has declared the foreign remittanceinflow through banking sector as tax-free and any purchase offixed assets by Non-Resident Bangladeshis will not requireproducing any Tax Identification Number or TIN. It increasedremittance inflow to Bangladesh in the recent years. According tothe economists, non-resident Bangladeshis are vital investors forthe real estate sector in Bangladesh as they are continuouslysupporting it.

Other Issues

There are hazards which customers face in purchasing lands, whichencourages them to buy apartments rather than lands. Construction

and maintenance of buildings require spending huge time andenergy, which make the people reluctant to build houses on theirown. The influence of western culture and housing design isattracting people more to buy apartments. These reasons arecontributing to the decision of individuals to buy apartments.

Dominating challenge of real estate Business in Bangladesh:The key challenge that Bangladesh real estate industry are facingtoday is given below-

1 .lack of urban planning

2 .lack of clear land administration

3 .Absence of industry status

4 .Lack of sources of collection of capital

5 .Shortage of skilled and qualified manpower

6 .Non availability of utility connection

7 .Exorbitant price hike of land

8 .Rising manpower and material cost

9 .Approval and procedural difficulties

Findings & Conclusion

The real estate sector is growing and shows tendency of futuregrowth. The GDP share and growth of real estate and constructionis growing. This indicates a hopeful future for this sector.

Rise in house rent, increasing demand for housing, getting easyfinancing facility, rapid urbanization, inadequacy of land andmany other factors are creating huge scope for this sector togrow. As a result aggregate demand for housing and apartmentshas shown increasing trend and is expected to increase further.Though inadequate, supply of apartments with the number of realestate developers also has shown rising trend and suggests futuregrowth. Regulatory environment has been helpful for the sector togrow except the recent Real Estate Management Ordinance 2008which is yet to be passed and is likely to be very important forprotecting buyers ’interest. Financing market for the real estatesector has become easier and more available than ever before.Private sector housing finance is available at competitiveinterest rate for flexible period but still the amount of loansgiven is very low compared with loans in other sectors.Strengthening the regulatory and supervisory system for thefinancial sector and improving and expanding debt markets are ofparticular concern for the housing finance sector. Cost forapartment has increased varying with different locations andsize. Additional cost for additional facilities is required. Onthe whole, this study finds a very promising and positive tone ofgrowth,provided this sector is given proper attention andfacilities. It has certainly become very necessary to satisfy theincreasing housing demand and minimize the supply gap in thecountry.

The Present Condition of Leasing inBangladesh & It’s Importance in theDevelopment of Bangladesh Economy

INTRODUCTION

Bangladesh is a small country densely populated country in theSouth Asia. The people of it mainly depend on agricultural. Sothat land is the main asset of this country. Due to globalizationand liberalization the country gradually shifting towardsindustrialization. Financial globalization does not always workto encourage economic development because it often leads todevastating financial crises which are a great problem like thedeveloping country Bangladesh. Recently the people of thiscountry are taking risk and are establishing businessenterprises. But these entrepreneurs are faced with variousproblems such as, scarcity of initial capital and shortage ofworking capital. The businessmen and industrialists need loan forlong term and they try to direct financing from commercial banks,specialized banks and other financial institutions. Receivinglong term loans from direct financing institutions in Bangladeshis very difficult. Lease financing is the most important issuewhich determines the direction of financial behavior in anorganization, a financial level of effort, and the organization’slevel of perseverance in the face of obstacles of other types offinancing. Leasing was able to confirm itself in many developedcountries as one of the most effective and available mechanismsfor financing the expansion and development of the means ofproduction, asset finance necessary for the development and forthe application of new technologies in business. Recently someleasing companies of Bangladesh are providing loan to thebusinessmen and industrialists. They provide loan with someconditions such as, length of lease term, interest rates, renewaland purchase options, cancellation provision and penalties,guarantees by lessee of residual values, amount and timing oflease payment etc. Leasing is a contract between the owner of theasset which is called lesser and the business that wants to leasethe equipment is called lessee or client. The broader definitionof the of leasing is a trade and financing method by location byfinancial institutions specializing in these operations, by

financial institutions or directly by manufacturers, to companiesthat carry out particular operations, or do not have sufficientborrowed or own funds to buy them

THE FINANCIAL SECTOR IN BANGLADESHThe financial sector plays an important role in the developmentof Bangladesh. The contributions of improvement are as follows

Money MarketThe financial system in Bangladesh includes ‘Bangladesh Bank’(the Central Bank of Bangladesh), scheduled banks, non-bankfinancial institutions (NBFIs), microfinance institutions (MFIs),insurance companies, co-operative banks, credit rating agenciesand the stock exchanges. Among scheduled banks there are 4nationalized commercial banks (NCBs), 5 state owned specializedbanks (SBs), 30 domestic private commercial banks (PCBs), 9foreign commercial banks (FCBs) and 28 non-bank financialinstitutions (NBFIs) as on 30 November 2006. Bangladesh Banksupervises and regulates all scheduled banks and non-bankfinancial institutions operating in Bangladesh. It maintains thetraditional central banking roles of note issuance and the bankerto the government and banks. It has the legal authority to imposepenalties for non-compliance and also to interfere in themanagement of a bank if serious problems happen. NBFIs are themost important part of financial system in Bangladesh and theiroperations are regulated under the Financial Institutions Act1993. The NBFIs consists of investment, finance, leasing Mohegan,H.K. (2012), The Lease Financing in Bangladesh: A SatisfiedProgress in Business and Industrialization, companies etc. Thereare 29 financial institutions operating in Bangladesh as of 30November 2006. Of these one is government owned, 15 are local(private) and the other 13 are established under joint venturewith foreign participation. Among the 29 financial institutions,12 have been listed in the capital market up to 30 November 2006

to strengthen financial capability and the rest are under processto be listed in the capital market. The other financialinstitutions are House Building Finance Corporation (HBFC),Anwar-VDP Unna an Bank and Karma Shang than which are all state

Capital MarketThe capital market in Bangladesh is yet to play its potentialrole as vehicle for financing long term investment. In Bangladeshit is regulated and supervised by the Securities and ExchangeCommission (SEC) under the SEC Act, 1993. The SEC has issuedlicenses to 27 non-bank institutions to participate in thecapital market of which 19 institutions are Merchant Bankers andPortfolio Managers, 7 are Issue Managers and 1 institution actsas Issue Manager and Underwriter. The Dhaka Stock Exchange (DSE)was established as a public limited company in April 1954, andthe Chittagong Stock Exchange (CSE) was established in April 1995to deal with the secondary capital market. At the end of 2008 thetotal number of enlisted securities with DSE stood at 328, ofwhich 273 are listed companies, 14 mutual funds, 8 debentures and44 treasury bonds. The Investment Corporation of Bangladesh (ICB)was established in 1976 and monitors the capital market whichobjective is to encourage and broaden the base of industrialinvestment. ICB also operates in both DSE and CSE as a dealer.There are some scheduled banks, such as Bangladesh Shiplap Bank(BSB), (BSRS), Bangladesh Small Industries and Commerce (BASIC)Bank Limited, National Commercial Bank and some foreign banks areengaged in long-term industrial financing

InsuranceThe insurance sector is regulated by the Insurance Act, 1938 withregulatory oversight provided by the Controller of Insurance withauthority granted by the Ministry of Commerce. A total of 68insurance companies operate in Bangladesh, of which 21 providelife insurance and 47 are in the general insurance field. Among

these life insurance companies, except for the state-owned JibanBima Corporation (GBC), a foreign owned American Life InsuranceCompany (ALICO), and the rest are privately owned. Regarding thegeneral insurance companies, state-owned Shadharan BimaCorporation (SBC) is the most active in the insurance sector. Atotal of 44 insurance companies are listed in the capital market,of which 9 are life insurance. Delta Life Insurance is the marketleader among the private sector insurance

Microfinance InstitutionsMicrofinance Institutions (MFI) in Bangladesh have beenunregulated since their inception. The government, with the closecooperation of Bangladesh Bank, established a regulatoryframework which terminated in the enactment of the Micro-creditRegulatory Authority Act, 2006. The Act is containing 52 articlesand 98 sub-articles. An Executive Mohegan, H.K. (2012), The LeaseFinancing in Bangladesh: A Satisfied Progress in Business andIndustrialization, Board consisting of eight members isresponsible for executing the management’s general andadministrative tasks. The Board consists of the Governor ofBangladesh Bank as ex-officio chairperson, six governmentofficials nominated by the government and one executive vice-president, who serve as the board’s member secretary. Theauthority’s main responsibilities include issuance andcancellation of licenses for microcredit, and overseeing,supervising and facilitating all MFI activities. Grameen Bank wasestablished in 1983 under a special law with the initial supportfrom the Bangladesh Bank. The typically landless borrowers ofGrameen-Bank are mostly women, who are owners of the bank. Inrecognition of the robust poverty eradication program throughmicrofinance activities, the Grameen Bank and its founder, Dr.Muhammad Yunus, were awarded the 2006 Nobel Peace Prize. It hasnow been globally recognized that microfinance can be easilyimplemented and has been replicated in many regions of the world

as an effective anti-poverty tool. The member-owned MicrofinanceInstitutions (MFIs) have an explicit social agenda to help poorersections of the population, and particularly focus on rural womenas clients. There are also more than 1,000 semi-formalinstitutions operating mostly in the rural sector of the countryof these, BRAC, ASA, and PROSHIKA are considered the threelargest NGO-MFIs. BRAC, one of the largest MFIs in Bangladesh,has taken recourse to structured finance by securitizing itsmicro-credit operation recently. This revolutionary innovation isfor the first time in Bangladesh. It is anticipated that if theprocess of micro-credit securitization can go well and unhinderedit will open up the opportunity for MFIs to diversify source offund, reduce on-balance assets and have abundant fund fordisbursement

Cooperative BanksIn Bangladesh 119 cooperative banks are operating, of which 64are central cooperative banks, 48 are land mortgage and rest 7are other cooperative banks. The maximum share of total assets(90%) occupied by central cooperatives. Similarly maximum sharedeposits (85%) and advances (90%) are handled by centralcooperatives

CONTRIBUTION OF LEASING COMPANIES IN BANGLADESHThere are mainly three leasing companies in Bangladesh which areas follows: The Industrial Development Leasing Company (IDLC)Limited, The United Leasing Company (ULC) Limited and PhoenixFinance & Investments Limited (PFIL). Recently some other leasingcompanies such as, Peoples Leasing Company, Industrial Leasingand Financial Services Limited, The Uttara Finance & InvestmentCompany Limited, Bay Eastern Leasing Company, GSP Finance, PrimeFinance & Investment Limited, and Prime Bank Limited have emergedin the financial market of Bangladesh.

Industrial Development Leasing Company LimitedIndustrial Development Leasing Company Limited (IDLC) is thefirst and the largest leasing company of Bangladesh. IDLC ofBangladesh limited is established in1985 as a joint venturepublic limited company with the multinational collaboration ofInternational Development Finance Institution, Commercial Banks,Insurance Company and Foreign Leasing Corporation. In October1990 it has established its first branch at Chittagong. Itsprimary focus has been in the area of 3-5 year term financialleasing with particular emphasis on balancing, modernization,replacement and expansion (BMRE) of existing units. It has beenestablished with the multinational collaboration of DevelopmentFinance Institutions, Commercial banks, Insurance and leasingcompanies. After 10 years of its commencement, IDLC has capturedalmost 60% of the total market share of lease finance in thecountry. It was listed in Dhaka Stock Exchange (DSE) on the 20March 1993 and on the 7 February 1994 it was duly licensed underthe Bangladesh Bank. It finance very few to individuals butcorporate financed through operating lease is the general natureof business. Generally, IDLC does not encourage new entrepreneursor new line of business. Modernizing, replacing and expanding arethe main objectives of leasing, when equipment is concerned forvehicle both new and reconditioned cars is taken intoconsideration. Its clientele is primarily corporate bodies. Theratio of corporate to individual clients is 95:5. It hasexperienced increasing growth of lease contracts from 1993 to1997 and compound growth rate of lease contract was 29.31%.Operational Mohegan, H.K. (2012), The Lease Financing inBangladesh: A Satisfied Progress in Business andIndustrialization revenue has increased from Tk.275.54M in 1993to Tk.768.55M in 1997. It also started an additional andalternative source of capital asset financing in differententerprises in the private sector. Short-term finance hasbroadened its customer base and is expected to contribute

significantly to its growth and profitability. At present leasefinancing has grown to be an industry of Tk.3.5B per annum.

United Leasing Company LimitedSubscription agreement of United Leasing Company Limited (ULC)was signed among the sponsors on 9 March 1989, incorporated on 27April 1989 and investment agreement has signed by the companywith Asian Development Bank (ADB) in Manila on 27 July 1989. Thecompany signed the first lease agreement with the lessee on 12September 1989. The ULC signed a loan agreement with CDC inLondon on 27 March 1992. The company has issued 75,000 shares on28 March 1994. It has opened its first branch in Chittagong on 16June 1994, Jessore Branch in 2005, Gazipur Branch in 2006, andBogra Branch in 2006. It traded its shares on DSE for the firsttime in 23 June 1994. It has duly licensed under FinancialInstitutions Act, 1993 on 7 February 1995. It has declared firstdividend on 20 April 1995. Its authorized capital is Tk.120M andissued, subscribed, and paid up capital is Tk.70M). ULC financedits portfolio largely through medium and short-term loans fromlocal banks and long-term loans from the World Bank and KFW ofGermany. Operational revenue has increased from Tk.97.57M in 1992to Tk.523.40M in 1997. In 1992 operating income was Tk.15.63M andin 1997 it has become Tk.68.86M

Phoenix Finance and Investments LimitedPhoenix Finance & Investments Limited (PFIL) (Former PhoenixLeasing Company Limited), one of the leading and reliable multiproducts Financial Institution in Bangladesh has incorporated on19 April 1995 and started business on the same date. It was dulylicensed under Bangladesh Bank on 9 May 1995 as a non-bankingfinancial institution under Financial Institution Act 1993. Itsigned the first lease agreement on the 21 September 1995. Itopened its first branch in Chittagong on 25 September 1996. Thecompany is being operated through its all offices located at

Dhaka (main office), Chittagong, and Khulna and Bogra districtsin Bangladesh. The authorized capital of the company is Tk.500Mand issued; subscribed and paid-up capital is Tk.50M The Companyhas changed its name to Phoenix Finance and Investments Limitedfrom Phoenix Leasing Company Limited with effect from firstFebruary 2007 complying with all the legal requirements in thatrespect. Authorized capital of the Company is Tk.1B divided into10,000,000 ordinary shares of TK.100 each. PFIL has floated itsshare through the Initial Public Offering (IPO) of the Companyfor 12, 50,000 ordinary share of Tk.100 each for amounting toTk.125M in 2007. Now the paid up capital of the company has beenraised to 3,361,875 shares amounting to Tk.336, 187,500. Theshares of the company were listed with DSE and CSE on 25September2007. Sponsor shareholders of the company includes a renownedcorporate body namely Phoenix Insurance Company Ltd., a leadinginsurance company in Bangladesh .Others are individuals havingwide range of experience in the field of commerce and industriesMohegan, H.K. (2012), The Lease Financing in Bangladesh: ASatisfied Progress in Business and Industrialization, The mainobjective of PFIL is to allocate scarce financial resources tocapital investment through funding in capital machinery/equipmentspecially balancing, modernization, replacement and expansion(BMRE) of the existing industrial enterprise to stimulate theindustrial development of the country and also to providefinancial assistance through leasing and other multi-dimensionalproducts and services to all levels of entrepreneurs for a widerrange of asset acquisition. The company has also diversified itsproducts and services to such other areas as housing and realestate, bridge financing, short-term and mid-term loan andstartup working capital to cater to divergent needs of theeconomy. It also opened a Small and Medium Enterprise (SME)branch in Dhaka on 7 February 2007 for promoting SME exclusivelyfor alleviation of poverty through creation of employment andgeneration of income on a sustainable basis. Besides this, PFIL

also recently acquired 100% ownership of Brokerage Companydealing with the DSE to further diversify its investmentactivities. The company extends lease finance for capitalmachinery, energy generating equipments, construction and medicalequipments, office equipments, all kinds of roadand marine transports, household and other essential items andequipments for business enterprises like mills, factories,financial institutions, banks and insurance companies as well aseducational institutions, clinics, hospitals, corporate bodiesand individuals. The company alsoextends term loan and house building loan facilities toestablished business enterprises, industrial units andindividuals.

Bay Leasing and Investment LimitedBay Leasing & Investment Limited (BLI) is a public limitedcompany was incorporated in Bangladesh on 7 February 1996 underthe Companies Act 1994 and Bangladesh Bank has granted license tothe company on 25 May1996 to function as a NBFI under theFinancial Institution Act 1993 and the Financial InstitutionalRegulation of 1994. It also registered itself as a Merchant Bankwith the Securities & Exchange Commission on 25 June 1998. Itextends lease financing as its core business for all types ofmachinery and equipment including vehicles for industrial,commercial and private purpose. It has also expanded itsactivities into term financing, housing finance and merchantbanking operations. The authorized and paid up capital of thecompany stood as Tk.500M and Tk.102M respectively as on 31December 2007

Bangladesh Finance and Investment Company LimitedBangladesh Finance and Investment Company Limited (BFICL) is anon-banking finance company incorporated in Bangladesh on 10 May1999 as a public limited company and it began business on 15

February 2000. It’s authorized and paid up capital are Tk.500Mand Tk.23M respectively, and the capital is divided into ordinaryshares of Tk.100 each. The business objectives of the company aremoving out direct trade, term and working capital financing,housing finance, equity participation, financial and industrialcounseling, fund management, and merchant banking activities ofall types. Main sectors in which the company has targeted tolease and invest are transport, electric and electronic goods(including computers), leather, textile, printing, marinevehicles and equipment, steel and engineering, fishing boats andtrawlers, medical equipment and small scale industries. Itpurchases property in its own name and pays Mohegan, H.K. (2012),The Lease Financing in Bangladesh: A Satisfied Progress inBusiness and Industrialization 60% to 70% of the total price of aparticular property to its supplier. It signs lease contractswith the lessee, generally for 2 to 4 years, and handed over theproperties to him for use. Lease installments generally payableon a monthly basis and are determined on the basis of the leaseprice of properties and other relevant factors.

Uttara Finance and Investments LimitedUttara Finance and Investments Limited (UFIL) is a joint ventureleasing and financing company in Bangladesh. It is registered asa non banking financial institution under the FinancialInstitutions Act 1993 and the Companies Act 1994 with the licensefrom Bangladesh Bank to operate and transact all kinds ofbusinesses as provided under the relevant laws. It has beenincorporated on 7 May 1995 but the company received license fromBangladesh Bank on 7 September 1995 and the company startedcommercial operation from 1 November 1995 and continuing withsuccess. It mainly upholds its commitment towards the developmentof financial service sector by offering high quality services tothe local entrepreneurs and focuses to the ever changing and

challenging business environment. With its continuous drive toimprove, it is well on track to be considered as one of theleading leasing company of the country.Strength and Weakness of Leasing

Strength:

a). Shifting the risk of technological obsolescence: In the caseof ownership, the firm bears the risk of the asset becomingobsolete. This dimension of potential risk is too important to beignored and particularly in the present equipment more expensiveto operate and totally inadequate to meet the company'scompetitive needs and thus inflict heavy losses to the firm.Leasing provides a cushion against all such hazards by shiftingthe risk of obsolescence of equipment to the less or.

b). Easy source of finance: A lessee avoids many of therestrictive covenants that are normally included in Long-termloan agreements while borrowing from financial institutions orcommercial banks. Besides, the leasing does not warrant anymortgage or hypothecation of the asset since it belongs to theless or. Above all, in the case of leasing, the asset is madeavailable to the lessee for immediate use without loss of time inapplying for loan, waiting for its approval, buying assetsubsequently, etc. and lease rental payments may also be matchedwith the cash flows availability of the lessee.

c). Enhances liquidity: The use of sale and lease backarrangement may permit the lessee firm to salvage its weakliquidity position by converting its existing fixed asset intocash, the funds so released can be used to augment its workingcapital funds. A firm having shortage of working capital orforeseeing liquidity crisis may exercise the option of sellingthe owned asset to a less or and take it back on lease basis.

d). Conserves borrowing capacity through OFF-THE BALANCE-SHEETfinancing: Leasing is considered a 'hidden' form of debt in thatthe company can acquire the use of an asset without having thelease obligations appear as liability on its balance sheet. Ifthe assets were purchased a 315 financed by borrowing, both theasset and borrowed funds would be shown in the firms’ balancesheet. Traditionally leasing provides off-the-balance sheetfinancing keeping the firms’ debt raising ability intact. Thetraditional accounting entries accompanying leasing make acompany appear to be in a better borrowing position than acompany that purchases equipment outright. The inclusion of debtin the balance sheet raises the debt equity ratio of the firm,which in turn restricts its future debt-raising capacity. Inother words, the practice of omitting the lease obligations frombeing recorded in the balance sheet has a favorable effect on thefinancial position of the lessee firm.

e). Tax benefit: Lease payments, i.e. lease rentals made by thelessee are entirely deductible for tax purposes because leaserentals are treated as revenue expenditure and thus provide agreater tax benefit for the lessee in comparison to borrowingfrom banks. In order to avoid the hostile of explanation ofsource of fund to the income tax authorities for acquisition ofcapital assets, it is preferable to go for lease rentals.Particularly, in case of acquisition of cars as per existingincome tax law, the cost of any such car valuing beyond Tk. 7.5Lakh is not allowed as deductible expense. But under leasefinance such expenditure is fully allowed.

f). Hedge against inflation: Payments of lease rentals areusually spreading over a number of years, so the real cost ofacquisition can be reduced which acts as a hedge againstinflation. In addition to the above benefits, leasing companies

have special commitment of providing financial assistance throughleasing to (1) all-level entrepreneurs for a wider range of assetacquisition from motor vehicles to large industrial machineryplant; (2) medium, small and micro-level entrepreneurs who haveno easy access to commercial credit/loans for establishing smalland cottage industries such as medium and small scale Textilelooms, Printing and Packaging machinery, Handloom, Hatchery,Poultry, Fishery equipment, Power pumps, Power tiller etc.; (3)Engineers, Doctors, Technologists etc. who have technicalknowledge but have lack of financial assistance for establishingsmall/micro enterprises/industries; (4) skilled and semi-skilledpersons who have no employment opportunities or access to bankloans or other sources of fund for establishing light engineeringworkshop/small enterprises by providing lathe machines, weldingmachines and other required tools, Computers, Photo copiers, Typewriters, Auto rickshaw, Van, Tempo, Pick-up etc.

Weakness:

a). Risk of being deprived of the use equipment: The lessee hasonly the right to use the asset but the ownership lies with theless or. If the less or’s financial condition deteriorates or ifthe leasing company is wound up, the lessee may be deprived ofthe use of equipment interrupting its normal manufacturingoperations.

b). Alteration in the asset: Under the lease, the lessee isgenerally prohibited from making alterations or improvements onthe leased asset without the prior approval of the less or. Itmay cause problem to the lessee if the less or disapproves hisplan of alternation. Moreover, the less or may impose certainrestrictive conditions, sometimes, regarding the use of theasset, say, number of hours the equipment may be put to use andso on.

c). Terminal value of the asset: In the case of assets, such asland and buildings, which have high terminal value at the end ofthe lease term, it would be more appropriate to own the assetthan to lease it as the salvage value belongs to the less or.

d). Problem of evaluating credibility of lease-customers: Thereis no credit information bureau or credit rating agency in ourcountry. Respondents reported that Bank Statements, AuditedBalance Sheet or Tax Return might be valuable source ofinformation to judge financial solvency of the party. Auditorsare not ethically sound. Accounts are manipulated by way ofwindow- dressing and they cannot be accepted to show the realpicture of the business

GLOBAL LEASING MARKET AND DEVELOPMENT IMPACT

The global leasing market was worth $476.6B in 2001. Only Europeand North America account for 82.7% of this market volume. Modernleasing emerged in the 1950s as a specialized financial serviceindustry in the USA. The industry expanded to Europe and Japan inthe 1960s and to the developing countries in the 1970s.

CONCLUDING REMARKS

In this paper we have discussed aspects of financial leasing inBangladesh in some details. Leasing business in Bangladesh hasbeen developed within a very short period of time and its furtherdevelopment is increasing continuously. The popularity of leasefinancing in Bangladesh is due to tax advantages, timesaving andconservation of cash and funds provide by the lassoers. At thefirst sight the lease finance seems to be simple but it is not soand a correct decision requires an assessment of almost all thesurfaces of financial decision making. The leasing companiesshould establish their own systems of risk assessment and control

to avoid their occurrence or, when risks do appear, to have goodmethods and techniques of risk management. The government andentrepreneurs of Bangladesh must be active to develop the leasefinancing for the economic development of the country. We haveinvestigated some financial leasing companies who are operatingin Bangladesh. The difference between lease and lend is givenbriefly but the advantages and drawbacks of leasing are givenelaborately. Finally we have highlighted global leasing market tocompare the leasing of Bangladesh with developed countries.