Leasing

What is Leasing
A lease represents a contractual
arrangement under which the
owner of the asset (the lessor)
grants to another party (the lessee )
the exclusive right to use the asset
for a specified period of time , in
return for the payment of rentals.
The duration of the lease contract ,
terms of lease payments , insurance
and maintenance of assets are all
decided at the time of entering into
the lease contract.
Essential elements of leasing:
Parties to the contract: A lease is a contractual agreement
between two parties establishing an arrangement for the use
of an asset for periodic payments by the user. In a lease
arrangement there are two parties of contract stated as-
 Lessor: The owner of the asset. The lessor is the asset owner,
who receives the periodic payments.
 Lessee: The user of the asset. The lessee makes the payments to
the lessor in return for using the asset.
The lessee views leasing as an alternative to buying the asset
using borrowed funds. The lessee is concerned primarily
with the use of the asset, not who holds title to the asset.
Assets
Ownership
Terms of lease
Lease rentals

Types of Leases
Leasing can be broadly classified into two types;
(a) Equipment leasing
(b) Real estate leasing
(a) Equipment leasing: This leasing provide the different valuable assets for
industrial and business use. Its can divided into two types-
1. Operating lease
- Generators, common vehicles, air condition, photo copier etc.
 Shorter-term lease
 Lessor is responsible for insurance, taxes and maintenance
 Often cancelable
2. Financial lease (capital lease)
 Longer-term lease
 Lessee is responsible for insurance, taxes and maintenance
 Generally not cancelable
Financial lease are two types-
1. Sale and Lease Back / Hire Purchases
In sale and lease back the firm sells the asset to the leasing
company and the later leases it back to the firm. Through
this transaction the firm unlocks its investment in an
existing assets and realizes liquidity but continues to enjoy
the asset . The firm contracts to pay the lease rentals which
are fixed with reference to the selling price
2. Direct Lease:
In this straightforward arrangement, the firm leases an asset
it did not previously own. The firm simultaneously signs
the lease arrangement with the lessor and orders the
equipment from the manufacturer. The lessor pays for the
equipment, which is send to the firm.
(b) Real estate leasing : Under this system the lessors are
actually the manufacturer who lease their products to the
users. Leasing company provide lease finance for buying
building or apartment for private use, industrial land and
factory building for industrial enterprise.
Another form of leasing;
Levered Lease:
In leveraged lease there are three parties to the lease transaction
– lessee , lessor and the lender. The lender enters a leveraged
lease transaction because the lessor finances the investment
in the lease partly by the equity and partly by the debt.
Domestic lease:
A lease transaction is classified as domestic if all
parties to the agreement, namely, equipment
supplier, lessor and the lessee are domicile in the
same country.
International lease: If all parties to the lease transaction
are domiciled in different countries, it is known as an
international lease. This type of lease is further sub-
classified into {1} the import lease and {2] the cross-
border lease.
Import lease: In an import lease, the lessor and the
lessee are domiciled in the same country but the
equipment supplier is located in different country. The
lessor imports the asset and leases it to the lessee.
Cross Border Lease: When the lessor and lessee are
domiciled in different countries, the lease is classified
as cross-border lease. Relates to lease transaction where
in the lessor and lessee are from different countries.
Illustration:- Leasing company in USA makes available
Air Bus on lease to Airline company in Bangladesh.
 Why do firm lease?

Among the perceived advantages of lease, the most prominent

are-
 Financing of the full value
 Flexibility in payments
 Lease is a revenue expenses and tax deductible
 Procedural convenience
 Avoidance of inflationary impact
 Budget planning is convenient
 Preservation of credit capacity
 Eliminates some other risks
Disadvantages;
Consequence of default
Inadequate protection against loss
Loss of terminal value
High interest cost
Process of Lease Documentation
The major steps in the process of lease
documentation are as follows:
The lessee submits a proposal in a format
specified by the leasing company. The proposal
provides information about the lessee in terms of
business history, financial statements in terms of
last 3 -5 years and data on existing long term debts
including HP and lease commitment.
Lessee will provide the information about the asset
to be leased , details of the suppliers, place of
installation and the purpose for which the
equipment will be used.
If the lessor is satisfied about the financial
feasibility of the investment and credit worthiness
of the lessee, the proposal is approved and
decision is conveyed to the lessee through the
letter of offer.
 The letter of offer is accepted by the lessee by passing a
board resolution which authorizes the officer of a
company to sign an agreement. Although passing the
resolution is not statutory still the leasing companies
usually insist on the resolution.
Income tax aspect of leasing
From the lessee point of view the equipment lease has
following tax implication-
The lessee can claim the lease rentals payable on the
asset as tax deductible expense.
The lessee will not be entitled to the tax shield on
depreciation since he does not own the asset.
Income tax aspect of leasing
From the lessor’s point of view the following tax
implications are relevant-
The income received by way of the lease rentals
will be taxed as business income. The advantage of
this source being taxed as business income is that
various expenses incurred to generate this income
can be claimed as tax deductible expense.
The Lessor is entitle to claim tax shields on
depreciation as he is the owner of the asset.
Leasing in Bangladesh
 Leasing in Bangladesh, like in many of its peer countries, owes its
origin to the efforts of the International Finance Corporation (IFC),
Washington. At the instance of IFC, the first leasing company in
Bangladesh, Industrial Development Leasing Company of
Bangladesh Ltd. (IDLC) was set up in 1984 and commenced its
operations in 1986, with a 20% shareholding from Korea
Development Leasing Corporation.
 For several years, IDLC remained the sole leasing company in
Bangladesh. However, the real momentum began in the 1990s. The
country's central bank, Bangladesh Bank, put in place a regulatory
mechanism under the Financial Institutions Act 1993 and the
Financial Institutions Regulations 1994.
 In 1997, there were 15 leasing companies in the country. Besides,
some of the banks and financial institutions also added leasing
divisions to their existing operations.
Growth of leasing in Bangladesh
 The growth of leasing volumes in Bangladesh is evident from the following chart:
 AIMS Of Bangladesh Limited

61/i, Panthopath Dhaka Dhaka Bangladesh 8617625 8802 8617624 1/16/2006 7:02:08 PM Bay Leasing and Investment Limited

5 RAJUK Avenue, Motijheel C/A Dhaka Dhaka Bangladesh 9567844, 9568599, 9565026 8802 9565027 1/16/2006 7:02:08 PM GSP Finance Company (BD) Limited

Senakalyan Ehaban, Suite ft 902, 195 Motijheel C/A, Dhaka Dhaka Bangladesh 9569001 8802 9569928 1/16/2006 7:02:08 PM International Leasing and Financial Services Ltd

8 BAJUK Avenue Dhaka Dhaka Bangladesh 3359639.9505357 88129559640 1/16/2006 7:02:08 PM National Housing Finance And Investments Ltd

Chamber Building (6th flr) 222 Motijheel Dhaka Dhaka Bangladesh 95593112, 9553254, 9553387 8802 9568987, Email:housingQihdcnline.com 1/16/2006 7:02:08 PM Oru Private Ltd.

Kamal Ataturk Avenue, Banani Dhaka Dhaka Bangladesh 88213042, 88213046 8802 88213047 1/16/2006 7:02:08 PM Phoenix Leasing Company Ltd.

88, Motijheel C/A, Shadhinata Bhaban Dhaka Dhaka Bangladesh 956900710 8802 9567787 1/16/2006 7:02:08 PM Vanik Bangladesh Ltd.

Salura Tower (11th Floor), 20, Kamal Ataturk Avenue, Banani Dhaka Dhaka Bangladesh 988370110 8802 8810998 1/16/2006 7:02:08 PM Abeeco Industries Ltd.

66 Dilkusha C/A Dhaka Dhaka Bangladesh 95672946 8802 9564481 1/16/2006 7:02:08 PM Anudip Hire Purchase Co. Ltd

67 Purana Paltan Dhaka Dhaka Bangladesh 9345931Ext25 8802 8317747 1/16/2006 7:02:08 PM Uttara Finance and Investments Ltd

Jiban Bima Tower (6th floor), 10 Dilkusha C/A, Dhaka Dhaka Bangladesh 95682079, 9562909 8802 9552461 1/16/2006 7:02:08 PM Phoenix Leasing Compant Ltd.

Sadhinata Bhaban, (1st.Floor) 88 Motijheel,C/A. Dhaka Dhaka Bangladesh 8802 9569007 8802 9567788 1/16/2006 7:02:08 PM Industrial Finance Ltd.

79,Green Road Dhaka Dhaka Bangladesh 9123711, 8114253 8802 8111449 1/16/2006 7:02:08 PM MIDAS (Micro Industrial Deviopment Assistance Security)

House#5, Road#16 , Dhanmoodi R/A Dhaka Dhaka Bangladesh 8118186 1/16/2006 7:02:08 PM PROYOJONI

45, Sonargaon Road (1st Floor) Dhaka Dhaka Bangladesh 500111, 502327 1/16/2006 7:02:08 PM Islamic Trade and Commerce Ltd.

Barun Shaban, 15, Kemal Ataturk Avenue, Gulshan-2 Dhaka Dhaka Bangladesh 9886321 1/16/2006 7:02:08 PM Industrial Development Leasing Co. of Bangladesh Ltd. (IDLC)

30, Agrabad C/A Chittagong Chittagong Bangladesh 031.711034, 504275 1/16/2006 7:02:08 PM Phoenix Leasing Company Ltd.

31, Agrabad C/A R.M. House Chittagong Chittagong Bangladesh 1/16/2006 7:02:08 PM Pioneer Credit Co-operative Society Ltd.

Kider Plaza, 221 Jubilee Row Chittagong Chittagong Bangladesh 1/16/2006 7:02:08 PM Arco Industries Ltd.

16, Keranigon Chittagong Chittagong Bangladesh 1/16/2006 7:02:08 PM Medipower Company

Premises of Kamal Enterprise,Rahman Chamber,Gr. & 1st Flr. 12-13 Motijheel C/A Dhaka Dhaka Bangladesh 9551884 9565390 1/16/2006 7:02:08 PM Prime Finance and Investment Ltd.

63, Dilkusha C/A Dhaka Dhaka Bangladesh 9563618, 9563860, 9563868Fax:8802 9563692 1/16/2006 7:02:08 PM
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Bay Leasing and Investment Limited
GSP Finance Company (BD) Limited
International Leasing and Financial Services Ltd
Who or what is a leasing company?
Leasing in Bangladesh is a "financial business" and
cannot be carried on except in terms of a license
granted by Bangladesh Bank.
Sec. 2 (1) defines "financial business" as the business
carried on by a financial institution. "Financial
institution" as defined in sec. 2 (2) includes a leasing
company.
 Restrictions on leasing companies:
 Having put leasing companies as par with other non-banking financial institutions,
the Act puts the following principal restrictions on leasing companies:

Corporate form
 1. Apparent from the definition of sec. 2 (17) is the intent that only corporate bodies
should be allowed to engage in leasing business.

What can leasing companies do:

 2. There are no restrictions in the Act in leasing companies undertaking non-leasing
activities. Apparently, leasing companies can engage themselves in other financial
businesses, principally hire-purchase. Most leasing companies in Bangladesh
currently do not take up hire-purchase or long-term corporate lending activities,
though they do have exposures in money markets such as bills discounting, short-
term deposits etc.
 There is a bar in sec. 15 in leasing companies taking up any non-financial business
such as import, export, retail or whole sale business.
 Hire-purchase, it may be noted, is clearly covered by sec. 2 (2) (c) of the Act.
 Minimum capital, branching, etc:
3. The Act empowers the Bank to fix minimum capital
for leasing companies. Opening of offices and
branches is also regulated.
Restrictions on declaration of dividend
4. Sec. 10 prohibits a financial institution from
declaring any dividends without fully writing off all
direct and administrative expenses, share issue
expenses, brokerage, losses, and other capitalized
expenses.
 Exposure restrictions
5. Very important restrictions are contained in sec. 14 on
exposure by leasing companies. These restrictions are:
 Not accept any deposit which is withdrawable by cheque, draft
or order of the depositor; in other words, not to accept any call
deposits;
 Not deal in gold or any foreign exchange;
 Not to expose more than 30% of its capital in a single
individual, firm, body corporate or companies controlled by
such individual;
 Not to provide any unsecured loan facility exceeding Tk 5 lacs
to any person; it may be noted that in the language of the Act,
a lease transaction will be treated as a secured financing since
the lessor retains title over the asset, etc.
 Not to acquire immovable properties exceeding 25% of its
paid-up capital and reserves.
 Maintenance of liquid reserves
6. Companies accepting deposits from individuals
shall maintain 10% of their aggregate liabilities
invested in prescribed securities.
Maintenance of reserve fund
7. Each company every year shall transfer at least 20%
of its divisible profits to a reserve fund, unless the
aggregate of its share premium along with such fund is
equal to or more than the paid up capital of such
company.
Leasing law in Bangladesh:
Leasing is an asset renting activity, and is therefore, governed
by common law. The Contracts Act 1872 applies to contracts
of leases. Sections 148 to 171 of the Contracts Act cover
provisions relating to bailment.
As these provisions are identical to those applicable under
English law, the chapter devoted to general law of leasing
adequately covers the law in Bangladesh as well.
It may be noted that the general law of contracts is limited to
bailments of "goods". "Goods" include movable property only
- immovable property is not covered by common law. As it the
common feature of all Anglo-Saxon legal systems,
transactions in immovable properties are covered by a
separate system of laws.
Taxation of leases in Bangladesh:
The taxation system in Bangladesh has been a subject matter
of criticism over a last few years. The system is characterized
by a large number of incentives, tax holidays and
concessions as a result of which the share of corporate
taxation to total tax collection by the Govt. has come down
drastically over the past few years.

Taxes on corporate profits, of both domestically and foreign

owned companies amounts insignificant as a 0.95% of GDP
in Bangladesh, compared with more than 6% in developed
nations. The main reason cited for this low contribution is
the tax incentives granted by the Govt. which are very liberal
as compared to its counterpart countries.
The following are the important features of taxation of leasing in
Bangladesh:
No true lease guidelines:
A lease, in order to qualify for tax deduction, has to be
different from a plain financial transaction. Evidently, no
depreciation benefit can be claimed in case of a transaction
of simple financing of an asset.
No clear distinction between lease and hire-
purchase
The difference between lease and hire-purchase
transactions is a crucial difference for all countries which
allow depreciation based on ownership of an asset. It is a
basic rule of law that "ownership" for tax purposes is not
merely legal ownership - it must be backed by beneficial
ownership.
Beneficial ownership implies the right to attain
benefits of ownership at some point of time. In a
hire-purchase transaction, the legal owner (finance
company) cannot be treated as beneficial owner,
since, having provided the user with a right of
purchase, the owner has divested himself of
beneficial interest completely.

Incentives claimable by the lessor:

On an impassioned study of Bangladesh taxation
statutes, one finds there are plenty of incentives that
can be claimed by leasing companies in Bangladesh,
in spite of major reforms in taxation in 1998-99.