Leasing in Pakistan

Leasing is a relatively new type of long-term financing method which is progressively gaining ground in the industrialised countries. There are two types of leasing viz., (a) “finance-lease” or “full payout” lease, and (b) “operating lease”. The “finance lease” is based on a contract between the lessor and the lessee for hire of a specific asset selected from a manufacturer or vendor of such assets by the lessee. The lessor retains the ownership of the asset and the lessee has possession and use of asset on payment of specified rentals over a period. Though the lessor is the legal owner, the lessee is given the exclusive rights to the use of the asset for the duration of the contract. The rentals during the fixed “primary” period are sufficient to amortise the capital outlay of the leasing company and provide an element of profit. The primary period is closely related to the estimated useful life of the asset and the lessee is normally responsible for all operating costs such as maintenance and insurance. The lessee has also the option for a “secondary” period of lease in which the rentals are reduced to a nominal amount. The period of lease usually ranges from 5 to 15 years depending on the useful life of the asset.

The “operating lease” is more akin to short-term hire-purchase arrangement and is also referred to as “non-full pay-out” lease as rentals are insufficient to enable the lessor to recover fully the initial capital outlay. The residual value is recovered through disposal or re-leasing the equipment to other users. Operating leasing has mainly been confined to specific kinds of equipment such as computers, motor cars, photo-copiers and similar items.

The banks in Pakistan may provide medium- and long-term finance either directly or through their leasing subsidiaries to firms under leasing arrangements. This method would be less risky and ensure to the bank a reasonable profit margin without having to look into the accounts of the firms. However, as against the practice currently in vogue, the cost of insurance of the assets will have to be borne by the lessor in order to make this method conform to the principles of Shari'ah. 

Source: Money and Banking in Islam, Ziauddin Ahmed; Munawar Iqabal; M. Fahim Khan. Republished with permission.