Leasing and it`s procedure ( MCB Bank)

Submitted To: Ms. Khudeja Warraich

Submitted By: Saad Nisar ( MBH01143) Abrar Zahid ( MBH0110 Zeeshan Arshad ( MBH0

Lease:
Leasing is an agreement between a landlord and a tenant the gives the tenant the right to use and occupy rental property for a period.

Leasing:
A process through which a firm or individual can obtain the use of certain assets by making series of contractual installments. Or Use Without ownership. The consideration for the lease is called rent.

Parties in Leasing:
Lessor A person who is the owner of the asset, which is being leased (bank or financial institutions). Lessee The person or party that undergoes for the lease contract, or is the receiver of the asset.

Types of lease Capital lease Operating lease Sale and lease back Leveraged lease Primary and secondary lease Domestic lease

ELEMENTS IN LEASE STRUCTURE This is an explanation of the elements in a lease - the parties, asset, rentals, residual value, etc.This section would also elaborate the unique features of a lease as different from a regularfinancing transaction. 1. The transaction:

The transaction of lease of lease is generically an asset-renting transaction. What distinguishes alease from a loan is that in the latter, what is lent out is money; in a lease, what is lent out is the asset. 2. Parties to a lease: There are two parties to a lease: the owner and the user, called the lessor and the lessee. Thelessor is the person who owns the asset and gives it on lease. The lessee takes the asset on leaseand uses it for the period of the lease.Any one can be a lessor, and any one can be a lessee, subject to usual conditions as tocompetence to contract, or holding of properties. Technically, in order to be a lessor, one doesnot have to own the asset: one has to have the right to use the asset. Thus, a lessee can be alessor for a sublessee, unless the parent lessor has restricted the right to sub-lease. 3. The leased asset: The subject of a lease is the asset, article or property to be leased. The asset may be anything - anautomobile, or aircraft, or machine, or consumer durable, or land, or building, or a factory. Onlytangible assets can be leased - one cannot contemplate the leasing of the intangible assets, sinceone of the essential elements of a lease is handing over of possession, along with the right to use.Hence, intangible assets are assigned, whereas tangible assets may be leased. 4. Lease period: The term of lease, or lease period, is the period for which the agreement of lease shall be inoperation. As an essential element in a lease is redelivery of the asset by the lessee at the end of the lease period, it is necessary to have a certain period of lease. During this certain period, thelessee may be given a right of cancellation, and beyond this period, the lessee may be given aright of renewal, but essentially, a lease should not amount to a sale: that is, the asset being givenpermanently to the lessee.In financial leases, is common to differentiate between the primary lease period and thesecondary lease period. The former would be the period over which the lessor intends recoveringhis investment; the latter intended to allow the lessee to exhaust a substantial part of theremaining asset value.The primary period is normally noncancelable, and the secondary period is normally cancelable. 5. Lease rentals: The lease rentals represent the consideration for the lease transaction. This is what the Lesseepays to the Lessor.If it is a financial lease transaction, the rentals will simply be the recovery of the lessor'sprincipal, and a certain rate of return on outstanding principal. In other words, the rentals can beseen as bundled principal repayment and interest.

Bank Leases: The lease finance facilities are available for a variety of assets (imported/local) conforming but not limited to the following categories: 1. 2. 3. 4. Vehicles (Private & Commercial) Plant, Machinery and equipment CNG Equipment Generators(Industrial & Commercial)

Who Can Apply?

1. 2. 3. 4. 5. 6. 7.

Sole Proprietors Partnership Firms (Registered / Un-registered) Private Limited Companies Public Limited Companies (Listed / Unlisted) Govt./ Semi Govt. Organizations/ Autonomous Bodies Pakistani national residing in the city and area where the product is launched. 25 years old or above when you apply and under 60 at the time of maturity of the applied financing period. 8. Salaried person, self-employed professional or a businessman with a verifiable monthly income stream. 9. Net take -Home income not less than Rs. 25,000 per month. 10. Have 5 years or more of business or professional experience. 11. Employed with the present employer for 2 years with a total employment history of 5 years.

BACKGROUND OF LEASE FINANCING IN PAKISTAN: The concept of leasing and hire purchase existed long before the first leasing company,National Development Leasing Corporation Limited was established in 1985. During 1985-1991periods, only six companies were established whereas during 1992-97, as many as, 27 leasingcompanies entered the market. Some of the modaraba companies are involved in leasing astheir business. The leasing sector has registered consistent and double-digit growthexcept for the last few years. However, this was mainly due to recessionary trend of the economy. The volume of leases underwritten over the years has increased mainly because leasing companieshave become the only source of medium-term financing. Initially leasing companies could start business with a capital of Rs 50 million. This limit wasraised to Rs 100 million in 1992 and further enhanced to Rs 200 million. Companies wererequired to increase the capital to this level by November 1999. However, a large number of companies failed to meet the deadline. All such companies have requested the SECP to extendthe deadline. The SECP was also requested to consider shareholders' equity (capital andreserves) as the capital for meeting this requirement. At present 32 leasing and 8 modaraba companies are members of Leasing Association of Pakistan. According to the information available from the Karachi Stock Exchange, 29 leasingcompanies posted profit for the year 1998-99 and 3 posted loss. Out of the profit makingcompanies 9 companies did not declare profit. As such leasing companies can be divided into three categories, large ticket, medium ticket andsmall ticket companies. While the five large size companies manage to get the largest share of the business, some of medium and small size companies have established their own nichemarket. Such companies, despite being small post modest return on equity. While the sector continues to operate under intense competition the new interpretation of oldlaws, particularly with regard to taxation, has become a serious concern for the companies. It istrue that the country needs additional revenues to minimize budget deficit, but tax collectorsmust refrain from issuing unrealistic demand notices. In this connection the tax regime mustread the explanatory note, regarding taxation, in the latest annual report of Orix LeasingPakistan. National Development Leasing Corporation was established in 1984 as a joint venture betweenAsian Development Bank, International Finance Corporation, National Development FinanceCorporation and local sponsors with a paid-up capital of Rs 20 million. As at June 30, 1999shareholders' equity was over Rs 1.2 billion. Orix Leasing Pakistan is a subsidiary of Orix Corporation Japan's largest leasing company. Itcommenced business in January 1987. Orix Leasing Pakistan serves as the regional base for theOrix Group's operations in the Middle East. It has strategic investment in and manages

jointventure leasing companies in Oman and Egypt. Orix Investment Bank Pakistan also has strategicinvestment from Orix Leasing Pakistan. First Habib Modaraba was floated in 1985 as a multipurpose and perpetual modaraba. It isinvolved in leasing as core business. Ever since its inception, it has been regularly payingdividend to its certificate holders. It paid the second-highest dividend for the year 199899among the 52 listed modarabas. Security Leasing Corporation commenced its operations in May 1995 and has a paid-up capitalof Rs 100 million. Foreign institutional investors are the majority shareholders in the Company.In addition to the leasing operations, the Company's activities include money market/short-term lending, capital market operations and project financing. Sigma Leasing Corporation commenced its business in January 1997. It has been sponsoredmainly by Almurtaza Machinery Company the leading supplier of apparel and textile made-up machinery for the last 26 years. The main focus of the Company is to provide lease financingto small and medium enterprises.

MAJOR LEASE FINANCING ACTIVITIES:LEASING OF REAL PROPERTY: Here are different types of ownership for land but, in common law states, the most common form is the fee simple absolute, where the legal term fee has the old meaning of real property,i.e. real estate. An owner of the fee simple holds all the rights and privileges to that propertyand, subject to the laws, codes, rules and regulations of the local law, can sell or by contract orgrant, permit another to have possession and control of the property through a lease ortenancy agreement. For this purpose, the owner is called the lessor or landlord, and the otherperson is called the lessee or tenant, and the rights to possess and control the land areexchanged for some payment (called consideration in legal English), usually a monthly rent.The acceptance of rent by the landowner from a tenant creates (or extends) most of the rights of tenancy even without a written lease (or beyond the time limit of an expiring lease). Althoughleases can be oral agreements that are periodic, i.e. extended indefinitely and automatically,written leases should always define the period of time covered by the lease. In the 1930s, theBritish government introduced infinite leases, only to remove the power to create these in theearly 1990s. A lease may be: a fixed-term agreement, in other words one of these two: for a specified period of time (the "term"), and end when the term expires;

conditional, i.e. last until some specified event occurs, such as the death of a specified individual; or

a periodic agreement, in other words renewed automatically usually on a monthly or weekly basis at will, i.e. last only as long as the parties wish it to,and be terminated without penalty by either party. Because ownership is retained by the lessor, he or she always has the better right to enforce allthe contractual terms and conditions affecting the use of the land. Normally, the contract willbe express (i.e. set out in full and, hopefully, plain language), but where a contract is silent orambiguous, terms can be implied by a court where this would make commercial sense of thetransaction between the parties. One important right that may or may not be allowed thelessee, is the ability to create a sublease or to assign the lease, i.e. to transfer control to a thirdparty. Hence, the builder of an office block may create a lease of the whole in favour of amanagement company that then finds tenants for the individual units and gives them control. Under common law, a lease should have three essential characteristics: 1. A definite term (whether fixed or periodic) 2. At a rent 3. confer exclusive possession

LEASE FINANCING OF TANGIBLE PERSONAL PROPERTY: An owner can allow another the use of a vehicle (such asvehicle leasing of a car, a truck or an airliner) or a computer either for a fixed period of time or at will. This can be a simple leasing transaction, or it can be a transaction intended to allow the user the right to buy the item atsome future time. o In a simple lease (rental) of a car, P pays O a rental for the use of the car during theagreed period which may be a few days (e.g. for a holiday trip) or longer where it ismore economic to pay for use rather than pay for the ownership of an asset of depreciating value. Normally, only P will be allowed to use the vehicle and, in such acase, P has possession and control. But, P could be an employer who allows C the use of the car to visit clients, and thereby gives C control. o In a lease with the possibility of purchase, O could allow P to lease the car for a specifiedperiod. If all the rental payments are made in full, P will then be allowed to buy the carat the contractual purchase option price. In a consumer lease subject to the

federalConsumer Leasing Act and the Truth in Lending Act, the purchase option price cannot bea "bargain" purchase, that is, it cannot be less than the originally estimated fair marketvalue. A "bargain" purchase creates an installment sale, to which the Truth in Lending Act (TILA) applies including the standardized disclosures, most importantly the AnnualPercentage Rate (APR). Typically, the vehicle dealer or other personal property selleroffers the leasing terms and contract of a third party finance company. Hence, O leasesthe vehicle to P, and upon execution of the contract simultaneously sells ownership of the car to F and assigns the lease contract to F. It is standard for the contractual termsto prohibit P from parting with possession or control of the car to another (if P does partwith possession, this can be atheftof the car from F).

There are two principal types of leasing, depending upon the party taking the risk of the valueof the vehicle (or other leased property) at lease end. In the U.S. this is calledClosed-endleasing.In other jurisdictions, it is calledhire purchase,lease purchase, orfinance leasing.These transactions are complicated. The most common problem arises when O makes specificrepresentations as to the quality and reliability of the car to P during the initial negotiations. If what is said induces P to buy the car from O, those representations would usually beenforceable against O. However, in this transaction, O first sells the car to F who makes norepresentations to P. The laws vary from state to state on the extent to which P might beallowed a remedy if the car proves to be of poor quality. To clarify the concept, the owner of tangible movables has the power to keep possession andonly to transfer control. This may be for: o short- or long-term storage (e.g. leaving a passport with hotel staff or depositingvaluable property in a bank vault- a hotel or bank holding property is a bailee); or o for delivery purposes (e.g. using a carrier to transport goods to a specific destination); or o It may be a form of mortgage a pawnshop holds apledgeover the goods depositeduntil the money lent is repaid. Leasing is a common method by whichairlinesacquire theiraircraft,usually from companies specialized in the field of Commercial Aircraft Sales and Leasing.Aircraft leasing transactionsare typically divided intofinance leasingandoperating leasing. Businesses often choose to lease rather than buy office equipment, including computers. Sinceoffice equipment depreciates rapidly,leasing can be more cost-efficient than ownership.In addition, more and more unconventional items are becoming available for lease, such as handbags and luxury watches.

EQUIPMENT LEASE FINANCING

Cash-starved businesses may want to consider leasing, rather than buying, equipment. Leasingaffords you access to many types of equipment: computers, copy machines, fax machines,trucks, and more. In addition, while leasing does not bring cash in the door, it does reduce theamount of cash needed to raise for your business. When you lease equipment, a manufacturer, dealer, or lender either buys or already owns theequipment you want. In exchange, you make monthly payments to the owner (lessor). Themonthly payment structure allows you to treat the payments as tax-deductible businessexpenses. Leasing also makes it easier to keep pace with technology. This is especially important if yourbusiness relies upon cutting-edge technology such as the latest computers, communicationdevices, or other equipment. A series of short-term leases will cost you less than buying newequipment every year or two. Some leases even have yearly computer upgrades built into themand eliminating the difficult decision of whether you can afford to upgrade. If you need equipment right away, leases are approved much more quickly than loans, andinvolve less paperwork and more relaxed credit requirements. Many equipment vendorsprovide lease financing, as do a number of banks. For early-stage businesses, equipment leasefinancing is more easily obtained from a vendor than from a bank. Ultimately, leasing equipment will likely prove more costly than buying, but if cash flow is animportant issue, then leasing is an attractive alternative.Then leasing, be sure to consider the following points: o Lease term. What is the lease term? The length of the lease will affect the amountof your monthly payment, with a longer lease term meaning a lower monthly rent. o Up-front payment. What is the size of any up-front payment? Can you reduce theupfront payment and amortize it over the life of the lease? o Monthly payments. Are the monthly payments reasonable? You can analyze theamount of the payment by determining the interest factor associated with thelease. o Return rights. For vendor-leased equipment, under what circumstances can youreturn the equipment if there are problems? o Early termination. Do you have the right to terminate the lease early? Most lessorswill be reluctant to do this, but you may be able to negotiate an early terminationright in exchange for paying a fee. o Option to purchase. Try to negotiate a right to buy the equipment. Equipmentlessors will often give you this right at the end of the lease term, usually for a fixedprice (e.g., 10 percent of the purchase price of the equipment) or at fair marketvalue. o You do decide to lease equipment, keep the term short -- two years is ideal. Try tonegotiate a "modern equipment substitution clause" that lets you update orexchange your equipment, so you don't end up paying for obsolete technology. Andinsist on a

cancellation clause that lets you pay a fee to cancel the lease. Be sure tonote the cost of any cancellation penalty

LEASING INDUSTRY IN PAKISTAN With the development of Pakistan's economy during the past decade and the privatization,deregulation and other industrial policies of the Government of Pakistan, the economy receiveda boost after a prolonged period of sluggish economic activity over the '70s and '80s. The first leasing company was established in 1985. The growth of the leasing industry inPakistan initially lacked momentum due mainly to a general lack of awareness regarding itsnature and benefits. From 1985 to 1997, 32 leasing companies were incorporated with theminimum capital of Rs. 100 million. The minimum capital requirement was raised to Rs. 200.00million by June 2000. This lead to mergers and acquisition. Thereby the number of leasingcompanies is reduced to 27. In addition, nine leasing Modarabas & 3 Investment Banks areactively involved in leasing business. In the mid-nineties annual average growth was in therange of 30 - 35 percent. The real growth in the leasing came in the period 1992 - 95, when over20 leasing companies were set up. In October 1995, leasing companies' paid-up capital wasRs.7.572 billion, with market capitalization of Rs.6.0 billion as on 30-06-2002. Leasing is not a very old phenomenon in Pakistan, but has gained acceptance very rapidly. The reasons are growing awareness, ease in obtaining the facility compared to conventional formsof financing (bank loans), inherent tax benefits, simple procedure and flexibility to cater to theneeds of the customer. Profit is earned with the asset, not the ownership. In leasing, theownership is vested in the leasing company and in return, for rental payments, the 'lessee' hasvirtually unrestricted use of the asset. Leasing is a medium to long-term hire of assets. Iteffectively increases a company's total availability of capital and leaves other sources of fundsavailable for usage that is more profitable. The leasing sector in general has experienced commendable growth over the years and hasadequately proved to be an alternative source of finance. In case of an expected economicrevival, the overall Leasing Sector is likely to regain its initial momentum particularly in thebackdrop of Islamization of the economy effective fiscal year 2002 - 2003 due to its inherentpotential of being in close conformity to one of the permissible modes of financing underShariah. However, in order to improve the near future demand prospects of Leasing Sector inparticular, the leasing companies need to develop innovative products along with encouragingleasing of plant, machinery and equipment relating to priority sectors of the economy includingenergy (CNG), IT (Computer hardware, software and accessories), textiles, engineering etcsubject to their intrinsic value. Agriculture sector is receiving special focus. The presence of commercial banks and DFI's in the lease market has impacted the leasing

company's margin,but their capability of offering large ticket leasing has enhanced the acceptability of leasing options.

Muslim Commercial Bank LTD. ( MCB)

Auto finance arose because the price of carswas out of the reach of individual purchasers without borrowing the money. The funding for personal car finance isprovided either by a retail bank or a specialistcar financing company. Some car manufacturers own their own carfinancing arms, Such as ford with thefordmotor credit company.

Defination: The financier finances foracquisition of vehicle whilepayment is to be made in equalinstallments comprising of bothprinciple and interest of the periodfor which a vehicle is financed.

MCB Car 4 U: Through MCB Car 4 u locally manufactured as well as imported cars can be financed at affordable rates. They can be either Brand new or used Slogen used: Kahin na Kahin tau Hai.. 1 Car 4 U

Features: Flexible: Option for financing or leasing Financing tenures from 1 to 7 years

Options for new as well as used cars Option for local as well as imported cars Financing up to Rs. 35 laces Option for early payment. Option for Replacement Loan Option for first year insurance financing

Affordable: Lower mark-up rates Lower insurance rates Only up to 10% down payment Equal monthly installments.

Speed: Fast and hassle free processing of application Priority delivery on different vehicles

Special Benefits: Option to pay your 1st installment after 3 months Pay your down payment after your loan is approved

Availability: Currently available in 16 major cities: Karachi, Lahore, Faisalabad, Rawalpindi, Islamabad, Quetta, Multan, Peshawar, Hyderabad, Sialkot, Gujrat, Gujranwala, Sargodha, Mirpur (AJK), Jhelum, Sahiwal Will soon be launched in Rahim Yar Khan, Sukkur, Mianwali, Abbottabad, Mardan and many more cities.

Existing Customers: Get 1 % discount if you are already our customer for Personal Loan, Pyara Ghar or Business Sarmaya. If you are our branch customer, you can avail this facility anywhere in Pakistan

Types of Auto-finance:
o For individual customers o For Business Sectors

Process of Lease
Process of lease consist of the following steps:

Contact of customer for lease information First of all the company in case of corporate lease or the individual in case of auto leasecontacted the MCB for getting information about the lease options and terms.Marketing and credit officer give this information to the customer. He gives them leaseproposal in which terms of lease are mentioned about their selected lease option. Inother case marketing and credit officer himself contacted the company or individual andgive them the lease proposal.

Approval of Lease proposal If the company or individual accepts the terms and conditions of the lease proposal theygive the lease acceptance to MCB.

Submission of the required documents by the customer Marketing and credit officer ask customer to submit the required documents for gettingasset on lease which are as follows:

For an Employee 1. Copy of National Identity Card 2. Copy of recent Utility Bills (Residential) in his / her name

3. 4. 5. 6.

Copy of last six months Bank Statement Copy of Ownership Documents or Rent Agreement of the residence Original / Copy of recent Pay slip A letter from employer confirming: Date of joining Designation Salary Package

For a Self-Employed Person (Professional), Like Doctors / Lawyer etc. 1. 2. 3. 4. 5. Copy of National Identity Card Copy of Ownership Documents or Rent agreement of the residence Any of the recent utility Bills (Residential) Copy of Professional Degree Copy of Membership Evidence in case the applicant is a member of anyprofessional organization 6. Financial statement (audited) or Management Accounts, If audited FinancialStatement are not available. 7. Copy of Last two years Tax Assessment Statements. 8. Copy of Last Six month`s Bank Statement

For a Businessman (Individual) 1. 2. 3. 4. 5. 6. Copy of National Identity Card Copy of Ownership Documents or Rent agreement of the residence Any of the recent utility Bills (Residential) Copy of Last two years Tax Assessment Statements. Copy of Last Six month`s Bank Statement Copy of Driving License

For a Business (Corporate) 1. 2. 3. 4. 5. Copy of National Identity Cardsof all partners (if partnership) Copy of Last two years Tax Assessment Statements. Copy of last three years audited accounts (Balance Sheet, Profit & Loss Account) Copy of Last Six month`s Bank Statement Copy of Form 29

6. Copy of Form A 7. Copy of Certificate of Incorporation 8. Copy of Ownership Documents or Rent agreement

Analysis of the credit worthiness of the customers After the submission of the documents by the customer credit worthiness of thecustomers is evaluated for giving them asset on lease. Individuals (employee) credit worthiness is evaluated from their salary slip and bankstatements. From these documents they come to know the monthly income of thecustomer and deposited amount in the bank account. Individuals (businessman) credit worthiness is evaluated from the bank statements theygave from the bank statements they done the volume test to calculate their monthlyaverage revenue. Also marketing and credit officer personally visited the customers business place to verify the information provided by the customer. Corporate customers credit worthiness is evaluated from the financial informationprovided by them. From their financial statements (balance sheet, income statementsetc;) ratios analysis are conducted to measure the financial strength of their business.

Approval: Credit limit, which can be approved by different persons are as follows: Designation Credit Limit Assistant Manager 500,000 Manager 1.5 million SR. Manager 2.5 million A.G.M 3.5 million Director marketing 5 million Managing director 10 million Executive committee 30 million Board of Directors Above 30 million

Final procedures:

After approval of the lease legal documents are prepared and signed by the lessee andlesser. Deposit is taken from the lessee and purchase order is issued to the vendor incase of direct lease. In case of sale and lease back first vendor issue sale invoice andcash receipt to the lessee, lessee gave these documents to MCB and issue sale invoice to MCB. MCB then issue purchase order to lessee and leased the purchased asset tolessee. After this lessee rentals are started which can be in advance or in arrear. In corporate lease two types of files are prepared1. 1. Approval file 2. Payment file

Approval file In approval file documents relating to credit evaluation and are kept. Lease Application Form Summary lease report Annual Reports Lessee information sheet Volume test Bank statements Tax Returns Property documents Purchase certificate Checklist for lessee

Payment file: In payment file all legal documents are kept such as lease contract, promissory note,acceptance receipt, undertaking indemnity for the use of the asset, for import, taxes,duties and other charges, for insurance premium, also it include guarantee andindemnity, execution slip, all rental receipts and all other memos related to the leasedasset. In case of auto lease there is only payment file and all document are kept in it.

1. Have some knowledge about customers budget 2. Setting a down payment 3. Know customers Credit Conditions & documentation Credit information Public Recordinformation Credit Inquiries Personal Information 4. Security arrangements by Bank The vehicles financed by thebanks shall be properly securedby way of hypothecation. Payments against the sale orderswill directly be made to the manufacturer/authorized dealer by the bank Upon delivery, the vehicle willimmediately be hypothecated tothe bank 5. Down Payments and Maximum price financed Down payment does not fall below 10% of the value of vehicle. Further, banks shall extend autoloans only for the ex-factory taxpaid price fixed by the car manufacturers. In other words, banks cannot finance the premium charged by the dealers and/or investors overand above the ex-factory taxpaid price of cars. 6. Insurance cover for vehicle financed The bank shall ensure that thevehicle remains properly insuredat all times during the tenure of the loan.

However, where the bank holds100% provision against suchloan bank may not obtaininsurance cover for the vehiclefor remaining tenure of the loan. 7. Repossesion of vechicle The clause of repossession in case of default should be clearly stated in theloan agreement mentioning specificdefault period after which therepossession can be Initiated. The repossession expenses chargedto the borrower shall not be morethan actual incurred by the bank.

Factors to be kept in mind:

Your target monthly payments Loan term Market Finance rates Down Payment Insurance Cover Hidden Charges

Documents Required:

FOR BUSINESS PERSONS: Copy of CNIC. Two recent passport size coloredphotographs Last six months Bank statement(s) Residential utility bills (as a proof of residence) Business proof required Copy of valid driving license (optional) Two references Banks Signature Verification form

FOR SALARIED PERSONS & SELF EMPLOYED: Copy of CNIC Two recent passport size colored photographs Last six months Bank statement(s) Recent salary slip

Employment certificate Residential utility bills (as a proof of residence) Copy of valid driving license (optional) Two references Banks Signature Verification form