Leasing

KOM AL S H AM IM
127 88

Definition of Leasing
A legal document outlining the terms
under which one party agrees to rent
property to another party.
A lease guarantees the lessee (the renter)
use of an asset and guarantees the lessor
(the property owner) regular payments
from the lessee for a specified number of
months or years.
The lessor is either the assets

Term of the Lease

The term of the lease is the period for which the
agreement of lease financing remains in
operation.
Term of the lease can be:
1. Fixed
2. Periodic
3. Indefinite

Rent
The consideration which the lessee pays to the
lessor for the lease transaction
Rent is paid for the following reasons:
1. Investment made in the asset,
2. Repairs borne by the lessor ,
3. Servicing charges over the lease period

Types of Leasing
1. Finance Lease

Do not provide for maintenance or service by the

lessor.

Financial leases are fully amortized.

The lessee usually has a right to renew the lease

at expiry.

Generally, financial leases cannot be cancelled,

Examples :
Ships
Aircrafts
Railway Wagons
Land
Building
Heavy Machinery, etc

2. Operating Lease
.Usually not fully amortized. This means that the
payments required under the terms of the lease are
not enough to recover the full cost of the asset for
the lessor.
.Usually require the lessor to maintain and insure
the asset.
.Lessee enjoys a cancellation option. This option
gives the lessee the right to cancel the lease
contract before the expiration date.

Examples :
Computers
Office Equipment
Automobiles
Trucks
Telephones ,etc

3. Direct Lease
A contractual financing arrangement in
which the lessor, typically a bank, purchases
the property directly from the manufacturer
and leases that property to lessee.

Buying Vs Leasing
A comparison between buying and leasing
can be drawn on the basis of :

Ownership
Responsibility
Resale Value
Depreciation
Maintenance
Cost

Advantages
Leasing is lesscapital-intensive than purchasing.
Leasing enables businesses to preserve precious
cash reserves.
Capital assets may fluctuate in value. Leasing shifts
risks to the lessor.
Leasing also allows businesses to upgrade assets
more frequently ensuring they have the latest
equipment without having to make further capital

It gives businesses certainty

In some cases a lease may be the only
practical option
Leasing may provide more flexibility to a
business which expects to grow or move in the
relatively short term, because a lessee is not
usually obliged to renew a lease at the end of
its term
Tax reduction

Disadvantages
The lessee does not get the ownership of the
asset.
In case of default of lessee in rental payment,
the lessor is entitled to take over the asset and
the lessee has no right to prevent him from
doing so.
The long term expense of leasing is quite high
as you pay more than the actual cost of the
item.

Leasing in Pakistan
Leasing started in Pakistan in 1983 and has had the
benefit of Government support from those early days.
In Pakistan, SMEs have traditionally been core
customers for leasing companies. During the 1980s
and early part of 1990s leasing companies were the
main source of medium term finance for SMEs and
many small enterprises benefited widely from lease
financing.
Transport sector which was almost entirely captive to

Leasing industry will continue to innovate and

will take bold steps to keep expanding.
Car sales took off with leasing support and
now leasing companies are beginning to enter
agricultural sector through tractor lease, farm
loans and operating leases for harvesters.
Microfinance is another area which leasing
companies have recently started focusing on.

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YOU