Leasing

What is Leasing
A
lease
represents
a
contractual
arrangement
under which the owner of the
asset ( 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 types1. 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

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;
Leveraged 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 lessors 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
1999-2011 www.velki.com , Dhaka Bangladesh. All Rights Reserved.

 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 nonleasing 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

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

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
characterised 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

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, inspite of major reforms in taxation
in 1998-99.