Sri Lanka – An Emerging Economy and an Emerging Leasing Industry (Part 2 of 3)

In the previous article on Sri Lanka and their leasing industry, we looked at the economy and the historical leasing model of local banks offering finance leases for vehicles but little else.

In this article we look at the leasing  industry today, how the Leasing Association has been structured and how leasing of “non vehicle” equipment is managed.

Every emerging market for equipment leasing faces two main challenges;  which comes down to supply and demand;  these are product development (supply) and market education about the availability of leasing (demand). The growth of the industry depends nearly entirely on these two factors (taking out for the time being the legislation that can either make it hard to transact business or even harder). Too much or unclear  legislation is restrictive such as in China and too little such as in Mongolia can increase the risk of leasing for a lessor.

The “Catch 22” of this situation is that banks and finance companies will not invest resources in product development until demand is registered in the market but demand will not start until the market has been made aware of the benefits of leasing to their companies.

The creation of the Leasing Association of Sri Lanka is an excellent step forward for the industry participants. To become a member you have to be a Commercial Bank, Development Bank, Merchant Bank, Registered Finance Company or Specialized Leasing Company that is registered with the Central Bank of Sri Lanka under the Finance Leasing Act of 2000. As a regulatory body this, on the surface makes good common sense. The many years of experience that is represented by it’s members as well as it’s Committee offers a great deal of knowledge to such an august body.

Their recently refurbished web site reflects the equipment that the industry has experience of when they talk of vehicle valuations in the country.

This begs the question” How does the Association help develop Equipment Leasing away from the traditional focus on vehicles?”

As with any equipment leasing emerging country  nearly all finance companies/banks start with vehicle leasing as it is a known asset with a reasonable residual value or at least a solid second hand market. This was the case in the UK, Europe, America and Australia when the leasing industry started to grow.

The next step would often be the emergence of foreign banks and equipment vendors coming into a country (such as China) with their success records on equipment finance from around the world. But Sri Lanka only has a GDP of US$ 60 billion and is therefore a relatively small market and so far too small to attract many IT vendor finance companies such as IBM, HP, Cisco or Netapp. Even the noted equipment lessor banks such as Macquarie Equipment Finance have shown no interest. The latter is not too surprising as Macquarie appear to have a marketing approach to Asia of “Now we’re in and now we’re out”.

So this traditional next step is not happening in Sri Lanka. In fact the market has created the next step for equipment leasing as import taxes on vehicles have increased over the last year by up to 200%. The vehicle registrations have been down for months and some imported vehicles are being re exported as they cannot be sold in Sri Lanka.

We therefore see the equipment leasing companies wondering what to finance as their markets have effectively vanished.

As I mentioned in the first article, the economy of Sri Lanka is growing at a steady pace of around 7% per annum with hotels and tourism being the fastest growing industry. At the same time, increased tourism places a greater strain on the country’s infrastructure.

The government have changed legislation recently to make it easier for foreign investment. This has seen an influx of funds from China to build the new freeway from Colombo to Galle in the south(opened just a few months ago) , a US$200 million loan to the government for their new international airport in the south at Hambantota called Mattila airport (opened in March 2013) and further similar investments in the ports and power stations.

James Packers group (the Australian entrepreneur) is looking to build a casino in Colombo and a resort facility on the east coast at Trincomalee. The majority of tourists to Sri Lanka still originate in India and as gambling is illegal in India this should create a new market for the country. Not dissimilar to Macau and mainland China relationship for gambling.

How therefore does this impact the equipment leasing market?

The growth of the economy in all the above sectors involves equipment in some shape or form. From construction and technology to power plants and shipping. Sri Lanka is poised to make a spectacular entry into the global leasing arena. Watch out for it  in future White Clark Group annual surveys.