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For an outsider looking in, leasing market in Sri Lanka looks a strange admixture of stinging nettles in the midst of thrilling sops, very mature accounting standards also seen often in breach than in compliance, a direct taxation system full of generous incentives but plethora of indirect taxes (with such inducing names as Save the Nation tax), and so on.

For the size of the country and the age of the leasing industry, leasing in Sri Lanka can be said to be a force to reckon with. Eranjith Wijenaike [this and the following reference to Wijenaike are to his write-up for the World Leasing Yearbook] estimates the penetration of leasing [percentage of leased goods to total leasable capital goods acquired] to be 18.2% which is very impressive indeed.

Wijenaike reports that "the leasing industry, which commenced in 1984 with only three companies, has grown significantly to have over forty five companies actively involved in leasing. Specialised leasing companies, finance houses, major commercial banks, merchant banks and development banks are all engaged in leasing today".

In terms of equipment composition, the share of plant and equipment has come down relative to vehicles. The reasons are not difficult to appreciate: with the threat of non-performing assets looming large, vehicles are considered far safer as asset-based financings.

Leasing in Sri Lanka continues to be predominantly financial leasing. One or two market participants have started writing operating leases for motor vehicles. The market is not currently ripe for introduction of operating leases for most products except a few utility assets.

It is important to understand that the current regulation of the Monetary Board of the Central Bank of Sri Lanka is based on whether the entity in question is a deposit-taking entity or not. Depository institutions are regulated by the Central Bank; non depository institutions are not.

A model law for financial leases, drafted based on the UNIDROIT convention on international lease transactions, has been drafted and is under consideration of the Govt for adoption, but has not been enacted as yet.

The current regulatory framework is based on the Finance Companies Act, 1988 as amended in 1991. The Act requires registration of an entity carrying on "finance business". "Finance business" is defined in sec. 46 of the 1988 Act as "the business of acceptance of money by way of deposit, the payment of interest thereon and the lending of money on interest, or investment in whatever manner otherwise, etc. "Loan" includes a hire-purchase agreement as well as a lease agreement, in the loosely defined meaning of the term in sec. 46 of the Act.

Therefore, though both hire-purchase and lease have been included in the business of lending, they are not "finance business" unless the entity also accepts deposit of money, with interest payable thereon.

Clearly therefore, it is only the depository finance companies that are covered by the Act for regulation. A non-depository company, whether engaged in hire-purchase or lease activity, is apparently not covered by the Finance Companies Act

Similarly, unincorporated bodies are not covered by the Finance Companies Act, but there is a prohibition in sec. 2 (1) of the Act against any such unincorporated body engaging itself in "finance business". Again, this restraint is applicable only if there is a deposit-taking activity linked to such business: that is, an unincorporated body may well get into leasing business, but cannot source deposits from public.

The various restrictions are set out in the Act of 1988 as amended in 1991. The enactment empowered the Central Bank to issue directions in respect of several matters such as rate of interest, exposure, concentration, minimum initial hire in case of hire-purchase transactions, maximum shareholding limits, etc.

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