The lesson on leasing
Leasing offers opportunities that businesses in Nigeria overlook or are unaware of. At the 13th lease conference organised by the Equipment Leasing Association of Nigeria [ELAN], stakeholders explain the imperatives of building sustainable national or regional leasing association that provides legislative advocacy and capacity building for leasing companies and members. Bukky Olajide writes.
The discussion at the 13th Lease Conference held recently in Lagos kicked off with a key question: who should regulate the leasing industry and its practitioners in Nigeria? Should it be the government or the market? The theme of the conference was “Equipment Leasing Act 2015: Understanding and Playing in the Evolving Leasing Industry”.
Speaking at the event, the head of IFC Financial Institutions Group [FIG], World Bank Group, Riadh Naouar, gave an insight drawing from the United States’ example.
He said there is a system of checks and balances imposed by the government and the market. For small players, bank creditors exercise control and measure efficiency; for medium and large players, the Security and Exchange Commission makes sure that the markets are informed and the analyst and credit rating agencies control the efficiencies, he explained.
“But the bankruptcy law provides an orderly exit of the inefficient and reasonable recoveries of creditors.”
Explaining further, he said in the developing countries like Brazil and Mexico, the story is different. There is no Central Bank or Federal Reserve System Control for leasing companies. In these countries, the system of checks and balances is transmitted by the Central Bank to the market while the apex Bank exercises a reasonable control and no co-management of the companies as in other countries.
‘ ’Only when the alarm signals are triggered, then the Central Bank intervenes, to possibly correct the deficiency; if the deficiency is not curable, then it liquidates the companies. But liquidation must be very fast, and it is conducted generally through the immediate sale of portfolio to the other market players.”
Naouar suggested that Nigeria adopts its own rules for the corporate structure, control and regulation of lessors which must be done according to the degree of development of its capital markets and the structure of the economy as well as according to the definition of the shareholders that need to be protected from abuses, negligence or poor practices.
Also speaking at the event, Theophilus Emuwa of Aelex [Legal practitioners and arbitrators] observed that, prior to legal framework of 2015, Nigeria operated on the English common law and Hire Purchase Act of 1965.
He explained that implied terms under common law is similar to terms under the Hire Purchase Act which was delivery of the equipment and redelivery of good title to the equipment, description of the equipment, quality and fitness for purpose, quiet possession and payment of installments.
The Act only applies to motor vehicles and small items that are worth as much as N2, 000, which is now considered small.
Emuwa expressed worry about section 36 of the act which makes ‘’capital allowance available only to lessor in operating lease, but said that it may be helpful to link register with CAC’s charges register
Managing Director, FleetPartners Leasing Limited, Samuel Akinniyi Ajiboyede on his part, examined leasing business without technology. He noted that doing leasing without the deployment of technology tends to lead to high cost, clients dissatisfaction and distrust: cumbersome data gathering, uncontrolled expenditure, staff misbehavior, asset abuse, inaccurate reporting and scheduling among other negative outcomes.
But with technology, the benefits are many, he said. He listed the benefits to include cost efficiency, effective risk management, minimal downtime, accurate reporting and scheduling, efficient staff, smooth communication channel between organization and stakeholders, effective maintenance management and profit guaranteed within transaction cycle.
Executive Director, Lagos and West Diamond Bank Plc, Victor Ezenwoko examined the economic impacts of a virile leasing industry. Asking why has leasing grown so fast, he answered by attributing it to a number of benefits enjoyed by lessor such as asset ownership, lower transaction costs: lighter regulations, [because leasing firms are not deposit taking institutions] tax incentives, [although they are eroding] and better control on utilization of funds.
“For lessee, there are fewer requirements about balance sheets, no outside security or collateral needed, low documentation cost, leasing can finance a higher percentage of equipment than bank loans while governments allow lessees to deduct full lease payments from their income before tax.
“For the market, leasing companies have helped develop capital markets by increasing financing options for segments of the market which previously relied on informal financing, supplier credit, and internal cash generation.
According to Ezenwoko, the industry is critical to the economy for the following reasons:
Leasing is a crucial approach to acquiring a variety of equipment types, especially high- tech equipment, which is so vital to innovation and growth. Its arrangements are used by all sizes of businesses, even though their capital requirements may differ.
Leasing is non discriminatory and cuts across goods-producing and services-producing industries in the economy. It increases the market for capital goods at a margin facilitates greater growth in new capital goods production and investment
And finally it creates employment and facilitates the growth of entrepreneurship and small businesses.
Ezenwoko also explained why leasing is attractive to SMEs. According to him, leasing provides many advantages to SMEs that do not have a lengthy credit history or a significant asset base to purchase equipment or collateral to secure a loan.
Leasing companies evaluate a potential lease based on the lessee’s ability to expand the business from revenues generated through use of the asset. Banks on the other hand evaluate client based on prior credit history and financial statements.
Leasing may be the only source of financing as access to capital markets or bank loans is difficult given the small size of these companies and/or their unproven track record.
The entry of leasing firms in financing the MSME has encouraged competition in many markets, whereby some of the banks started to go down-market in order to serve the smaller clients.
A number of SMEs struggle with inadequate access to the medium or long-term financing to invest in newer, better technologies and improved equipment as well as to finance agricultural production. Leasing is an important source of funding for SMEs, which are key drivers of economic development in developing countries.
“We must encourage an appropriate legal and regulatory environment, conducive for potential leasing players to enter and exit the leasing market. Market-oriented guarantees, such as USAID’s Development Credit Authority (DCA), can be used in conjunction with technical assistance to generate greater access to finance among leasing companies.”
Donor interventions in the leasing industry should entail a combination of investment and technical assistance. Leasing support services that serve rural and agricultural SMEs are more effective when located in the areas where rural and agricultural SMEs operate.
There is need for more public awareness and public education initiatives about leasing and its benefits and risks to effectively impact market supply and demand.
The industry needs to advocate portfolio diversification as an effective risk mitigation tool for leasing companies to safeguard against defaults.
The chairman, Board of Directors, ELAN, Chuka Onwuchekwa, restated that leasing has continued to contribute to the nation’s development, improving the economic landscape and wealth creation.
‘’In the last 10 years, the leasing industry added assets worth over N4.8trillion to capital formation in the Nigerian economy. In 2014, outstanding lease volume was estimated at N869 billion, up from N780 billion in 2013, representing a growth rate of 11.3 percent,’’’ he said.