THE IMPACT OF FINANCE LEASE ON THE PERFORMANCE OF NIGERIAN BANKS

CHAPTER ONE

INTRODUCTION

Background to the Study: One of the most prominent issues in the corporate and financial world today is the issue of leasing (Abashiya, 2005). In the developed countries, it is almost an integral part of the overall financial system and often advocated as the least expensive and most advantageous form of funding (Afzal, 2003). As (Olusoga, 2003) indicates, the most generally accepted method of financing capital investment throughout the world is equipment lease financing option.

In Nigeria, although lease volume remains relatively insignificant in terms of world rankings, the concept is fast gaining recognition and has been influencing some major decisions in the various sectors of the economy. With the paucity of capital in the continent, many African countries such as South Africa, Zimbabwe, Ghana, Nigeria and recently Egypt have used leasing as a major anchor of their economic development policy with considerable success. In these countries, lessors are fully involved in investments in the extractives industries, transport, agriculture, construction and telecommunications (Olakunle, 2002).

Leasing has been used extensively in the financing of ships, aircraft containers, heavy-duty machines, plants and machineries, vehicles, cranes and bulldozers and assets of substantial value. The concept of leasing is applicable to both medium and long term financing. The essence of a lease contract is that the user and owner remains separate and the former pays the latter a regular rental for the use of the asset (Higson, 1990).

Firms use buildings and equipment in the production of goods and services. One way of obtaining these is to buy them, but an alternative way is to lease them. Prior to the 1950s, leasing was most often associated with real estate, land and building. Today however, it is possible to lease virtually any kind of fixed assets (Weston and Brigham, 1981).

A common decision faced by firms is whether to buy an asset by issuing debt to finance the purchase or to simply lease the asset. These alternative financing options have attracted a lot of studies and models. In a lease context, the debate has become enshrined in the phrase; “Lease or Borrow”, and “Lease or Buy”. (Bloomfield and Ma, 1974). Should firms be deciding between leasing and borrowing a purely financing decision, or between leasing and buying, or a combination of the investment and financing decision?

A lease is a legally enforceable contract which defines the relationship between an owner, the lessor, and a renter, the lessee. A typical lease spells out all of the terms involved in a land or merchandise rental agreement, including the length of time a lessee may use it and what condition it must be in upon return to the lessor. The amount of payments and any financial penalties for late payments may also be included in a contract. Most consumers encounter a lease when renting housing or leasing a car. It can be very short-term (a few weeks or months), or it can be extended for a number of years. Many small businesses and retail stores have agreements for 10 years or more, and renewal may just be a formality. Apartment renters, however, rarely sign a contract extending past one year of occupancy. Those who lease vehicles usually sign two-year agreements as opposed to five-year financing plans for buyers.  An agreement protects both the lessor and the lessee. The lessor knows that a legally binding contract obligates the renter to make regular payments throughout the life of the lease. The lessee knows that he or she has full rights to the property without fear of sudden seizure or eviction. A lease also guarantees that the original rental terms will not change until the contract has expired.

A lease arrangement does not always guarantee smooth sailing between landlord and tenant, however. Unlike a mortgage between a bank and homeowner, the contract between landlord and tenant can contain a number of restrictions. Renters and leasers are not owners, therefore the property is always subject to scrutiny by the landlord and/or titled owner. If certain conditions are violated, such as an unauthorized pet or a sanitation problem, the lessor can decide to terminate the agreement.

Another consideration is the length of the lease itself. Some renters sign longer leases in order to reduce monthly payments, only to encounter a more appealing situation long before the end of the agreement. A lease may allow lessees to legally break the terms if a new job is located 50 miles away or more, but in general the renter may have to honor the entire term. Some lessees may find someone willing to continue the rental obligation without a lease — a practice called subletting. Some landlords allow tenants to sublet, but it's not always a viable option. The important thing to understand about a lease is that it is a binding legal agreement and you should be aware of all the conditions before signing.

A finance lease is a lease that transfers substantially all the risks and rewards incidental to ownership of an asset. Title may or may not eventually be transferred. An operating lease is a lease other than a finance lease. A lease is classified as a finance lease if it transfers substantially all the risks and rewards incidental to ownership. A lease is classified as an operating lease if it does not transfer substantially all the risks and rewards incidental to ownership.

Whether a lease is a finance lease or an operating lease depends on the substance of the transaction rather than the form of the contract. The legal form of a finance lease is that the lessor is the legal owner of the leased asset. The economic substance of a finance lease is that the lessee has all the benefits and costs associated with ownership of the asset. The finance lessee is in the same position as it would have been if it had borrowed money to buy the asset itself. That is why such leases are called finance leases; they provide finance for the use of an asset. If the lessor includes this term in the lease the lessor knows that when the asset is given back to it at the end of the lease, the asset will only have a small value.

Therefore the lessor knows that it needs to make sure to recover the cost of the asset together with any related interest during the lease term. The rentals are set at a level which allows it to do this. The lessee will pay the full cash price of the asset together with related finance expense over the lease term. The lessee would only do this if it had access to the risks and benefits of ownership. In substance, this is just like borrowing the cash and buying the asset. Therefore, the lease is a finance lease.

1.2 STATEMENT OF THE PROBLEM

Contrary to what obtains in many development nations, leasing is relatively a new financing option in Nigeria. If we look at the exiting financing device or option open to small-scale enterprises shows that small-scale enterprise experience a chronic storage of institutional credit which ordinarily should form the bulk of their finance. This situation calls for remedy, and the researcher believes that leasing could be encouraged and promoted to satisfy to a great extent, the financing needs of small enterprises which helps in the growth of a nations economy.

For instance in Cross River State, the government has evolved measured to alleviate poverty through various agricultural projects, upgrading the status of some markets, providing and developing tourism capacity building, skills acquisition and empowerment of people. On observation of the entire state, it is discovered that small businesses are on the increase, ranging from G.S.M operators, barbing and hairdressing salons, to mention but few. But it is shocking that their gain are not easily recognized or felt in the economic advancement of the state.

This can be attributed to some bottleneck, such as difficulty in accessing micro finances, inadequate management, lack of experience and skill personnel especially in compiling a convincing feasibility study and work plan, market competition, inadequate capital and many other problems (Akakaye, 199:112).

Leasing has been long established as a creative financing tool for the acquisition of capital assets. Over the years, leasing has grown into an industry of imposing scope and even greater potentials are met through this unique form of financing. For example, small companies may lease to conserve cash and large profitable ones may lease to keep bank credit lines open for other purpose (Olakunle, 2002).

Therefore, leasing could be the right solution but the capacity of leasing to create wealth for the business sector has not been fully embraced in Nigeria (ELAN, 2004). In Europe the situation is almost the same (Giobanoli, 2005). The classification of finance leasing in private law remains controversial and various views are expressed with regard to this question.

However, many studies have been conducted in the area of leasing to assess how the sector is doing. Lemo (2003) evaluates leasing and economic development in Nigeria. The study examines the contribution of leasing to the Nigerian economy. Ajekigbe (2004) opines that the establishment of virile equipment leasing is a key ingredient in building a vibrant economy.

Wright (2004) evaluates the impact of leasing on the performance of small and medium enterprises in Nigeria. The study concludes that there is a positive impact on the performance of the small and medium enterprises from the perspective of profitability.

1.3 OBJECTIVES OF THE STUDY

The main objective of this study is to assess the impact of lease financing on the Nigeria Economy. More specifically, the study seeks to achieve the following objectives:

1. To assess the impact of lease financing on the profitability in Nigeria economy.

2. To determine the effects of lease financing on the investment volume of Nigeria economy.

3. To evaluate the contribution of lease financing to the growth of Nigeria economy.

1.4 RESEARCH QUESTIONS

This study seeks to address the following fundamental questions:

(1) To what extent is lease financing increases the profitability of Nigeria economy?

(2) What is the contribution of lease financing on investment of Nigeria economy?

(3) What is the relationship between lease financing and Nigeria economy growth?

1.5 RESEARCH HYPOTHESES

In line with the research questions, the following hypotheses have been formulated in the null form.

H01 Lease financing has no significant impact on the profitability of Nigeria economy.

H02 Lease financing has no significant impact on the investment level of Nigerian economy.

H03 Lease financing has no significant impact on the  growth of Nigerian economy.

1.6 SIGNIFICANCE OF THE STUDY

Since many studies have been conducted on leasing and firms of different industries and most of the outcomes shows positive impact of leasing on the firms, this study will serve as a pioneering effort of assessing the impact of leasing in the Nigerian industries.

This research will serve as a reference material for the academic community by enhancing the knowledge of readers and those interested in further research in the area of leasing.

It will also be useful to shareholders of banks to know the impact of leasing on their fund.

It is hoped that the result of this study will be of benefit to all participants in a leasing business especially to all members of ELAN in creating more awareness about leasing in Nigeria, which will improve the patronage and level of their business.

The management of banks used in this study will find the study very useful because it highlighted the benefits of lease financing on the activities of their banks.

Government and its agencies will also find this study useful, since it highlights the need to standardize the legal aspect of leasing in Nigeria.