CHAPTER ONE INTRODUCTION 1.1 BACKGROUND OF THE STUDY
Since the commencement of lease financing by indigenous institutions in the early 1970’s the leasing industry has been going through various problems. Although modest growth has been recorded over the years with the establishment of more merchant banks in the 1970’s 1980’s and the early 1990’s. The introduction of the Structural Adjustment Programme (SAP) in 1986 brought in its wake, local currency against major international currencies. This single most important feature of SAP imposed severe operating conditions on business occasioned by high rates of inflation and the attendant high cost of raw materials, spare parts, capital equipment and other inputs. As though this was not enough the trade Liberalization aspect of the programme encouraged the influx of foreign goods, produced under much more efficient systems (with, more efficient technologies) which were inevitably more competitive in price as well as quality, compounded the problem of local manufacturers, who could hardly muster enough foreign exchange required to procure raw materials and essential parts to operate at economic level.
The result was that the local businesses that were somehow able to remain in business were operating at low or no profit. For those few that were able to record either absolute profits, the profit represented sharp declines in real term; in other words the profit were only inflation profits. Severe cash crush was, therefore, the lot at most business and, it was virtually unimaginable to general adequate cash flow to acquire capital equipment for expansion or moderating programmes not to talk of setting up new facilities. It was during this period that equipment leasing presented itself as perhaps the most attractive means through which business could acquire equipments they so badly needed (Osaza: 1-3). This was so because under a lease, a business concern could, with little or no financial outlay have the use of the equipments it desired (which it would eventually own) in return for which it was to make periodic payments to the leaser (the equipment provider) during the lease term.
Ironically, the same conditions brought about by SAP, which naturally opened the eyes of many equipments users to the irreversible alternative of equipment leasing also contained the capacity of the banks to meet the enormous lease financial needs. For one, the sheer volume of funds required to fiancé equipment acquisition imposed a stain on he funds of banks available for lending activities. The situation was compounded by the news requirement in 1991. That lease financed is counted in the aggregate credit volume determination for banks. To further compound matters, the Nigerian Accounting Standards Board (NASB) released almost simultaneously, statement of accounting standards No. II (SAS II). SAS II ruled that bank leases finance lease and therefore, banks as lessons should not claim capital allowances (Akinfeiwa, 2013). These developments drastically reduced the enthusiasm of banks in lease financing.
The issue of capital assets inspection provision of inspectorate division of the federal ministry of industry (which is very vigorous and clumsy) (Akinfemwa, 2013) Before procurement of acceptance certificates by lessors is frequently being cited as another major disincentive of growth of lease finance by Banks in Nigeria. The withholding tax normally charge on lease income is also disincentive to bank lessors as it reduces income on lease transactions. In both of these cases, the financing of capital equipment tends to be accomplished through other types of credits e.g. loans, overdrafts, and commercial papers etc and because some of these facilities are inappropriately utilized to fund equipment acquisition. This often leads to problems of default in their servicing or repayment. Bank would, therefore do well to consciously discourage the use of these facilities were lease finance may be more appropriate, this will consequently lead to a health, growth in the leasing industry, which will in turn help the growth of the leasing industry in Nigeria. Although lease financing by indigenous financial institution is well over two decades old and although training and retraining of leasing personnel is to be vigorously pursued, knowledge of the subject is still either inadequate or is not being put to use in the promotion of lease financing. The many different ways a lease can be structured or tailored to suit the circumstances of the lease, while meeting the investment objective lease and lessor, can decide both a prospective lease and lessor to have a lease transaction instead of some other format of leasing knowledge by banks personnel involved in leasing will, therefore, go a long way in generating or increasing interest in lease financing.
1.2 STATEMENT OF THE PROBLEM
Leasing is an aged old business dealings but the subject has not received adequate attention from authors particularly in Nigeria. Some of the problems are: The banking industry substantially lost interest in lease financing in the wake of the issuance of the Statement of Accounting Standards No. II (SAS II). The limited growth of lease financing in the banking industry is significantly related to the use of other forms of credits at the expense of lease finance to finance equipment acquisition. Commercial banks do not appear to have been making conscious efforts to employ this innovative vehicle of finance in meeting relevant needs of their customers. This is because these facilities are in many cases unsuited for the purpose they are growth (mismatch). However, owing to the relative case and convenience with which they are arranged in some cases, they are preferred by especially the borrowers, to meet their immediate needs. Also, the assets used to cover such lines of credit may not be realistically valued or revalued. Their nature (e.g. floating assets in a floating debenture securing arrangement) may also quit easily get the odds stacked against the lender when it comes to realization. The problem of limited growth of lease finance, that leads to other problems in other form of credit which may in turn plunge the organization into the more serious problem of distress. The consequences of this for the banking industry need not be overemphasized.
1.3 OBJECTIVE OF THE STUDY
The objectives of this research are:
To find out whether banks lost interest in the leasing as a result of the introduction of SAS II?
To find out whether the use of other forms of credits at the expense of lease to finance equipment acquisition affect the growth of lease financing positively in the banking industry.
To recommend solutions to the problems militating against the growth of the leasing business in the banking industry.
To emphasize the main features of the different types of lease, their implications, and how these can be adapted to suit the circumstances of the borrowers.
To emphasize the relevance of lease financing compare to equipment lease financing.
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