Enhancing the Leasing Enabling Environment - Economic Growth ...

leasing to a specific type of lease product (e.g., a finance lease as defined by accounting
criteria), which will constrain growth and innovations in the leasing sector.
It is also important to know how borrower-defaulted lease transactions are handled in the
courts. Leased equipment is owned by the lessor, who should have immediate rights to
repossess their equipment if the lessee defaults. The judicial process and its timing are
important elements in developing a productive leasing environment.
Current tax considerations under leasing. It is critically important to have clear direct and
indirect tax regulation regarding leasing. The more favorable tax considerations are for
leasing, the greater economic impact it can have. More important, a lessor will incorporate
effects of tax into the pricing of each lease transition. An unclear or misinterpreted tax rule
can make the difference between a profit and a loss on a lease transaction. Also, the amount
of VAT due can vary depending on whether the transaction is considered a ―delivery‖ of a
good or the ―supply‖ of a service. This can significantly change the cost of financing for the
borrower and/or the leasing company’s lease yield.
Operational capabilities. Leasing is not an easily transferable skill from lending. It requires a
different approach in accounting, documentation, credit underwriting, monitoring, knowledge
of equipment, and its valuation and marketability. Leasing is one of the most flexible forms
of equipment financing and requires personnel who understand leasing and an operational
system that can properly monitor the risks of a lease portfolio.
The biggest advantage that leasing companies have over banks is that they raise capital through
debt and equity instruments, not deposits. Banks are regulated to ensure that there is a match of
maturities between its loans and deposits; leasing does not have this constraint.
The commercial or company law (i.e., civil code) should be reviewed to determine capitalization
requirements, if any, for a leasing company. Banks like to have leasing as an additional financial
service to its customers; however, caution must be taken to understand the national bank rules on
subsidiary investments by banks. There are often limits on the percentage of a bank’s capital that
can be invested in a subsidiary, such as a leasing company. Capital investment in a subsidiary
includes debt, equity, and guarantees. In the beginning, the limitation may not be significant, but
it can quickly curtail leasing activity if the demand outstrips the parent company’s (i.e., bank’s)
ability to raise additional capital.
Increasing the capital of leasing companies in emerging economies can be challenging. There are
two ways to do this: through debt or equity. Equity can be the most challenging because the
leasing company is usually not willing to give up any percentage of its ownership. Sources such
as the International Finance Corporation (IFC), investment funds, and, in some cases, donor
agencies such as USAID are possible candidates to provide loans. However, these lenders
usually require some percentage of equity as added security for the loan. Other financing
alternatives include other local banks or correspondence banks of the parent company. The
leasing company should be evaluated like any other borrower; the lender usually requires
sufficient collateral and guarantees from the parent bank.
Leasing companies generate leases that have value in their payment streams (i.e., the monthly
collection of all lease payments). One alternative for a leasing company to raise capital is to
package a portfolio of leases and pledge them as collateral to another lender. There are
FS SERIES #7: ENHANCING THE LEASING ENABLING ENVIRONMENT 19