Financial leasing to boost productivity |26 February 2014

Domestic productivity is set to receive a big boost with the coming into force of the Financial Leasing Act.

Financial leasing, which is essentially a means for financing assets, is expected to provide the public with an alternative means of finance.  This will be particularly beneficial to small and medium-sized enterprises (SMEs), many of which may not necessarily have the collateral requirements to acquire a loan from a bank.
 
Given that the lessor retains legal ownership of the leased asset during the tenor, additional collateral is seldom required, as in most cases the asset will itself effectively serve as the collateral.  This is expected to therefore increase domestic productivity thereby leading to increased employment, labour specialisation, and greater export potential, to name but a few.

The ‘Financial Leasing Bill 2013’ was approved by the National Assembly on October 29, 2013.  The Bill was subsequently accorded Presidential assent on November 18 of the same year, thereby giving existence to the Financial Leasing Act, 2013.  The Act seeks to:

•    introduce the concept of financial leasing and the parties involved, being the lessor (person licensed to conduct financial leasing), lessee (person granted the right to possess and use the asset) and supplier (person who supplies the asset to the lessors) of the moveable asset;

•    specify the rights and duties of lessors, lessees and suppliers of the asset;

•    provide for an expedient repossession mechanism process;

•    provide for the assignment of a registry for leased assets; and

•    provide for the licensing, regulations and monitoring of financial leasing institutions and for matters connected therewith or incidental thereto.

Financial leasing is used in many countries and is essentially a means for financing assets.  It can be defined as an agreement between three parties – namely the lessor, lessee and the supplier – whereby the lessor provides an asset for use by the lessee, for a period of time (known as the tenor) in return for specified payments by the lessee.  These assets can in turn generate an income for the business and is useful when the asset used generates an income in excess of the agreed repayments.  It also allows a person to better manage its business as it frees up the cashflow, allowing such to be more efficiently allocated.  This can provide a business with a competitive advantage over its competitors and can lead to long-term profitability.

Financial Leasing is geared towards large value assets principally being acquired for commercial ventures.  Thus, for illustrative purposes, assets that could be financed by a financial lease could include earth moving equipment such as dump trucks and excavators. Tourism establishments wishing to also invest in a large volume of a certain type of asset could also acquire such through a financial lease, and this could include things such as television units for each room, hairdryers, kitchen equipment and mini-fridges, just to name a few.  It is also common around the globe for farmers to acquire machinery via a financial lease.

Typically, the lessee will choose the asset and negotiate the price and purchase modalities with the supplier as well as the required guarantees.

 These information along with any other additional information required are submitted to the lessor for processing.  If the request is approved, the lessor will communicate such with the lessee and advise of their required terms and conditions.  Subject to the lessee’s acceptance of said terms and conditions, the lessor and the lessee may enter into an agreement for the supply of the asset.
 
 The lessor will then liaise directly with the supplier to obtain a supply agreement, arrange for delivery and effect payment.

Upon delivery and acceptance of the asset by the lessee, the terms and conditions of the financial lease agreement become irrevocable; and the lessee is then required to effect the agreed payments during the tenor period.  During this tenor, the lessee is granted the right to possess and use the asset subject to the terms and conditions of the financial lease agreement.

It is crucial to note that under a financial lease agreement, the lessor retains legal ownership of the leased asset, while the lessee attains economic ownership and assumes the risks and rewards from the use of this asset.  In this regard, the Act also makes provision for the protection of the lessor’s ownership of the asset in the event that the lessee goes bankrupt.  As such, other creditors of the lessee cannot make a claim on the leased asset, as this asset is effectively owned by the lessor.  This serves to further reinforce the lessor’s confidence in offering a financial lease.

Upon expiration of the tenor, the lessee has the option - subject to agreement by both parties – to:
 
(a)    return the asset to the lessor;

(b)    renew the financial lease agreement; or

(c)    purchase the asset for a residual value.

It is only in the case of option (c) above that there is a transfer of legal ownership of the asset.

Typically, a financial lease will cover a substantial part of the economically useful life of the asset, during which the lessee pays the principal plus an interest component, and the general assumption is that the lessee will execute the purchase option.

The promotion and formal introduction of this alternative means of finance is particularly aimed at small and medium-sized enterprises (SMEs), which generally find it harder to acquire loans from banks, due to a lack of appropriate collateral (guarantee).

 SMEs are typically perceived as inherently riskier investments than large corporates and this adversely affects the terms and conditions which banks would accord them a loan.  The added benefit of assets under financial lease is that additional collateral is seldom required, as in most cases the asset will itself effectively serve as collateral.

  This is supported by the fact that the lessor retains legal ownership of the asset during the tenor (as previously noted above) and this is clearly provided for in the Financial Leasing Act.  The latter also makes provision for a registry of all assets under financial lease, which will serve as notice to third party purchasers of existing interest (lien) in the leased asset, thus also protecting the lessor.

Moreover, the guarantee in protection of the legal ownership of the asset enhances the lessor’s confidence in dealing with this sector.

  This concept provides the lessor with additional assurances which they would not have with a loan by making it relatively easier for the lessor to repossess the asset in case of a breach of the terms and conditions of the financial lease.  This is in view that the lessor retains legal ownership of the leased asset during the tenor and the lessee has merely been accorded the right to possess and use the asset subject to the terms and conditions of such financial lease.  Nonetheless, the due legal process still has to be followed, thereby also protecting the lessee from abuse.
 
 Should a lessee be experiencing any difficulties, his/her best course of action would be to approach the lessor in an attempt to come to a solution at an early stage.  However, as long as both parties abide to these, the quiet possession, use and enjoyment of the asset by the lessee should not be infringed.

Financial leasing is considered as a credit facility and as such information on financial leases will also feature on the Credit Information System (CIS) which is administered by the Central Bank.

  This will contribute to lessees generating a credit history over time, such that lessors may make fast and informed decisions in terms of credit allocation and credit pricing, consequently promoting greater efficiency in the financial system.

Central Bank will also be the licensing and regulatory authority for financial leasing in Seychelles.  The Act also makes provisions for Central Bank to also prescribe prudential requirements which financial leasing institutions will have to abide by, as well as enforce penalties against offenders.  In general, regulation by the Central Bank is intended to ensure that the soundness of our financial system is not undermined.

Contributed