Financial leasing in Seychelles – Part 2 |03 May 2016

Typical process in applying for a finance lease

In the first part of this series of articles, the subject matter was briefly introduced and some examples of certain benefits were given.  In today’s article, we will go briefly over the typical process for applying for a finance lease.

Typically, the lessee will choose the asset and negotiate the price and purchase modalities with the supplier as well as the required guarantees. This information along with any other additional materials required are submitted to the lessor for processing. If the request is approved, the lessor will communicate such with the lessee and advise of its 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 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, and subject to agreement by both parties, the lessee has the option to:

a)            return the asset to the lessor;

b)            renew the financial lease agreement; or

c)            purchase the asset for a residual value.

Only in the case of option (c) above is there 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. In the third and final part of this series of articles, we will look at the segment for which finance leases can greatly serve, while addressing some of the elements that will serve to create enhanced confidence amongst financial leasing institutions.

 Contributed by Central Bank of Seychelles