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Determinants of Financial Determinants of Financial Leasing in JordanLeasing in Jordan

Dr. Shamsi Bawaneh

Dr. Mohammad Al-Shiab

Mohammad_alshiab@yahoo.com

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Structure

• AbstractAbstract.

• Introduction.

• Theoretical Background

• Methodology and HypothesisMethodology and Hypothesis.

• Results & Discussion of FindingsResults & Discussion of Findings.

• Conclusion.

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AbstractAbstractThis research:

• Investigates the the impact of different variables on the use of financial leasing, namely; tax and accounting issues, legislations, and marketing.

• The OLS model approach was adopted for testing the study hypothesis after collecting the data through a questionnaire developed by the researchers.

• The questionnaires returned back were 65% out of 150 questionnaires randomly distributed to industrial companies listed on Amman Stock Exchange .

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Prior to the 1950s in the USA, leasing was generally associated with real estate-land and buildings.

It is possible today to lease virtually any kind of fixed asset.

In 1984 about 20 percent of all new capital equipment acquired by businesses in the USA was financed through lease arrangements.

It is estimated that leasing, in the late 90s, provides about one-eighth of the world’s equipment financing requirements.

Introduction

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In 2004, financial leasing was the fastest growing way of financing fixed assets all over the world.

It was raised by 26% counting around 580 billion dollars. The USA part count $241 billions taking over the funds provided through the USA banks credit, bonds and equity.

35% of the fixed assets purchased by the biggest 500 USA companies financed by leasing.

Introduction – Cont.

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• Definition: a contractual agreement between a lessor and a lessee that gives the lessee the right to use specific property, owned by the lessor, for a specific period of time in return for stipulated, and generally periodic, cash payments (i.E. Rent).

• Advantages to the lessee: less costly financing, financing at fixed rates, protection against obsolescence, alternative minimum tax problems, flexibility, and off-balance-sheet financing.

• Advantage to the lessor: interest revenue, tax incentives, and high residual value.

Theoretical BackgroundTheoretical Background

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• Types: Sales-and-Leaseback Arrangement.

Operating Leases.

Financial Leases.

Theoretical Background – Cont.Theoretical Background – Cont.

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• Financial Leases: transfers all risks and rewards incident to ownership of an asset. Moreover, title may or may not eventually be transferred.

• Financial leases are differentiated from operating leases in that they:

1. Fully amortized, that is the lessor receives rental payments equal to the full price of the leased equipment plus a return on investment.

2. The lessee generally pays the property taxes and insurance on the leased property.

3. Do not provide for maintenance service.4. Not cancelable.

Theoretical Background – Cont.Theoretical Background – Cont.

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• Financial leases are differentiated from sale-and-leaseback arrangements in that they:

1. The leased equipment is new.

2. The lessor buys it from a manufacturer or a distributor instead of from the user-lessee.

Theoretical Background – Cont.Theoretical Background – Cont.

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• The International Accounting Standards (IAS) 17 suggests several factors, which normally indicate that a lease is a finance lease:

1. The lease transfers ownership to the lessee by the end of the lease term;

2. The lessee has the option to purchase the asset at a price significantly lower than the fair value of the asset;

3. The lease term is for the major part of the economic life of the asset;

4. The present value of the lease payments amounts to all the fair value of the leased asset;

Theoretical Background – Cont.Theoretical Background – Cont.

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5. The leased assets are of a specialized nature such that only the lessee can use them;

6. Gain and losses from the fluctuation in the fair value of the residual value belong to the lessee;

7. The lessee has the ability to continue the lease for a secondary period at a rent, which is substantially lower than market rent.

Theoretical Background – Cont.Theoretical Background – Cont.

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• If an asset where capitalized:1. The lessee records an asset and a liability generally

equal to the present value of the rental payments.2. The lessor recognizes a sale by removing the asset

from the balance sheet and replacing it with a receivable.

• If an asset where not capitalized:1. The lessee records no asset, and no asset is removed

from the lessor’s books. 2. When a lease payment is made, the lessee records

rental expense, and the lessor recognizes rental revenue.

Theoretical Background – Cont.Theoretical Background – Cont.

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• Financial Leasing Before 1990s in China:Problems: operating in an uncertain legal environment,

relied heavily on local-government guaranties rather than the creditworthiness of the lessee, shortages of trained personnel, lax of supervision by the authority, failure to deliver or maintain the leased item, government protection of lessees who failed to perform their obligations, and inaccurate record keeping.

• Financial Leasing After 1990s in China: Developments: licensed several financial

leasing companies (i.e. 42 equity-joint-venture leasing companies), stronger legal foundation, More thorough and comprehensive supervision by PBC, providing greater tax incentives.

Theoretical Background – Cont.Theoretical Background – Cont.

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• The theory of financial leasing traditionally has focused on:

1. Differential tax position of the lessee and the lessor as the primary rationale for leasing.

2. Economies of scale in structuring lease contracts.

3. The cost of managing cash flows in the presence of default risk and interest rate uncertainty.

4. The role of information asymmetries between the lessee and the lessor regarding the residual value of the leased asset.

Literature ReviewLiterature Review

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Annual reports were not provided for those Jordanian companies have used the financial leasing.

Such data could be used to investigate the characteristics of companies using the financial leasing to see whether they have different results compared to those not using such financing method.

Previous empirical studies used many estimates, the most common ones; retained earnings relative to total assets, growth rates, coverage ratios, debt ratios, operating risk.

Methodology and HypothesisMethodology and Hypothesis

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In addition, financial leasing has just started to be used by Jordanian companies listed on ASE.

The financial consequences of using financial leasing expected to be recognized on the long run not on the short run.

Therefore, the methodology used in this paper relied on the questionnaire instead of using companies’ annual reports for testing the importance of such financing method on companies’ achievements.

Methodology and Hypothesis – Cont.Methodology and Hypothesis – Cont.

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To examine the effect of tax and accounting issues, legislations, and marketing on the use of financial leasing, the following null hypothesis is proposed:“There is no tax and accounting, legislations, and

marketing influences on the use of financial leasing”

Multivariate analysis carried out in this study is not only multiple regression routines but also stepwise regression technique in order to determine which explanatory variables are “best” in explaining the use of financial leasing.

Methodology and Hypothesis – Cont.Methodology and Hypothesis – Cont.

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Results Results

LEASTACLEGMAR

LEAS1.000

TAC.529**1.000

LEG.426*.395*1.000

MAR.485*.451*0.579**1.000

LEAS, TAC, LEG, ans MAR are vectors of financial leasing, tax and accounting issues, legislations, marketing, respectively. Pearson 2-tailed tests are indicated as: * < 0.1; ** < .05; *** < 0.01

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Results – Cont.Results – Cont.

ConstantTACLEGMAR

β-.294.574.202.231

t-statistics-.2882.061**

.7441.178

F Value 5.077*

R2 0.369

Durbin-Watson 2.02P-values test the null hypothesis that the restriction is not valid at the 0.05 level. T-statistics figures and F values are with the following levels of significance indicated: * < 0.1; ** < .05; *** < 0.01, two-tailed tests.

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ConclusionConclusion

Using a questionnaire developed by the researchers, we found evidence that:

• Tax and accounting issues yields significant positive effect on the dependent variable.

• Legislations and marketing variables influence were positive, but not significant.

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QuestionsQuestions