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ELAN National Leasing Conference
Promoting Leasing and Investment in Developing Economies; The Role of Leasing Law.
November 24, 2015, Sheraton Hotel, Lagos – Nigeria.
Riadh Naouar
Head, IFC Financial Institutions Group (FIG) Advisory
1. Africa Leasing Facility Program
2. Project Description
3. Why Leasing?
4. Objective of leasing Legislation /
Regulations
5. Best Practices
6. Leasing Regulation
7. Attracting Leasing investment
Opportunities
8. Financial Measures
9. Conclusion
OUTLINE
AFRICA LEASING FACILITY PROGRAM
ALF II : CountriesCote d’Ivoire, Guinea, Guinea-Bissau, Mali, Liberia, South-Soudan, Seychelles, Niger, Djibouti, Sierra Leone, Burundi
ALF I countries: Burkina Faso, Madagascar, Mauritania, Senegal, Tanzania
L
PROJECT DESCRIPTION
Improve the leasing legislative and regulatory framework
(Over 30 leasing laws and regulations drafted and passed by Parliaments)
Provide Leasing advisory services to Financial
Institutions
Increase access to financial services by helping small business owners
(micro) and SMEs; to gain access to leasing knowledge and information to
finance their equipment needs
Building Capacity and raising large public awareness
Contribute to the increase of leasing transactions in
program countries by the end of December 2017; ALF
OBJECTIVES
The objective of ALF II is to facilitate increased access to finance for micro, small and medium enterprises (SMEs) in FCAS by developing a sustainable leasing infrastructure to promote this sector.
Objective of Leasing Legislation and Regulations
The Law must pursue the common welfare of the society.
In the context of leasing, the common welfare is attained through economic development
The Law must provide for judicial security so that the members of society can trust each other; and
The Law must provide justice and equity
Objective of Leasing Legislation and Regulations
The law must be enforceable by the courts
The law must be fair to the lessor and the lessee
The law must clearly state the rights and responsibilities of all parties
Critically, the law must clearly define a lessor, lessee and repossession process
The terms and conditions of a lease contract must reflect the intent of the leasing law
Leasing Regulations
The Central Question is: Who must take care of Leasing and its Practitioners?
The Government? Or The Market?
Best Practices - Who takes care of leasing and its practitioners
In the United States, there is a system of checks and balances imposed by the market:
- For small players, bank creditors exercise control and measure efficiency- For medium and large players, the Security and Exchange Commission
makes sure that the markets are informed and the analyst and credit rating agencies control the efficiencies
- Finally bankruptcy Law provides an orderly exit of the inefficient and reasonable recoveries of creditors
- There is no Central Bank or Federal Reserve System Control for Leasing Companies
Best Practices - Who takes care of leasing and its practitioners
In developing countries (Brazil and Mexico):- The system of checks and balances is transmitted by the Central
Bank to the market- The Central Bank exercises a reasonable control and no co-
management of the companies as in other countries;- Only when the alarm signals are triggered, then the Central Bank
intervenes, to correct the deficiency, if possible;- If the deficiency is not curable, then it liquidates the companies;- Liquidation must be very fast, generally through the immediate
sale of portfolio to the other market players.
Regulation of Leasing in Nigeria
Each country, Nigeria for instance must adopt its own rules for the corporate structure, control and regulation of lessors:
- According to the degree of development of its capital markets- According to the structure of the economy- According to the definition of the shareholders that need to be
protected form abuses, negligence or poor practices.
Regulation of Leasing
Each country must adopt its tax Rules according to:
- The situation of public finance- The economic reality- The clear understanding about how leasing can be used as a
propeller for generation of additional revenues collections via the continuous investment.
Building strong leasing brands to attract investment
opportunities
Corporate Structures and Controls
Lessors must have at minimum:- Strategic orientations: professionals with vision, mission, targets,
strategies, tactics, execution and control capabilities;- A solid credit culture- A solid asset management culture- A solid skills in win-win negotiation in order to develop big, solid
and sustainable leasing portfolios.
Attracting potential investment opportunities
Strategic orientation:- A lessor must know what are its objectives:• Value creation, accumulation and addition
• Return on equity goals- A lessor must have a solid risk management culture in order to
attain its return on equity objectives without surprises that would turn around its profits into losses.
- A lessor needs to know how to build, fund and service or maintain a portfolio.
Attracting potential investment opportunities
Asset management culture:- A lessor must know and track the economic value of the assets
that is financing to lessees.• the lessor must evaluate the potential secondary market of the equipment
that is financing;• The lessor must track the evolution of prices and the gap between its risk
exposure and the value of the asset (Lease to value curve);• The lessor must have a tracking system in place that must include regular
inspections and updates;• The lessor must have end-of-lease strategy based upon the data of its asset
management organization.
Attracting potential investment opportunities
Credit Culture:- A lessor must have a very solid culture to evaluate the three Cs
of credit:• Character: Debtors fail to pay for 2 basic reasons: 1) Lack of willingness to
pay; 2) or inability to pay. The character must be evaluated and assessed with professional methodology;
• Capacity: the economic support that a given debtor or lessee has to be able to generate cash in order to meet his/her/its obligations.
• Collateral: the value of all the goods or equity of the debtor, and in particular, the leased asset, which shall be evaluated with asset management skills.
Attracting potential investment opportunities
Credit Culture:- A lessor must have a very solid culture to evaluate the three Cs
of credit:• Character: Debtors fail to pay for 2 basic reasons: 1) Lack of willingness to
pay; 2) or inability to pay. The character must be evaluated and assessed with professional methodology;
• Capacity: the economic support that a given debtor or lessee has to be able to generate cash in order to meet his/her/its obligations.
• Collateral: the value of all the goods or equity of the debtor, and in particular, the leased asset, which shall be evaluated with asset management skills.
Attracting potential investment opportunities
Negotiation skills:- A lessor must understand the business of the lessees and
structure the deal in terms that both parties win• A deal where one party win and the other loses, is a recipe for disaster and
experience demonstrates that the loser becomes winner and the winner becomes loser
• An event of default must not be converted into a field of war and confrontation event, because both parties lose.
- Therefore contracts must be balanced and fair, but solid in terms of addressing and covering the risks of the lessor following best practices of risk underwriting;
- Defaults must be treated with balance, taking into account that the act of mercy is not to give fish to the hungry but to teach him how to fish
Attracting potential investment opportunities
Controls:• Who are the stakeholders that must be protected in the
event of mismanagement of a lessor?
- It depends on the funding structure of the lessors• Bank creditors• Institutional investors, or• The public at large, and • Shareholders
- And also depends on the regulations that provide an orderly market exit of the inefficient;
• In a system where leasing companies are difficult to liquidate, lessees may also suffer
• In addition to creditors, and• Shareholders
Metrics and alarm system to exercise control of lessors
Financial Measures
Leverage
Times Interest Earned
ROA
ROE
Asset Growth Rate
Income Growth Rate
Net Margin
Provision for Credit Losses
Charge-offs to Assets
Other Assets to Total Assets
Residual Write-downs
Year-end Share Price
Average Cost of Funds
Conclusion
A Leasing Law is an important Pillar for potential leasing investment opportunities, beyond this, a lot other important best practice business approach identified in previous slides account significantly in attracting potential investment opportunities at firm level.
Conclusion
While the leasing market develops, in particular capital markets would find leasing attractive if the leasing companies adopt best practice approach in doing leasing business.
Conclusion
Finally, Government agencies including the regulators must exercise soft control on lessors, to strengthen best practices in corporate governance and business execution…..evidence of such controls also creates investors confidence.
