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LEASING AS AN INSTRUMENT OF FINANCE PROBLEMS AND PROSPECTS (A CASE STUDY OF ENUGU STATE AND ITS ENVIRONS)

(Accounting)

LEASING AS AN INSTRUMENT OF FINANCE PROBLEMS AND PROSPECTS (A CASE STUDY OF ENUGU STATE AND ITS ENVIRONS)

ABSTRACT

            This research work is an “Leasing as an instrument of finance” problems and prospects.  The contribution of leasing as an instrument of finance to banks were examined, its impacts on the  economy was also explained.       The objective of this project is specifically to find out if leasing as an instrument of finance has been sufficiently contributed to corporate finance..  also the benefits of equipment leasing were explained and some recommendation were given for proper accountability.  Fifteen questionnaires were distributed and ten were returned using stratified random sampling. Also related interatures dealing with leasing were examined.      The data collected were analysed and interpreted, from the study, it was discovered that leasing as an instrument of finance has sufficiently contributed to corporate finance.

PROPOSAL

            This research work is designed to make the reader to fully understand what leasing is all about.  It contribution as a financial instrument.  It focuses on the important of leasing in financial institutions its advantages and disadvantages.     More so this research work will explain why leasing is a source of fund to many banks and some organization in Nigeria especially in Enugu state and its envirous.  Thus this research work will critically view all aspects of leasing as an instrument of finance, its problems and prospects.  The researcher will also go further to explain types of leases like financial lease, operational lease, leveraged lease etc.     This research work will also provide the reader with the following information’s.

i.                    The study will try to find out if leasing as instrument of finance has sufficiently contributed to corporate finance.

ii.                  The study will as wel try to find out the benefit of equipment leasing.

iii.                This research work is also aimed at finding out the problems and prospects of equipment leasing both now and in the near future.

iv.                The study will also focuse on the need to fix actual percentage of commercial bank fund to equipment leasing.

Consequently, the researcher will use primary questionnaire to deduce inferences from her respondents.  She will also look into the relate literature, research methodology to enable her throw more light in analyzing data to reveal the problems and give some suggestions. However, the writer will give recommendations and conclusion from the findings, she will also make references.

            Further more, the researcher could only go to certain extent in her findings because of the following limitations

i.                    Lack of fund

ii.                  Time factor

iii.                Lack of adequate information

TABLE OF CONTENT

CHAPTER ONE

INTRODUCTION

1.1              Background of the study

1.2              Development

1.3              Statement of problems

1.4              Objectives of the study

1.5              Formulation of hypothesis

1.6              Research hypothesis

1.7              Significance of the study

1.8              Scope and limitations of the study

1.9              Definition of terms

CHAPTER TWO

REVIEW OF RELATED LITERATURE

2.1              Types of leases

2.2              Variation of lease arrangements

2.3              General provisions in lease agreements

2.4              The trend of lease in Nigeria

2.5              Major constraints to development of leasing in Nigeria

2.6              Factors favouring the growth of the industry.

2.7              Equipment leasing and inflation

2.8              Equipment leasing association of Nigeria

2.9              Accounting for leases in Nigeria and  its problems.

CHAPTER THREE

RESEARCH METHODOLOGY

3.1              Research design

3.2              Area and population of study

3.3              Method of data collection

3.4              Determination of sample size

3.5              Distribution of questionnaires

3.6              Method of investigation

CHAPTER FOUR

PRESENTATION OF DATA

4.1              Analyzing of data

4.2              Test of hypothesis

4.3              Interpretation of data used in the research

CHAPTER FIVE

FINDINGS

5.1              Conclusion

5.2              Recommendations

References

Bibliography

CHAPTER ONE

INTRODUCTION

            To understand leasing as an instrument of finance, it is pertinent to first of all understand “finance” as it relates to business organization.

            Finance could be said to be sources, application and management of funds finance as a discipline is merely a body of facts, pricinples and theories dealing with the raising and using of money by individuals business and governments.  It is also the activity of managing money especially by a government or commercial organization.

            Finance is concerned with money (the life-blood of a company or business).  Borrowers have access to a variety of financial instruments which includes shares long term or short term loans, hire purchase facilities and the ability to lease assets or rent property.

1.1              BACKGROUND OF THE STUDY

To understand fully the lease process, it is crucial to delve into where leasing came from and why it has become what it is today, hence the historical background.

            According to J. Johnson clark Tow Dark and S.P Amembal etal, the exact date of the first leasing transaction is unknown but the earliest records bear 2000 B.C in the ancient Sumerian city of UK.  The documents produced on damp clay recorded transactions ranging from leases for Agricultural tools, land and water rights, oxen and other animals with priest of the temples as leases and the local farmers as leases.

            There could be possibility of leasing existing in some other parts of the world as at that ealier date but there is no document in existence to show for it.

            Norwegian King and the Norman Duke utilized forms of lease financing to secure the necessary ships, crews and equipments for military engagement.  Leasing of personal property became permissible in united states with writings of “state of wales “ in 1884.  however, it is from history and from decided cases in the British House of Lords that there were some form of leasing in the 1840’s and 1850’s.  it is known that London’s first railway –London Green which is said to have been leased to the south Eastern Railway in 1844 for 99 years.  Legal records show that equipment leasing dates as far back as 1703.  in coggs V Benard (1703) 210 Rayon 909, Hoct C.J. in discussing the nature of equipment leasing, stated that it was an expression applied to various contracts all of which have one thing in common, a contract of hire or bailment of goods under hire contract”.

            Modern leasing according to Ugboaja, stanted in the united states in 1952 and spread to Europe, Japan in 1960’s and the rest of the world in 1970’s.  Samuel and Wilkes and Ugboaja are of the view that there was not much of leasing transaction in the city of London as a new method of business finance.  In Nigeria, leasing has been in existence for over 26 years.  According to Ugboaja and Elanin the sixths, prior to the incidence of exchange controls in 1987, some equipment was leased by British leasing company to their Nigerian subsidiaries.  The volume was predictably low due to the level of industrialization in Nigeria at that time.  This type of off-shore leasing arrangement did not leave long consequent on the imposition of strident exchange control measure at the beginning of civil war which were necessary to conserve the countries foreign exchange.

            In Nigeria, starting with the early activities of companies like Bert Wort finance company and Nigeria acceptance limited, leasing became prominent in the 1970’s with the establishment of the new merchant bank.  However, with the post war reconstruction and the increased earning from oil export as a result of the Arab, Isreal war(1973), the country embarked on an ambitious industrial, zation programme which required a heavy outlay of capital assets.  Many of the contractors are mostly foreigners who chose to lease rather than purchase their equipments, as the dominant equipment lessors were merchant banks.  The volume of leased equipment in the country grow in direct proportion to the number of the merchant banks in operation therein, seventy five percent (75%) of equipment leasing is done within the construction industry.  The fortunes of this sector has had a very great effect on the leasing industry.

1.2              DEVELOPMENT

The emergence of merchant banks in the late 70s in Nigeria financial system contributed to the growth of leasing industry in Nigeria, Particularly since leasing was recognized in the banking Act 1979 (Amended) as one of the principle activities of this category of banks.  As at that time leasing was not popular as a source of finance for a number of reasons.

a.                   The ease with which business could access other types of financing alternatives, such as loans, to procure needed equipment was very high aware of the benefits of leasing both to themselves and to the leases.

b.                  The existing regulatory controls on interest roots and the foreign exchange regime might have reduced the attraction of leasing to the banks.

c.                   Ownership factor was rated above availability of use of assets.

d.                  Many business were either completely ignorant of this option or barely aware of its benefits to their operations.

In the 80’s and particularly with some significant policy and regulatory shifts in the management of the national economy, leasing has definitely emerged as real financing option in the Nigeria financial landscape.  Leasing is now the tack of the day in Nigeria business world of today.  The researcher arrived at this conclusion because the Nigeria weekly financial papers carry articles on leasing almost every week for the past one year and eight months and giving the impression that it is now the most attractive source of financing, the acquisition and the use of fixed assets examples:

a.                   A new attraction in the field of business financing in Nigeria today, which lures more patrons by the day is equipment leasing

b.                  “Accounting standard to govern accounting treatment of leases, a major capital assets financing option in the country”.

According to Ugochukwu and Ubunna “the new surge in equipment leasing transactions is another progeny of the structural adjustment programme (SAP).  Secondary causes of the awareness include the abolition of the import licensing system, the gross deprecation of the Naira, the serious government stand on imports and the relatively ease access to credit facilities for leasing.  On 29the June, 1983, a regulatory body on the practice of leasing the equipment leasing association of Nigeria (ELAN) was formed with six members to regulate the activities of members.  The total leasing volume of this association was estimated at #61 million.  The founding fathers were:

Chase merchant bank Ltd (continental merchant bank).  I con ltd (merchant bankers) N.A.I merchant bank ltd.

Nigeria –American merchant bank Nigeria ltd.  The ELAN membership has grown from 29 at the beginning of 1989 to 1010 as at 30th September 2000.  this factor compiled with the high cost of machinery and equipment has resulted in a steady growth in the demand for equipment leasing in Nigeria.

            According to awokwo, present of ELAN (1993) “the real boom in leasing business began in 1987 with a total lease portfolio of #400 million recoded by ELAN members in that year”.  His predecessor stated that “leasing volume which aggregated #400 million a year ended in December 1987 assumed an upword swing of seventy five percentage (75%) to an all time high point of about #700 million by year ended December 1988.” This figure did not include those of non-members of ELAN. Shola Akinfe, at a workshop organized by the financial institutions center in April 1992 stated that “leasing has today indeed become a recognized definite tool to face the challenges of productive investment and efficient allocation of scarce resources”.

            By the end of 1993, the total lease portfolio of the merchant banks and other had hit the 01 billion target, by the middle of 1994, the increase in the membership of ELAN coupled with the high cost of machinery resulted in a steady growth in the demand for equipment leasing in Nigeria   leasing can neither be said to be new to production in Nigeria nor can it be said to be in its infancy as many people think.  Some members of ELAN in their continue effort to make leasing one of the main source of business financing have spear headed the introduction of new leaving products.  The ELAN news letter of February 1988 on the new development in the industry reported that … 1987 was a year of corporate acquisition in Nigeria and lese financing prove a viable instrument for concoctive lease or lease syndication with either direct ownership of assets by the syndicated members.  As a result of this:

Continuental merchant bank led the first syndicated lease of #20 million in faviour of spin tax Nigeria ltd while international merchant Bank (IMB) let a #30 million lease syndication in favour of united spanese ltd.  Also another innovative product pack aged in the leverage lease, a special form of lease transaction involving basically three parties – the lender or group of lenders, a lessor and a lessee.  There is also the cross –border lease.

1.3              STATEMENT OF PROBLEMS

Despite, the prospect of leasing as an instrument of finance, it is still faced with numerous problems which are the reasons for embarking on this project.  The problems includes:

1.         The absence of any legislation or specific codes on the operations of equipment leasing in Nigeria, as a result of this the ELAN is proposing a leasing decree to form an integralpart of the industrial policy for the country.

2.         the lack of any specific pronouncement on the tax treatment and uniform accounting standard for leases.

3.         the astronomical cost of equipment being leased due to devaluation of naira

4.         the current restrictions on the total capital allowance clainable and method of determination of such claims.

5.         the decrease in number of trained and experienced personnel in the structuring of leases.

6.         the problem of instability  in the economy equipment leasing is a risky business and so can only by lucrative when the economy is buoyant and stable.

1.4              OBJECTIVE OF THE STUDY

1.         This research work is aimed at finding out the problems and prospects of equipment leasing both now and in the near future.

2.         The study will try to find out the benefits of equipment leasing

3.         if leasing as an instrument of finance has sufficiently contributed to corporate finance

4.         whether there is need to fix actual percentage of commercial bank fund to equipment leasing.

1.5              FORMULATION OF HYPOTHESIS

HO – Null hypothesis

HI – Alternative hypothesis

1.         HO – The contribution of equipment leasing in corporate financing, has been insufficient.

HI –The contribution of equipment leasing in corporate financing has ben sufficient.

2.         HO – Corporate bodies do not benefit from equipment leasing.

HI – Corporate bodies do benefit from equipment leasing

3.         HO- There is no need to compel commercial banks to allocate specific percentage of their fund to equipment leasing.

HI – There is need to compel commercial banks to allocate specific percentage of their fund to equipment leasing.

1.6              RESEARCH HYPOTHESIS

The research hypothesis which are subject to test and change are as follows.

HO: The contribution of equipment leasing in corporate finance have been insufficient

HI – Corporate bodies do benefit from equipment leasing

HO- There is no need to compel commercial banks to allocate specific percentage of their funds to equipment leasing.

1.7              SIGNIFICANCE OF THE STUDY

The writer is aware of several suggestions on why a company should lease equipment rather buying it.  Some of the reasons are sensible while some are not.  At the end of the day, a company should take a financing decision that would optimize shareholders value.  Although equipment leasing is growing, there is still a lot to be known about the instrument in Nigeria.  It is well known that all the merchant banks in the country are in the business, commercial banks are also rushing into it the controlling body ELAN had its pofolio over #20 million at the end of 1994.  even then equipment leasing is not very popular and it is still in its infancy.

Therefore, the study of this subject matter especially, at this time when equipment leasing has been classified as a banking item under the 1992 credit policy guidelines, is of immense importance to the following persons or groups:

Government:

The rate of industrialization is very slow in the country, this may be attributed to so many factors ranging from non-availability of the huge capital outlay and the prevalent credit sequency.  This project is meant therefore to direct the government to recognize the extent to which equipment leasing has contributed to corporate financing and that necessary attention should be given to the leasing industry, if this is done, leasing will play a leasing role in the economy of the nation.

Individual:

This includes all the participants in the leasing business like the merchant banks, leasing houses, financial instructions, industrialists, corporate bodies and entrepreneurs.  In other words the following groups could be described as lessors and lessees.

1.8              DEFINITION OF TERMS

LEASE: An agreement whereby the lessor conveys to the lessee in turn for rent, it is a right to use an asset for an agreed period of time.

LEASED ASSET:      The type of assets conveyed by a lease agreement is the tangible type and with long effective life.  Such assets were landed property, building, equipment and others that can generaaate income.

LESSOR: The lessor is the owner, financer of the asset lessed to the borrower or user who pay a fixed rent for its use.  The lessor in turn uses such rentals to amortize the cost of the asset and reserves some if it as profit or reward for service rendered.  The lessor could be individual or corporation such as mortagage banks, equipment dealer or governmental body engaged in such activity.

LESSEE: The lessee is the long term borrower who uses the equipment for the business from which he derives his earning.

FAIR VALUE: The amount for which an asset can be exchange between a knowledgeable willing seller in an era of transaction.

USEFUL LIFE: This is the period over which a depreciable asset is expected to be used by the enterprise.

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