Can Leasing Industry Help Solve Nigeria’s Economic Problems?

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By Abdulaziz Musa

The Nigerian economy has been under siege for a long time and financial indices about the country’s economic outlook has been dismal if not downright disheartening. Statistics from both government agencies and non-governmental organisations paint a very gloomy picture. The country has been declared to be technically in recession, given its negative growth in the last two quarters. While the government has tried several measures to kick start the economy, these measures are yet to translate into positive outcomes for the economy and for Nigerians.

With the quasi-liberalisation of the foreign exchange market recently introduced by the country’s apex bank, the CBN, where the market is expected to be driven by the forces of demand and supply and the anticipated return of both domestic and foreign investors as key players in the economy, attention should be paid to other sources of growth for the Nigerian economy. This is particularly important as it has been clearly demonstrated that the Nigerian economy can no longer afford to continue to rely only on the internationally determined price of crude for growth if it is to grow, therefore the resounding call for diversification of the economy.

While the government continues to make efforts to diversify the economy, one key sector, the leasing industry, which is very vital and central to the Nigerian economy has been overlooked. Leasing is vital for economic growth and poverty reduction. The link between leasing, capital investment and economic growth has been established globally. It is a given that capital investment stimulates economic growth. It is also a fact that leasing stimulates capital investment, especially in countries where it is well developed, for leasing enables businesses and even governments (at the local and national level), to acquire capital assets for production. The acquisition and use of productive assets leads to productivity, income generation as well as job creation.

The whole essence of leasing therefore is to enhance the planning, improvement and development of any economy.

Equipment leasing is now recognised and established as a creative financing alternative that is being used to meet the world’s equipment needs. In the United States of America for instance, leasing remains the single most widely–used method of external finance, representing 30% of investment in capital equipment. Many developing countries such as Brazil, Indonesia, Pakistan, Zambia, South Africa and Ghana, are equally using leasing to stimulate investment and create jobs. In these countries, leasing is at the forefront of investment in the extractive industries, transportation, agriculture, telecommunications, roads and other infrastructure.

As Nigerian government and businesses continue to suffer due to scarcity of funds resulting from dwindling oil revenues, leasing can indeed facilitate easy and convenient access to the much needed capital equipment in these challenging times. Essentially, leasing can play a major role in the diversification and other developmental agenda of the government.

The planned huge investment in infrastructure, agriculture, mining and job creation, creates a wider scope for leasing participation in meeting the expected demand for capital equipment. However, the capacity of the industry needs to be strengthened to enhance leasing participation and continued contribution to the economy. An appropriate legal framework is part of the pillars for a sustainable leasing development which recently crystalized in the Equipment Leasing Act 2015. It is expected that under the right legal and regulatory conditions, leasing can play an even bigger role in Nigeria’s economic development.

In the past, a major problem Nigerian lessors faced was that of repossession in the event of default. The judicial process on repossession of leased assets was very slow and complex. Lessees had frequently taken advantage of the cumbersome judicial process to obtain frivolous injunctions against repossession. Given that the matter often remained unresolved for a long period, substantial financial losses were suffered by Nigerian lessors from lost income, and the continued but essentially unlawful use of the asset by the lessee.

Furthermore, in the event of bankruptcy or insolvency of the lessee, the lessor stood a risk of losing his property. The Bankruptcy Act provides that immediately upon adjudication, the properties of a bankrupt shall vest in a trustee. Such properties include those assets that are legally in his possession, including leased assets. This places onerous burden of proof task on the lessor to establish himself as a general creditor in the bankruptcy of the lessee.

Another area of major concern was in sale and leaseback transactions. Lessors in the past were exposed to fraudulent multiple lease financing by lessees. This practice involved the fraudulent lessee selling the same equipment to two or more lessors and obtaining lease facilities from them. This was possible because there were no means of checking whether an asset has been encumbered or not.

It was against the backdrop of the various inadequacies of the regulatory regime that stakeholders in the leasing industry clamored for enduring regulatory framework which includes the enactment of a comprehensive leasing law. It was not surprising therefore that the Equipment Leasing Act was received with much enthusiasm marking the end of a tortuous journey spear headed by the Equipment leasing Association of Nigeria (ELAN).

The recently enacted Equipment Leasing Act 2015 is expected to usher a new dawn for the leasing industry by creating clarity, certainty and sanity in the practice of leasing. Also, it will encourage more investments. While Nigeria has been recognised as having great potential for leasing in Africa, foreign investors have been wary of doing business in the country due to the uncertainty in the existing operating environment. Smaller African countries have attracted foreign investors in their leasing industry by putting an appropriate, business-friendly legal framework in place.

For instance, the International Finance Corporation (IFC) has substantial investments in leasing companies in eleven (11) African countries including Ghana, Morocco, Zimbabwe and Malawi. The enactment of the Egyptian Leasing Law in 1995 paved way for the rapid development of the industry, and within two years 150 new leasing companies were established. The influx of foreign investors seeking partnership with the firms shows the value of an enabling legal framework and business environment. Similar effects are being experienced in Liberia, Rwanda, and Tanzania.

The Equipment Leasing Act has 45 sessions and is essentially aimed at promoting the business of leasing in Nigeria by among other things, creating clarity, certainty and sanity in the practice of leasing and ensuring protective mechanism, for both the lessor and lessee. The Explanatory memorandum of the Act states that “This Act seeks to regulate the business of equipment leasing in Nigerian so that the relationship between the lessor and the lessee and other third parties is identified and protected. The Act also seeks to establish a regulatory authority to provide for the registration of all equipment lease and the certification of equipment lessors”.

The Act brings together relevant stakeholders under a Public Private Partnership (PPP) arrangement to strengthen the regulatory framework that would ensure the realisation of the developmental objectives of the law. The Ministry of Finance is a major stakeholder in this regard and empowered by the Act as the supervisory ministry for the leasing industry through a Registration Authority made up of representatives from Ministries of Finance, Justice, Trade & Investment as well as Central Bank of Nigeria (CBN),Small & Medium Enterprises Development Agency of Nigeria (SMEDAN), Equipment Leasing Association of Nigeria (ELAN) and the Business Community represented by Nigerian Association of Chambers of Commerce, Industry, Mines & Agriculture (NACCIMA).

The Nigerian Leasing industry, despite all the challenges facing it has remained a sustained source for growth to all sectors of the economy, facilitating easy access to capital equipment. Available statistics show an impressive 27.39% growth in leasing activities in 2015. The volume of outstanding leases grew from N869 billion in 2014 to N1.1 trillion in 2015.

This perhaps can be explained based on the developmental attributes of leasing which makes it attractive whether the economy is witnessing a boom or recession as is currently the case. Many industries are relying on leasing as a creative financing alternative for capital assets and this has created increased investments from existing lessors and endeared new entrants into the leasing industry to tap into the opportunities in the market

Leasing has contributed immensely to capital formation in the Nigerian economy and would further make greater impact with the Equipment Leasing Act, especially in driving the diversification policy of the Government in the focus areas of agriculture, mining, manufacturing and employment

– Abdulaziz Musa writes from Kano