Olanrewaju Usman tells of the trials & tribulations of leasing in Nigeria

The Nigerian leasing industry has contributed immensely towards capital formation in the economy. In 2013, outstanding lease volumes, according to the Equipment Leasing Association of Nigeria (ELAN), was N780bn representing a growth rate of 16.3% compared to the previous year (2012: N671bn) (ELAN 2013 annual report).

Aside from tax issues, operators of equipment leasing in Nigeria are faced with enormous challenges that affects the growth and development of the leasing industry. Research has shown that the problems are in the areas of funding, high importation cost of equipment, default in payment in terms of fatigue, fraudulent practice and poor credit bureaux. 

Others are the newly introduced auto-tariff policy by the Federal Government which increases the importation tariff by 35% (BusinessDay, March 9, 2014), this has resulted in high increase in the value of used foreign (Tokunbo) vehicles. 

The idea of the policy is to encourage auto manufactures to have assembly plants in the country. The declining value of the naira against the US dollar is contributing to the high cost of imported equipment. 

Most of the assets for leasing are imported products and with the high exchange rate, factoring the withholding tax and VAT etc, lease pricing becomes high and this discourages potential clients.

Cheap credit

The majority of our commercial banks that do equipment leasing see leasing companies as their main competitors and extend cheap credit to the leasing companies to the impairment of the whole economy.

The non-availability of long-term low-cost borrowing has contributed majorly to the decline of equipment leasing in the country. It is a known fact that leasing business involves small- to long-term financing and since the local finance players cannot offer the funding solution the only option for leasing companies is to get a foreign financial institution as financier or partner.

This, however, is not likely because of the socio-political considerations and the unbalanced security situation in the country that is not attractive to foreign investors.

Fraudulent practices by lessees are another unfavourable challenge to lease development. These include: tampering with mechanisms of the assets on lease; simultaneous multiple-lease financing; and default in the rental payments arising from payment fatigue and other causes. 

Payment fatigue, according to Boniface Ochonogor, is when a leased asset is structured for a long period and the asset starts developing faults and requires repairs. The lessee will not pay, or becomes reluctant to pay the rental when due.  This is one reason why default rates on lease payments are on the increase.

The lack of leasing legislation is also a major negative factor.

In Nigeria there is no law regulating the practice of leasing but interestingly some African countries like Liberia have leasing legislation in place. Previous governments in Nigeria have attempted to introduce the law but not yet achieved it. 

Currently, there is a pending proposed leasing law before the National Assembly (Senate) which is stagnant due to lack of understanding of its benefits to the Nigerian economy. Plus some kick-back request as ‘PR’ for some members of the committee whose responsibility for oversight falls on the leasing industry.

The bill did not pass the second reading following opposition by some Senators (ELAN, 19th Annual Report).  In fact this corroborated the submission of some members of the ELAN board members at the last ELAN 19th Annual General Meeting (26/06/2014) in Lagos that some members of the National Assembly (Senate) were demanding for about 300 million naira in order for the leasing law to be passed.

Although the assertion was an unconfirmed report one can “tell by discretion”. 

The bill, if finally passed into law, will lead to the expansion of leasing activities since it will bring about an improved environment by addressing some major constraints affecting the industry, which include high default, clumsy repossession process, and fraudulent activities by some disreputable lessees.  

With the absence of leasing law in the country, the practice of leasing in the country has been governed by common law, and certain tit bits of provisions, and often influenced by some major decisions in other financial sectors of the country. 

The consequence of this is that foreign lessors will shy away from the country as they will consider Nigeria a risky investment society. The absence of a leasing law and proper judicial framework is really contributing to the default rate by some fraudulent enlightened lessees who play around with the law.

Cumbersone judicial system

The judicial process is cumbersome, which therefore gives crooked lessees a field day to frustrate lessors. This development is worsened by the difficulty of repossessing leased assets as some courts are presided over by dishonest judicial officers – which does not help matters.

In some established cases, lessees have gotten fraudulent court injunctions basically to frustrate repossession efforts by the lessor, hence making the financier lose huge sums of money in the event of rental defaults. 

In addition to losing their investments as a result of default, coupled with the lack of legal structure for operation, the lessor repeatedly has to contend with vast administrative and legal costs to pursue defaulters in the event of repossession.

The leasing industry in this country should have more impact on the economy, given better acceptance of equipment leasing as a funding option. This however can only be achieved given a viable provision of enabling, and regulatory environment, by the authorities in Nigeria.

The government should make more funds available and accessible to the leasing companies through borrowing or injections – as this will reduce the cost of lease funding and dependency on the capital market for long term loans for the acquisition of leasable assets.

Efforts should be geared up to establish a leasing law and address the poor, or absent, legal framework that covers leasing.

Olanrewaju Usman is Head of Marketing, Lease/Credit at Rosabon Financial Services Ltd