LEASING IN LIBERIA HANDBOOK A PRODUCT OF IFC ADVISORY SERVICES AFRICA LEASING FACILITY

Transcription

1 LEASING IN LIBERIA HANDBOOK A PRODUCT OF IFC ADVISORY SERVICES AFRICA LEASING FACILITY

2 2 Leasing in LIBERIA Handbook International Finance Corporation HEAD QUARTERS: 2121 Pennsylvania Avenue, N.W., Washington, DC LIBERIA OFFICE: Mamba point Monrovia All rights reserved. June 2012 This document may not be reproduced in whole or in any part by any means without the written consent of the International Finance Corporation. This information while based on sources that the IFC considers to be reliable is not guaranteed as to accuracy and does not purport to be complete. This information shall not be construed, implicitly, as containing any investment recommendations. This information does not constitute an offer of or on behalf of IFC to purchase or sell any of the enterprises mentioned, nor should it be considered as investment advice. The information in this handbook / leasing guideline for Liberia is presented in good faith as general informational material and IFC cannot be held liable for any loss, expense and /or possible consequences arising from the publication of or the use of information contained in the leasing guideline. All information and materials used in preparing the survey are the property and archives of the International Finance Corporation (IFC).

3 EXECUTIVE SUMMARY Leasing in LIBERIA Handbook 3 Executive Summary IFC, member of the World Bank Group, is a global leader in leasing advisory services and investment opportunities with leasing experience in over 60 countries around the world. Relatively new to Liberia, leasing is one of the most dynamic industries in the world. It facilitates the financing of equipment and real property. It fosters economic growth, creates employment, and enhances tax revenue. It affects nearly every sphere of our lives as it is used to finance automobiles, furniture, airplanes and computers, in addition to equipment used in the restaurant, telecom, agricultural and medical sectors. Worldwide, equipment leasing has proven to be one of the most effective ways of asset financing and possibly its acquisition. Finance leasing has emerged as a new financial product on the Liberian stage to help address the country s urgent need for efficient, modern and appropriately used equipment and technology to boost production in all sectors. With a market value estimated at $200 million in 2012, all stakeholders, including the Government of Liberia, are in support of the development of the leasing sector as an important tool to enhance the country s economic development. In emerging economies such as Liberia, leasing offers access to finance opportunities to small businesses, or SMEs, by allowing them to acquire productive assets without the need to provide otherwise difficult to obtain collateral. Such assets, typically in the form of equipment, in turn, are used for productive purposes, allowing SMEs to grow their businesses. SME growth in turn, contributes to the stimulation of the country s economic development. With the introduction of favorable legal and regulatory framework for leasing in Liberia by the Government and Central Bank, there is now potential to develop and grow Liberia s leasing market. The introduction of established and enforceable protections for the leasing parties, is serving as an incentive for an increase in leasing activity in Liberia. Investor protection, in addition to the current stability of the Liberian economy will further stimulate growth for private sector development if there is an injection of leasing investment opportunity. The purpose of this leasing handbook is to describe leasing and the steps required to undertake lease transactions, with the objective of teaching the benefits and advantages of leasing as an alternative source of equipment financing in Liberia. The handbook further serves to provide guidelines of the standard requirements for a lease transaction and outlines the motivation for banks and SMEs to do leasing business. It analyzes the role of the government in promoting leasing, and outlines the legal and tax benefits from the lessor and lessee perspectives.

4 Acknowledgement This publication was made possible due to the generous support of its donors and contributors. IFC would like to thank all Liberian stakeholders whose efforts in creating an enabling environment for leasing in Liberia have been valuable to the publication of this handbook. Specifically, IFC would like to thank the following partners in Liberia: Ministry of Finance Central Bank National Investment Commission Bankers Association Special mentions extend to: the National Investment Commission s Chairman, Natty B. Davis and its Executive Director, Ciata Bishop; the Central Bank of Liberia s Governor Dr. Mills Jones, Director of Banking Supervision and Regulation, Mussah Kamara, and the late and former General Counsel, Isaac Wonasue; the Ministry of Finance s Audit Director, Eric Filor Nagbe; and the Bankers Association Secretariat. At the time of this publication, all IFC leasing work in Liberia was supported by the IFC Conflict- Affected States in Africa Initiative, known as CASA, funded by Ireland, The Netherlands and Norway; and the Swedish International Development Cooperation Agency. This handbook was also made possible by generous contributions from the Swiss State Secretariat for Economic Affairs, otherwise known as SECO, whose continued support to the IFC Africa Leasing Facility has been invaluable. And lastly, we wish to acknowledge the generous inputs of the IFC Liberia office and members of the IFC Africa Leasing Facility team, without which this handbook would not have been possible. We would therefore like to thank Kimberlee Brown, Kobina Daniel, Jonathan Gigin and Riadh Naouar for their work on this publication.

5 Table of Contents Background 01. Leasing Background and Definition: What is leasing? Types of Leases: What are the types of leases available? Parties and Steps in a Finance Leasing Transaction: How does finance leasing work? Advantages of Leasing: What are the benefits of leasing? The Lease vs. Purchase Dilemma: Why lease instead of buy equipment? 17 Practical 06. Ten Things Lessees Should Know Before Signing a Lease: What should a lessee know? Parties and Responsibilities of Parties to a Finance Lease Transaction: What are the roles and responsibilities of each party? Risks of Leasing: What are the potential risks of signing a lease? Documenting a Lease Transaction: What documents may I expect in a lease transaction? The Leasing Contract: What are the principal clauses I should expect in a leasing contract? Additional information on how to enter into the leasing businesses: Where may I find more information on how to enter into the leasing business? 27 Leasing in Liberia 12. Economic Overview of Liberia State of Leasing Industry in Liberia Leasing Opportunities in Liberia The National Investment Commission and Doing Business in Liberia Legislative and Regulatory Framework for leasing in Liberia 37 Leases Chapter 3 of the Revised Commercial Codes Finance leases Chapter 3A of the Commercial Codes Leasing regulation by the Bank of Liberia 17 Accounting and Tax Treatment of Leasing Transactions in Liberia 48 Glossary and Conclusion 18 Glossary of Leasing Terminology Conclusion 64

6 01. WHAT IS LEASING?

7 01. WHAT IS LEASING? Leasing Background A healthy leasing industry facilitates economic growth, because leasing increases finance flows to the productive sectors of a country s economy, and increases financing options for private businesses. Leasing is an effective mechanism for jumpstarting a growing economy, and particularly advantageous to developing countries like Liberia. Equipment use plays an important role in the economic development of any given nation including Liberia. Finance Leasing has proven to be an effective financial tool used to achieve rapid economic development in both developed and developing countries. In developed countries leasing is used to finance about one third of private investments. While in developing countries it has recorded high growth rates since the 1990s. In most developing countries it is observed that there is an urgent need for efficient, modern and appropriate use of equipment and technology to boost production in all sectors. All over the World equipment leasing has proven to be one of the most effective ways of asset financing and possibly its acquisition. Finance leasing provides a dual role in the financial market by competing with, and complementing other financial products. The advantage of finance leasing is that the equipment in use serves as the collateral it therefore enables small businesses with no collateral to gain access to asset financing. When properly structured, a leasing transaction can provide tax benefits, flexibility and convenience to both the lessee and the lessor. Leasing is a unique financial product because no collateral is required for Small and medium enterprises (SMEs) to access leasing. This implies that it is cash flow transaction and not subject to collateral because the equipment is the security. In leasing the lessor owns the leased asset and allows the lessee for its use in return for periodic payments It is flexible and offers businesses including start-up companies the option to purchase the equipment at the end of lease for a small fee called residual (remaining) value. It is flexible because it gives lessees room to call for restructuring if there are payment difficulties. Leasing can play an important role in providing access to finance by helping SMEs acquire moveable assets in the form of equipment to increase productivity. Presently, there are opportunities to develop the leasing market in Liberia to benefit businesses, and now businesses with equipment needs also have the option to use leasing to grow. As an alternative source of asset / equipment financing for businesses, leasing offers many advantages over traditional financing. Under the newly established leasing law in Liberia, businesses now have additional financing option which initially did not exist.

8 8 Leasing in LIBERIA Handbook Definition of Leasing In its simplest form, leasing is a means of providing access to finance and may be defined as a contract between two parties wherein one party (the lessor) provides an asset for use to another party (the lessee) for a specified period of time in return for specified payments. Leasing, in effect, separates the legal ownership of an asset from the economic use of that asset. Leasing is a medium-term financial instrument for the procurement of machinery, equipment, vehicles and/or properties. Fundamentally, it is assetbased financing with the asset providing (in most situations) the security for the financing. Leasing institutions (lessors) whether banks, leasing companies, insurance companies, equipment producers or suppliers, or nonbank financial institutions purchase the equipment that has usually been selected by the lessee, and then allow the lessee use of that equipment for a specified period of time. For the duration of the lease, the lessee makes periodic payments to the lessor, at an agreed rate of interest and in an agreed currency. At the end of the lease period, the ownership (title) in the equipment is transferred to the lessee at a preagreed residual value, or the equipment is returned to the lessor, which may then sell it to a third party or declare it worthless and obsolete. Leasing is based on the proposition that income is earned through the use of assets, rather than from their ownership. It focuses on the lessee s ability to generate cash flow from business operations to service the lease payment, rather than on the balance sheet or on past credit history. This explains why leasing is particularly advantageous for young companies, as well as small and medium businesses that do not have a lengthy credit history or a significant asset base for collateral. Furthermore, the lack of a collateral requirement with leasing offers an important advantage in countries with weak business environments, particularly those with weak creditors rights and collateral laws and registries for instance, in countries where secured lenders do not have priority in the case of default. Because the lessor owns the equipment it can be repossessed relatively easily when the lessee fails to meet lease rental obligations.

9 02. WHAT ARE THE TYPES OF LEASES AVAILABLE? Types of Leases A lease can either be a finance lease or an operating lease. A finance lease covers a longer period (2 to 4 years), including repayment of the original cost of the asset plus the interest charged. While an operating lease is for a shorter period (12 months or less), and allows the lessee enjoy the use of the asset for a predetermined period before returning the asset to the lessor. Finance Lease Under a finance lease, the lease contract covers almost the entire expected economic life of the equipment/asset. It covers the cost of the asset plus interest and profit, and at the end of the contract, the lessee normally has the right to purchase the equipment. Thereafter, the remaining value of the equipment, known as the residual value, is of little or no significance to the lessor. Some examples of the different forms of financial leasing include: sale and lease back, leverage lease, cross border lease, back-to-back lease, and vendor/captive lease. For example, a sale and lease back enables a lessee to sell a piece of equipment in use to the lessor for cash and then lease it back from the lessor. This occurs when a lessee has cash problems and is in need of working capital. Features of a finance lease It cannot be canceled by either the lessor or the lessee before the expiration of its tenor. The lessor seeks to recover his investment along with a return on his investment. The lessee has the exclusive right of possession and use of the equipment during the entire period of the lease as long as the lessee pays the rentals and complies with the terms of the lease agreement. The lessor retains ownership of the equipment while the lessee enjoys the use.

10 10 Leasing in LIBERIA Handbook The lessee carries the ownership risks and rewards and is usually directly responsible for such costs as insurance, maintenance and similar charges on the leased asset. Operating lease Such a lease is typically designed for short term use of equipment and therefore a non-full payout. Under this type of lease, the lessor purchases the equipment and makes profit by renting it out to different users, for instance, a car rental. The lessor bears the risks associated with the residual value of the equipment. The lessor also bears risks and rewards of ownership and is responsible for insurance and maintenance of assets/equipment that the lessee uses. At the end of the transaction, the lessee returns the asset back to the lessor with no option of purchase. Under a finance lease, the lease contract covers almost the entire expected economic life of the equipment/asset. Features of an operating lease The lease can be cancelled by either party (lessor or lessee). Lessor retains all the risks, obligations and rewards of ownership, and is in charge of the upkeep of the asset/equipment. In determining the rentals, the lessor estimates and considers the residual value of the equipment and relies on this value to partly recover the investment in the lease and earn profit. In some instances, to recover the investment and earn a profit, the lessor is compelled to lease the equipment to many lessees over the equipment s economic life and eventually sell it. Operating leases are usually confined to equipment having an established use, or an active second hand market. The lessor s activities are restricted to a range of equipment in which (s)he specializes. This enables a lessor to offer attractive lease terms by reflecting purchase discounts, lower maintenance costs and expertise in the area of business.

11 03. HOW DOES FINANCE LEASING WORK? Parties Involved in a Finance Lease Transaction In a standard lease operation, the key parties include: LESSEE LESSOR SUPPLIER The Lessee is the user of the equipment being leased. The Lessor is the owner of the equipment which is being leased to the lessee. The Supplier or equipment producer furnishes the equipment for lease.

12 12 Leasing in LIBERIA Handbook Steps Involved in a Finance Lease Transaction The following two pages describe the nine basic steps involved in a leasing transaction. Step 1 How leasing works The entrepreneur, or the lessee, approaches a supplier, chooses the needed equipment, and negotiates the price and the terms of delivery. Supplier Lessee Step 2 The supplier provides a quotation. The lessee then approaches a lessor (bank or leasing institution) and submits an application for financing. Supplier Step 3 The lessor then evaluates the lease application. If it is approved, the two parties sign a contract. Lessor Step 4 The lessee pays the advance lease payment. The lessor purchases the equipment from the supplier and leases it to the lessee for a period close to the economic life of the asset. Lessor Supplier

13 Leasing in LIBERIA Handbook 13 Step 5 The lessor registers and insures the equipment. The supplier then provides after sales services as per contract. Supplier Step 6 The lessee has the right to use the equipment and maintains the equipment. Step 7 The lessor monitors the lease operation. The lessee makes regular installment payments to the lessor. Lessor Step 8 At the end of the lease, the lessee either returns the equipment or exercises the option of purchase. Lessor Step 9 If the option is to purchase, the lessee pays the agreed final sum and the lessor transfers the ownership of the equipment to the lessee. Lessor

14 04. WHAT ARE THE BENEFITS OF FINANCE LEASING?

15 04. WHAT ARE THE BENEFITS OF FINANCE LEASING? Advantages of Leasing Leasing from the perspective of the Government Leasing helps increase local production and productivity within an economy. Most leasing equipment is imported; nevertheless imported equipment assists in boosting local production and cuts down on imported consumer goods. Leasing competes with other forms of credit delivery within an economy. This can lead to increased efficiency and diversity of the local financial market. By accessing external financing, leasing companies can lead to an increase in liquidity within the local financial market. Leasing can help in the development of infrastructure through the provision of equipment to contractors in the execution of government contracts. Leasing from the perspective of a Lessor Maintaining legal ownership of the leased asset tends to minimize risk. Ownership can assist in the event of repossession and in times of bankruptcy of the lessee. The lessor has greater control over the use of funds and the leased asset. The lessor can acquire specialized knowledge through, for example, equipment specialization. The lessor can use this knowledge to effect a more efficient credit delivery and monitoring system. Leasing provides diversification of product range and can allow an extension of other credit facilities without additional collateral that banks normally require. Leasing from the perspective of a Lessee No- collateral requirements. In leasing, collateral or security is seldom required because the leased goods serve as the security for the finance advanced. The lessor retains legal ownership over the asset, and in the event of default, the lessor can repossess the goods, a relatively straight forward process in most countries. Simple to structure with low transaction costs. A lease can be concluded more quickly and simply than a bank loan. The lessor is only interested in determining the ability of the leased goods to generate sufficient cash flow to pay monthly rentals throughout the lease term. Tax Incentives. In many countries the tax system is normally conducive to leasing. Tax incentives differ from country to country. In Korea, for example, the lessor registers

16 16 Leasing in LIBERIA Handbook the full lease payment (principal +interest) as income but deducts the accelerated depreciation of the assets. The lessee claims the lease payment (rentals) as deductible. The lease term is usually shorter than the economic life of the equipment, so the lessee in fact depreciates the equipment faster than if the asset was purchased. In Tanzania it is different, the lessee is the party entitled to claim depreciation and the interest portion of the lease rentals is registered as income to the lessors. Modernizes production and develop small businesses. By allowing technological refreshment and/or at times, off balance sheet financing (for countries where finance lease is classified as a lease and not a loan) leasing offers opportunities to modernize production for small businesses thereby allowing them to further grow their businesses. Leasing from the perspective of an Equipment Supplier Leasing increases the lessee s liquidity and therefore allows an increase in equipment acquisition that also leads to increase in business for equipment suppliers. Collaboration between lessors and equipment suppliers can lead to an increase in marketing channels for suppliers. The lessor s specialized knowledge can be placed at the disposal of an inexperienced equipment purchaser that can reduce the burden on the supplier.

17 05. WHY LEASE INSTEAD OF BUY EQUIPMENT? It is not possible to say that one is better than the other because the answer depends on the specific set of circumstances. When making a lease or buy decision you must look not only at financial comparisons but also at your own personal priorities - what is important for you. The Lease vs. Purchase Dilemma Whether to lease or to purchase equipment: that is the question. Which is better? For anyone who has ever contemplated a lease, this question has crossed their minds. So what is the answer? The answer is: It depends. Leases and loans are simply two different methods of asset financing. One finances the use of equipment, the other finances the purchase of equipment. Each has its benefits and drawbacks. Things like, is having new equipment every two or three years with no major repair risks more important than long-term costs, or are long term cost savings more important than lower monthly payments? Are having some ownership of equipment more important than low up-front costs and no down payment? Is it important to you to pay off your equipment and be debts-free for a while, even if it means higher monthly payments for the first few years? So, making the lease or buy decision is not quite cut and dry. When making a lease or buy decision you must look not only at financial comparisons but also at your own personal prioritieswhat is important for you.

18 06. WHAT SHOULD A LESSEE KNOW? 10 Things Lessees Should Know Before Signing a Lease Understand how leasing works. Learn more about the product and seek advisory or professional services from leasing companies before signing a lease. Make at least two inquiries from leasing companies and/or banks about their products and services. Ask questions and seek detailed explanations from experts. Evaluate which type of lease is right for you. The types of lease you select should match your equipment needs, business goals and cash flow requirements. Know your ability to make payments. Understand that under a finance lease contract, the contacts are non-cancellable commitments that must be honored in line with the term of lease. Do not enter into a lease if you are not certain of your ability to make regular payments on the due dates. Do you homework on your business. Make realistic projections of your cash flow to be able to accommodate the lease rental. There must be a balance between the cost of the equipment and payment of your lease rental in order to conveniently cover the lease duration. Understand flexibility of leasing. You can negotiate your deal such that you will be able to take a secondary lease on the same equipment at the end of the primary lease. Leasing allows greater flexibility and convenience to the lessee. Insist on selecting your own equipment. As a customer, you should insist on selecting your equipment since the lease agreement protects the leasing company from all liabilities braising from the condition of the asset at the time of purchase. Ensure preventive maintenance of leased equipment. The leased asset must be handled with care and well maintained through out the period of the lease. Ensure preventive maintenance to avoid break downs and loss of revenue. Inform leasing company immediately if you experience any financial difficulties. If you have a financial problem during the period of the lease, it is advisable to inform the leasing company immediately. The lease can be restructured and some leasing companies business support teams. Know when to let go of the asset. If your business becomes insolvent, do not hang on to the leased asset. It will be prudent to minimize the losses by working jointly with the bank or leasing company to either return the asset or suppose it to minimize losses. Do not sign unless you fully understand the terms of the lease. Do not sign on the dotted line until you are sure of the terms of the lease especially the obligations and responsibilities of all the parties to a leasing transactions.

19 07. WHAT ARE THE ROLES AND RESPONSIBILITIES OF THE PARTIES TO A FINANCE LEASE TRANSACTION? Finance Leasing as a Three Party Transaction There are different opinions whether finance leasing is a three party or a two party arrangement. IFC differentiates a finance lease agreement, which it believes to be a two party agreement between a lessor and lessee, from a financial lease transaction, which it believes to be a three party transaction involving an enterprise (as lessee), an equipment supplier (as lessor), and a bank, finance or leasing company (as intermediary financier). IFC is interested in promoting leasing as a financial product and believes that normal operating lease contracts could be best left to contract. IFC also believes, however, that operating leases can be legislated for if countries need legislative guidance for these types of leases. Responsibilities of Parties Rights and Obligations of the Lessor: The foremost, and usually the only, obligation of a lessor to a lessee in finance leasing is to ensure that the lessee is entitled to quiet enjoyment and use of the leased goods, without interference by the lessor or by third parties who claim a superior title to the leased asset. This means that the lessor is obliged to ensure that it acquires good title to the leased asset and that it surrenders possession of the asset, for the lessee s use, without unlawful interference or negligence on the lessor s part. The lessor may assign the lease agreement to another lessor, usually without having to obtain the consent of the lessee. In an assignment, the new lessor is obliged to respect the terms of the lease agreement and provide for quiet enjoyment and use of the asset by the lessee provided that lessee abides to the terms of the lease agreement. Rights and Obligations of the Lessee: In a finance lease, the lessee s utmost obligation to the lessor is to meet its rental obligations as specified under the finance lease agreement. Once a finance lease agreement has been accepted by the lessee, the lessee s duties towards the lessor become irrevocable. In other words, the lessee becomes entitled to make rental payments specified in the lease and not to withhold rentals or to default on rental payments under any circumstances. This is the so called hell or high water principle that forms the essence of a finance lease agreement. The rationale of this principle is that a finance lease is similar to a term loan; and for the health of the

20 20 Leasing in LIBERIA Handbook financial system borrowers should be obliged to return credit advanced to them. Other duties of a lessee include the duty not to assign the leased goods without the consent of the lessor; the duty to maintain the leased goods in good condition, fair wear and tear excepted, and the duty to notify the lessor of damage to the equipment, among others, which may be specified under the lease contract and or under leasing legislation. Rights and Obligations of the Supplier: A supplier, or vendor of goods, in a finance lease transaction is a party that sells, or otherwise transfers title of goods to a lessor (bank/ leasing company), which goods the lessor leases to the lessee. There may be other ways by which leases can be entered into between a lessor and lessee, including through the appointment of the lessee as an agent of the lessor to purchase the assets on its behalf. The prevalent practice in Tanzania, for example, has been for lessees to directly select vendors/suppliers and equipment of their choice without any involvement of the lessor, and for suppliers to transfer legal title to goods to the lessor. In a finance lease, the lessor requires the lessee to select a supplier/vendor and equipment of its choice and that is suitable for its purpose without intervention from the lessor. The lessor, as part of its asset control and management responsibilities, will ensure that goods selected by the lessee are of good quality. Although lessees select goods from suppliers directly, the suppliers/vendors raise and address any tax, sales invoices or other documents that evidence the lessor s legal title to the goods, including a sale/purchase/supply agreement in the name of the lessor in order to ensure that lessors acquire good title to the goods as legal security for the credit supplied. On the other hand, a supplier/vendor or manufacturer of goods owes duties with regard to goods that it supplies. These duties have to do with the quality of goods and sometimes with the fitness for purpose for which the goods are being acquired. In certain instances, a supplier of goods may retain maintenance responsibilities in respect of the goods. Finance leasing requires that if goods under finance lease are found unsuitable or defective, the lessee should not be able to avoid the finance lease agreement with the lessor, but rather, should seek compensation from the supplier under the terms of the warranties attached to the goods. In common law countries, the legal issue that a three party finance lease arrangement raises is that it is usually not possible for the lessee to enforce contractual obligations with regard to the goods directly against the supplier, as usually there will be no direct contractual relationship between the two parties. In Liberia, the common law principle of privity to contract may prevent a lessee from taking direct action against a supplier of goods for lease. The aforementioned has been at issue under the existing legal framework applicable to finance leasing. The existing leasing law in Liberia enables lessees to take direct action against suppliers in the event of supply of defective goods under a finance lease agreement, but prevents both the lessor and lessee taking action against the supplier for the same defect. The lessees right to take action against the supplier is subject to provisions of the law and to the terms of the suppliers warranties for defect in goods. In Liberia, the common law principle of privity to contract may prevent a lessee from taking direct action against a supplier of goods for lease.

21 08. WHAT ARE THE POTENTIAL RISKS IN SIGNING A LEASE? Risks in Leasing Leasing like any other business is prompt to various risks that may affect pricing of lease products. The main risks are as follows: Lease portfolio risk. Risk of non servicing of lease installment payments by the lesseee as scheduled. Residual Value risk. The risk incurred with respect to the value that leased equipment is expected to maintain at the end of the lease term. Predicting/estimating future value of the asset is a difficult task which may have impact on determining unreasonable lease payments. Asset Management Risk. Further categorized into: Maintenance and repair risk. Associated with use and maintenance of the equipment. Since lessees do not own the equipment and may not opt to own it at the end of the lease, there is risk that the equipment may be kept in a poor state of repair. Procurement and merchantability risk. For its own security, the lessor must ensure that the lessee procures equipment that is of good quality. Cost of capital risk. One reason leasing is more attractive to SMEs than loans is that loans available to SMEs are mostly short-term in nature, while leases on the other hand, have a longer term linked to the economic life of the equipment. In most cases, and especially in developing countries, it is difficult to raise fixedrate medium term finance cheaply. Sometimes lessors are forced to finance leases from several short-term borrowings. Since the rate of interest prevailing for every subsequent borrowing cannot be predicted with certainty, the aftermath is to reduce the profitability of the lease due to the shifting cost of capital during the lease term. Changes in tax regulations risk. Sudden changes in tax regulations may significantly affect the profitability expected from leases. Tracking and monitoring risk. The lessor should be able to monitor the equipment regularly as equipment can be vandalized or removed from outside the territory, etc. Title risk. The lessor should ensure that it acquires enforceable legal title to the goods. PHOT CREDITS: google.com

22 09. WHAT DOCUMENTS MAY I EXPECT IN A LEASE TRANSAC- TION? Documents Used to Document Lease Transactions The legal documents used to create a finance lease of equipment are commonly a: Master Lease Agreement or a Lease Agreement (or both) Finance Lease Schedule Purchase Agreement Maintenance Agreement Buy Back Guarantee Other Miscellaneous documents Below these documents are described in detail: Master Lease Agreement A Master Lease Agreement is an agreement that allows for the leasing of goods from time to time. The Master Lease Agreement contains all the principal provisions (terms and conditions) pursuant to which all subsequent leasing business between the lessor and lessee is to be conducted. A Master Lease Agreement does not refer to specific assets or to specific financial terms for the lease of particular goods which would be encapsulated in separate lease agreements when the specific goods are leased. The purpose of a Master Lease Agreement is to allow for the incorporation of leasing of different goods, as and when such need arises. For this reason, the Master Lease reduces on-going transaction costs for parties. The Master Lease Agreement controls later leases or subleases, particularly of parts of the leased property, and does not include details of the goods to be leased, length of lease term, rentals or maintenance charges or reserves. A Master Lease Agreement or a Lease Agreement (if a Master Lease Agreement is not required) may ordinarily contain the following: Provisions relating to subject matter of agreement (leased goods) Provisions relating to term, rent, and payment Provisions relating to taxes Provisions relating to notification and reporting Provisions relating to delivery, use and operation of goods Provisions relating to maintenance Provisions relating to Insurance Provisions relating to return of equipment Provisions relating to default and remedies for default Provisions for assignment Provisions for hell or high water Provisions regarding indemnification Disclaimer provisions Provisions regarding representations and warranties Provisions for early termination Purchase Option. (This list does not claim to be exhaustive)

23 Leasing in LIBERIA Handbook 23 The purpose of Master Lease Agreement is to allow for the incorporation of leasing of different goods, as and when such need arises. If a Master Lease Agreement is utilized, the following is applicable: Separate lease agreements are entered into for each good or set of goods being leased. Provisions of the Master Lease Agreement are incorporated by reference in each lease Agreement. Those specific details not provided for in the Master Lease Agreement for example, details of specific goods being leased, rentals, maintenance charges, commencement date, duration of lease etc are incorporated in the Lease Agreement. Finance Lease Schedule The financial lease schedule to the Master Lease Agreement will include the following details: Details of equipment subject to the terms and conditions of the lease; Financial terms, including the following: Advance rentals, if any Capitalized lessors cost Basic term Basic term lease rate factor Basic term commencement date Option payment First termination date Last delivery date Basic term rent Taxes Purchase Agreements The parties to a purchase agreement will normally be the Vendor and Purchaser. The Vendor may either be a third party manufacturer, supplier or dealer (except in the case of a sale and leaseback when the Vendor is the Lessee). The Purchaser can be the lessor or the lessee if the lessor and lessee have previously executed an Agency agreement with the lessor appointing the lessee to purchase the goods on behalf of the lessee. The purpose of a Purchase Agreement is to document the terms of the supply of goods between parties. The agreement should contain specific description of the goods supplied; state when the goods should be delivered to the lessee and the specific location of delivery; incorporate provisions for damages or rescission if the vendor fails to deliver the goods to the lessee on a specified date. The agreement should set out the specific warranties in respect of the goods (and if applicable, that the benefit of such warranties may be assigned); the purchase price of the goods and the payment terms applicable. Maintenance Contracts Parties to a Maintenance Contract will normally be the lessee and a third party manufacturer, supplier of dealer or lessor or such other party providing maintenance services. The purpose of a Maintenance Contract is to specify the terms and conditions by which leased goods are maintained. Maintenance Contract should make provision for: leased goods to be maintained from time to time based on usage or after periodic intervals, fixed/ variable maintenance charge, replacement goods (if possible) and review of maintenance records. The contract should provide for where repairs can be undertaken. Buy Back Agreements Parties to a Buy-Back Agreement will usually be the Lessor and a third party manufacturer, supplier or dealer providing the buy-back guarantee. The Lessor has the right to require the vendor/ supplier to re purchase the goods at a pre determined price or at a price ascertained in accordance with pre determined formula. The buy back agreement must cater for the obligation to re purchase the goods if the lease agreement is terminated by

24 24 Leasing in LIBERIA Handbook effluxion of time or upon earlier termination of the lease. A pre-determined formula would have to be used to calculate the repurchase price if the lease is terminated prior to the stipulated termination date. The supplier will wish to make obligation to buyback at pre determined price subject to compliance with pre-agreed use, maintenance and return conditions. The supplier may want to be able to deduct from the pre determined repurchase price excess wear and tear and/ or usage charges. Personal Guarantees Leasing companies in less developed leasing markets usually require additional security for a finance lease transaction. In these markets, it is common for leasing companies to require that the lessee provides a personal guarantee made by a third party in respect of the finance lease agreement. The Guarantor, under a Guarantee Agreement, will guarantee to the lessor payment of outstanding lease payments in event of the lessees default on the financial lease agreement. However, it is important to ensure that a Personal Guarantee is backed by realizable security (property), as in some cases the undertaking that a third party will be liable in respect of the default of the lessee is not backed by identified property that the lessor can realize as security, and therefore has proven difficult to enforce a personal guarantee. Parties to a Maintenance Contract will normally be the lessee and a third party manufacturer, supplier of dealer or lessor or such other party providing maintenance services.

25 10. WHAT ARE THE PRINCIPAL CLAUSES I SHOULD EXPECT IN A LEASING CONTRACT? The leasing contract: basic clauses The leasing contract formally translates the reciprocal obligations of the lessor and the lessee. The supplier s obligations are commercially governed by the sale deed. It basically focuses on the following features: Irrevocable nature of the contract. The term of the contract is agreed upon in advance and it is irrevocable. To financially balance his operation, the lessor may depreciate the equipment over the duration of the contract and does not assume the risk of commercialisation before the term. The term of the contract. It is a compromise between the duration of the economic life of the property, its fiscal depreciation period and the lessor s refunding possibilities. To limit his risks, the latter may try to reduce the term of the contract, unlike the lessee who may try to extend it to spread his charges. In any case, the term of the contract should not exceed the duration of the economic life of the equipment. In Burkina the time for the depreciation of the leased property is supposed to coincide with the term of the contract. Rent payments. The rent starts from the date of reception of the equipment by the lessee as materialized by the signing of the minutes of the taking over by the latter and the supplier. The rents payable in advance with a generally constant frequency. (monthly, quarterly, half yearly. The amount of the rents cannot be revised, but it can be constant, digressive and even seasonal. Finally, non payment of one term of the rent may lead to the termination of the contract, by right, by the lessor. As a general rule, the lessee should, in such case, return the equipment to the lessor, at once, and he may be condemned to pay the outstanding rents. Holding and maintenance of the equipment. The user is not the owner of the equipment, but he should behave as such throughout the duration of the contract. The lessor has the right to verify the conditions of use and maintenance of the equipment owned by him and even oblige the lessee to subscribe a maintenance contract. All the expenses incurred for the use, maintenance and repairs are chargeable to the lessee and, in case the equipment is not working, whatever the reason or duration may be, he is obliged to continue to pay the rents to the lessor.

26 26 Leasing in LIBERIA Handbook Insurance of the equipment. In his capacity as custodian of the equipment, the lessee is responsible for the damages caused by this equipment, of any risk, deterioration or total or partial loss of this equipment. So, he is obliged to subscribe an insurance policy covering all the risks the equipment is prone to, with delegation of the allowance of the lessor, in case of disaster; Expiry of the contract. At the expiry of the contract, the restitution of the equipment may be envisaged but, because of the low residual value, purchase options are more common. It is an option and not an obligation for the lessee to buy back the equipment for the residual value set at the beginning of the contract. It is also possible to opt for a new lease of the equipment on conditions set in advance or negotiated during the new lease. The user is not the owner of the equipment, but he should behave as such throughout the duration of the contract.

27 11. WHERE MAY I FIND MORE INFORMATION ON HOW TO ENTER INTO THE LEASING BUSINESS? IFC S GLOBAL LEASING TOOLKIT IFC AFRICA LEASING FACILITY Global Leasing Toolkit The Global Leasing Toolkit draws on IFC s 35 years of experience supporting equipment leasing entities in emerging markets. Why the Toolkit? In many emerging markets, the equipment leasing needs of SMEs are not being adequately addressed. Based on its long experience developing leasing in emerging markets, IFC strongly believes the Toolkit will: Help give SMEs in emerging markets, and especially in developing countries, the same access to leasing and the same benefits from leasing as currently enjoyed by SMEs in the United States and other industrialized countries. Help leasing entities operating in emerging markets, and especially in developing countries, develop a profitable business, primarily but not exclusively based on leasing to SMEs. The Toolkit s three objectives: To provide a prac-tical guide for managers of leasing entities, especially bankaffiliated lessors, with an emphasis on leasing entities offering lease products to small and medium-sized enterprises. To provide a practical guide to financial institutions, businesses such as equipment suppliers and vehicle dealers, and other entities considering entering into or engaging in the business of leasing equipment to SMEs. To provide an efficient means for IFC s SME Advisory Services, as well as IFC leasing projects globally, to engage with the management of leasing entities and other stakeholders including those considering entering into leasing or investing in leasing entities. The Toolkit is a working manual The Toolkit is designed to be a working manual. Making extensive use of case studies, it has been written and devised by leasing professionals with extensive experience in founding and operating leasing entities, both non-bank and bank affiliated. The information in this Toolkit is the result of years of practical experience of leasing professionalsboth inside and outside of IFC.

28 28 Leasing in LIBERIA Handbook Who will find the Toolkit useful? While the Toolkit is targeted at both bank-affiliated and nonbank lessors, especially institutions offering financing products to SMEs, it will also be useful to business entities engaged in or considering engaging in leasing operations. These include private equity institutions, microfinance institutions, equipment sellers, and manufacturers looking at leasing as a means to facilitate the sale of their equipment, as well as international financial institutions (IFIs). How the Toolkit was written The Toolkit combines IFC s more than 35 years of experience supporting equipment leasing entities in emerging markets, including both Advisory Services and debt and equity investments in leasing entities world wide, with the experience of two experts. These experts together have over 65 years of experience establishing and managing leasing entities in the United States, both bank-affiliated and non-bank lessors, and extensive international advisory experience in the former Soviet Union, the Middle East, Southeast Asia and Sub- Saharan Africa. For more information on the Global Leasing Toolkit, please visit: Global+Leasing+Toolkit IFC Africa Leasing Facility Launched in 2008 and active in 15 countries on the continent, IFC s Africa Leasing Facility works with governments, financial institutions, equipment suppliers, insurance providers and small business owners to help make leasing a viable tool to increase revenue of small businesses thereby impacting overall country GDP. Over the past five years, the program has trained over 9,000 small business owners through 200 training sessions, assisted in the passage of 12 leasing legal, regulation and tax laws and facilitated investment in 7 leasing projects worth $31 million. The Facility, run from Senegal, is being implemented by IFC Advisory Services and is funded through IFC s Private Enterprise Partnership for Africa in partnership with the African Development Bank, Denmark, Ireland, Japan, Luxemburg, The Netherlands, Norway and SECO. Since 2008, upon request from the Ministry of Finance and the Central Bank of Liberia, the IFC Africa Leasing Facility has been engaged with various Liberian counterparts to provide technical support to both the public and private sector. Program contributions in Liberia include a market survey to identify leasing opportunities in Liberia; validation of the market survey report in various stakeholder workshops; a best practice finance leasing law drafted and enacted as part of Liberia s new Commercial Code; a process that permits prompt recovery of assets in the event of default under the new Commercial Code; and a set of best practice regulations developed by the Central Bank of Liberia. IFC leasing work in Liberia is currently being supported by Ireland, the Netherlands, and Norway through our Conflict Affected States in Africa Initiative and the Swedish International Development Cooperation Agency. For more information about the IFC Africa Leasing Facility in general, please visit: IFC Africa Leasing Facility Rue Aimée Césaire x Impasse Prolongée BP 3296 Dakar, Sénégal Tel: + (221) For more information, please contact: Riadh Naouar Senior Operations Officer IFC Africa Leasing Facility Rue Aimé Césaire x Impasse FN 18 Prolongé Fann Résidence BP 3296 Dakar, Senegal Tel: Fax: rnaouar@ifc.org Jonathan D. Gigin Operations Officer SSA Leasing - IFC Africa Leasing Facility The Village Sangai Sophie s Community, Oldest Congo Town Tubman Boulevard, Monrovia, Liberia Tel: / Mobile: Mobile: Jgigin@ifc.org

29 Leasing in LIBERIA Handbook ECONOMIC OVERVIEW OF LIBERIA

30 12. ECONOMIC OVER- VIEW OF LIBERIA Economic Indicators for Liberia Economic Indicators: GDP at market prices (L$bn) GDP (US$bn) Real GDP growth (%) Consumer price inflation (av, % Population (m) Exports of goods fob (US$ m) Imports of goods fob (US$ m) Current account balance (US$ m) Foreign exchange reserves gold (US$ m) Exchange rate (av) L$: US$ Source: Economic Intelligence Unit 2012 Outlook of the fiscal and economic forecast The government has adopted strict fiscal discipline to prevent increase in public debt, and the borrowing capacity is planned not to exceed more than 2% of GDP per year, according to an agreement with the International Monetary Fund (IMF) for additional concessionary. The economic policy will be guided by the country s extended credit facility (ECF) with the IMF till end of March 2012 to give way to a succession program. The focus on the ECF is to improve economic governance and bank supervision, manage public expenditure, fight corruption and maintain macroeconomic stability. The president is focusing on improving public services including water expansion, public health and education, and building on improving the gains of her first term in office. Agriculture output accounts for over 60% of the GDP, and the economy is expected to receive a boost following an expected increase in agricultural output. Investment in palm oil and timber will start production, and forestry activities will gain momentum. The real GDP is forecast to pick up to 9% in 2012 and 7.5% in Source: Economic Intelligence Unit March 2012