Liberia Leasing Investment Forum

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1 Finance Leasing in Liberia: Unlocking Accelerated Market and Business Development GROWING COMPETITIVE AND EFFECTIVE LEASING MARKETS Collins David-Ikpe Past chairman, Equipment Leasing Association of Nigeria Monrovia,

2 2 INTRODUCTION A GROWING, COMPETITIVE & EFFECTIVE LEASING MARKET MEANS: 1. A PROSPEROUS MARKET WITH INCREASING LEASE VOLUMES 2. THERE IS MORE THAN SUFFICIENT SUPPLY (BUYERS MARKET) 3. THE MARKET IS SERVING ITS PURPOSE (SMEs AGRIC SECTOR) CONDITION: 1. ALL THE PLAYERS ARE ACTIVELY INVOLVED WITH MANY OF THEM STRIVING AND ACHIEVING THEIR STRATEGIC OBJECTIVES.

3 3 INTRODUCTION PLAYERS: 1. GOVERNMENT Creates the enabling environment - Defines the framework (Regulations) - Grants incentives (temporary) - Monitoring & Interventions to correct deviations Depending on Government structure, one establishment should be appointed to be in the forefront (Liberia NIC)

4 4 INTRODUCTION PLAYERS: 2. INVESTORS Provide Equity capital - Provide Debt Capital Private investors Venture capital companies Pension funds, Banks, Insurance companies, etc Foreign Leasing companies looking to expand Development institutions, etc

5 5 INTRODUCTION PLAYERS: 3. SUPPLIERS The right Equipment - Durable Equipment - Provide after sales service (Maintenance) - Right pricing

6 6 INTRODUCTION PLAYERS: 1. LESSORS Funding. - Management & Technical skills. -Performing portfolio (Lessee meeting contract. obligations and loss on defaulter minimised). - Insurance claims settlement. - Good margins.

7 7 INTRODUCTION PLAYERS: 4. LESSEES Right Asset - Right pricing - Low lease rates

8 8 INTRODUCTION PLAYERS: 1. INSURANCE COMPANIES Premium payments

9 9 INTRODUCTION PLAYERS: 5. LEASE BROKERS 6. ASSET/COLLATERAL REGISTRY 7. CREDIT BUREAU 8. CAPITAL MARKET 9. ASSOCIATION OF LEASING PRACTITIONERS

10 10 INTRODUCTION Many of the needs of the players are conflicting. For example, the Lessees want to pay lowest possible rentals but Lessors want higher margins. Government wants to leases to Agric sector, lessors want to lease to sectors with better cash flows, etc. The Government s system must be sufficiently efficient to identifying these areas of conflicts in good time and then intervene appropriately.

11 11 INTRODUCTION THE LESSOR & CHALLENGES Needless to say, there exists a strong case to pursue opportunities in emerging markets. However, there are significant challenges that both foreign and local investors and businesses must overcome.

12 12 INTRODUCTION As foreign investors and businesses look to participate in these markets they are faced with the challenge of pursuing investments in an unfamiliar environment and ensuring business models are successfully executed in a completely new context. For Local investors and businesses they are faced with the additional challenge of funding and managing (due essentially to lack of skill and expertise).

13 13 INTRODUCTION How can an investor or business stay profitable in the face of these challenges? How should it tackle the issue of skills gap in the local community?

14 CHALLENGES 14 For foreign investors their greatest concerns are mainly environmental or factors external to the business and these can be categorised into: Political: Instability Frequent changes in policies Economic: Inadequate infrastructure High level of inflation Low purchasing power High debt burden Weak currency value Legal: Inadequate and obsolete legislation Weak judicial system leading to delayed justice or even outright denials. Social: Corruption & decaying Value system Cultural barriers

15 15 CHALLENGES Many, if not all of the above environmental challenges can be addressed by effective political leadership and good governance. However, the expected improvement may not come any time soon. The Liberian Government has demonstrated sufficient commitment to building a viable leasing market based on the presentations that have been made in this forum.

16 16 THE MANAGEMENT CHALLENGE Many times the challenge facing leasing businesses in emerging markets is how to stay profitable and enhance shareholders wealth. In a recent review, IFC s Independent Operations Evaluation Unit (OEU) identified a number of key success factors for leasing institutions: Portfolio Performance Lessors typically should act more quickly to protect their position before a lessee s operations deteriorate drastically. This calls for frequent portfolio reviews. Caution Vs Aggressiveness Institutions with good portfolios consistently opt for quality over quantity.

17 17 THE MANAGEMENT CHALLENGE Exposure Limits Lessors should limit single enterprise or group exposures and single industry or equipment-type exposures in relation to the institution s net worth or its portfolio. Security & Guarantees Lessees have commonly called for concentration on equipment that is clearly identifiable, removable, unlikely to become rapidly obsolescent, and able to be leased again in the event of repossession. However, seeking additional security or guarantees for riskier operations or unusually large exposures can reduce losses.

18 18 THE MANAGEMENT CHALLENGE Reliance on Equipment dealers Avoid excessive reliance on financing the equipment sales of local dealers on the strength of their guarantees without reviewing the financial strength and business practices of the dealers. Reviewing the buyers ability to pay must never be compromised. Procedures & Systems Lessors should establish proper procedures from the onset, modify the procedures and systems as operations change and ensure the presence of checks and balances. Monitoring & Supervision Lessors should make it a rule to visit clients regularly no matter the value of the lease transactions. In the process there will early knowledge of delinquency and development of strong collection effort.

19 19 THE MANAGEMENT CHALLENGE Spreads Remember that clients are willing to pay higher spreads due to: 1. the possibility of financing a higher proportion of the cost of an asset than would be possible when borrowing; 2. the lesser need for collateral and compensating balances; 3. the greater speed in arranging lease financing; 4. the possibility of excluding lease obligations from balance sheets; 5. the tax advantages.

20 20 THE MANAGEMENT CHALLENGE Amembal, Dean & Associates in the book The Handbook of Equipment Leasing, volume one identified other Key success factors to include: Competitive advantage Specialisation Customer service and flexibility Funding ability Controlled back-office costs Highly-trained workforce Appropriate strategies Adaptability to market shifts Maintenance of objectives

21 21 THE ROLE OF AN ASSOCIATION An Equipment Leasing Association of lease practitioners can play a significant role in growing the lease market. The principal objectives amongst others would be: Advocacy, link and interaction with the various arms ofgovernment on leasing matters Promote activities of members and provide information & industry statistics Creating awareness for leasing and its benefits Training and skills development

22 22 RECOMMENDATION Determine capital requirements for independent leasing companies. Jump start the market by establishing the first leasing company with the following as shareholders: NIC 12.5% IFC 12.5% Ins. Company 15.0% Bank(s) 60.0% 100% If no insurance company or bank is willing to invest, then NIC should seek venture capital companies and foreign leasing companies to take up the 60%. NIC in collaboration with IFC should appoint a consultant to carry out this function and all preliminary incorporation processes.

23 23 RECOMMENDATION The controlling shareholder should employ the CEO who must have good managerial and technical experience (on say a 5 year contract). The CEO who may be an expatriate should be given a free hand to build his management team and to set up the offices. The shareholders form the Board of directors with membership and voting rights based on shareholding. Raise long term & low cost debt capital through Government guaranteed bonds from the stock additiexchange market which may be outside Liberia, that is, if the law permits. This will provide onal long term funding (Foreign exchange risk is low because the economy operates on dual currencies (L$ & US$). Raise medium term government guaranteed L$ debt loans from the local banks. With the equity and debt capital the company will have sufficient funds to operate. It is important to watch the debt/equity ratio.

24 24 RECOMMENDATION Government to provide additional incentives such as: Reduction of or Exemption from import duty on imported lease equipment Lessor to claim capital allowances on finance leases Exemption of lease rentals from sales taxes, etc. Grant pioneer status (say for 1 st 3 yrs) exempting company from paying company s income tax. Capital allowances and losses to be carried over until recovered. Grant incentive if specified minimum is achieved in lease volume in the sectors government want to increase activity (say 50% rebate on companies income tax on income from leases in those sectors in excess of the threshold. This should qualify for transfer until recovered.

25 25 RECOMMENDATION Government should accept the cost of the incentives and possible losses on the guarantees issued as its investment in job creation, poverty alleviation and economic development. These incentives should apply to all leasing companies established within say the next 2 years. This means a 5 year incentive program after which it should be reviewed and appropriate action taken. Board of Directors agree target market definition including geographical spread and risk asset criteria (Internal lease policies) with the CEO & Management.

26 26 RECOMMENDATION How to encourage growth of Independent leasing companies Prudential regulation should continue to require banks to show capacity and skill to carry out leasing. However, provide inceptive for banks that lend to Leasing companies (say interest income on such loans exempted from company s income tax). Leasing companies should not be deposit taking. The CBL should create a non-bank financial institutions supervision department to monitor and supervise leasing companies. Capital requirement for leasing companies should be lower than for banks. Banks should not be allowed to set up Leasing companies to avoid sharp practices.

27 27 RECOMMENDATION How to encourage growth of Independent leasing companies All donor and other funds for equipment finance should disbursed to Leasing companies through banks at a predetermined margin (say no more than 3%). Leasing companies should also get a predetermined margin (say 2%). This is to ensure the Lessee enjoys the benefit of low interest costs. Loans granted by banks to Leasing companies should be in form of credit lines that should be disbursed only on qualification of a lease. It should be mandatory for Lessees to provide down payments (say a minimum of 15%) in form of advance rentals to reduce the risk of loss from repossessions. Government should fast track the establishment of the credit bureau and the least identification mechanism should be the 10 finger print capture to reduce the incidence of double identity. A national unified identity system would make the credit bureau more effective.

28 28 RECOMMENDATION How to encourage growth of Independent leasing companies Recognise the lease broker an important party. They will create awareness, engage in active marketing, organise lessees into formal groups such as co-operatives where necessary and bring lessors and lessees together. They will help Lessee present bankable proposals. Their fees should be paid by the leasing companies but only for successful deals. Encourage Leasing companies to list their shares in stock markets. Raising equity and debt capital in these markets is easier as investors are attracted to such companies because of the ease of exit. Pension funds are a source of long term funding if they exist. Government should consider giving its guarantee to leasing companies that want to access this fund especially in the early years.

29 29 RECOMMENDATION How to encourage growth of Independent leasing companies The government should get the Leasing companies to form an association of companies including banks engaged in Leasing business. This should be separate from the banking association. Top management of leasing institutions should experienced professionals who must have spent a minimum number of years in practice. This should be a licencing condition. There must be a minimum training budget for each leasing company and government can consider providing counter part funding for these trainings. IFC should play a significant role here especially in the early years.

30 30 THANK YOU

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