Auto leasing: A vital tool for equipment financing

Story: Boahene Asamoah

AUTO-LEASING has become one of the important means of equipment financing in the country’s leasing sector, representing about 48.4 per cent of assets financed as of the end of last year.
According to a report on Leasing in Ghana by the International Finance Corporation (IFC), construction and mining lease accounts for 24.93 per cent, production equipment represents 16.93 per cent, office equipment, 7.96 per cent and other forms of lease accounts for 2.31 per cent.
The PNDC Law 331 of 1993 defined finance lease as a written agreement between two parties whereby one of the parties (known as lessor) undertakes to lease to the lessee for the latter’s use only and against payment of mutually agreed lease rentals over a specified non-cancellable period.
The report said there had been tremendous growth in the leasing sector of the economy as a result of the awareness created and regulation in the financial sector.
Additionally, there has been an increase in the number of leasing firms from five to 12 as result of the Banking Act 2004, which mandates banks to undertake universal banking concept.
These firms are Leasafric Ghana, Horizon Leasing dxz & Finance Company, Ghana Leasing Company, Dalex Finance and Leasing, and IFS Finance and Leasing. These are non-bank lessors. The bank lessors are Ecobank, Merchant Bank, Ghana, Barclays Bank Ghana, Stanbic Bank Ghana, Guaranty Trust Bank, Zenith Bank Ghana and Amalgamated Bank Ghana
The leasing industry had been dominated by non-bank lessors over the past few years and the banks are beginning to take over the business.
Significantly, the independent leasing companies are losing market share to the bank lessors and this trend is expected to continue.
As of the end of 2006, bank lessors led the way in the value of leases with 51 per cent as against 49 per cent by non-bank lessors.
Total market share for non-bank lessors (gross lease receivable) also decreased from about 80 per cent in 2005 to less than 53 per cent in 2006.
According to the report, the growth in the domestic leasing market has been driven mainly by the bank lessors. In 2006, the total value of equipment acquired through a lease (new lease, bank and non-bank) increased by more than 114 per cent over that of 2005.
Within the same period, the value of new leases written by bank lessors increased by more than 119 per cent.
There has been consistent growth in the leasing sector in the country since 2001. However, the growth between 2005 and 2006 was especially remarkable.
Total lease portfolio (gross lease receivables increased from GH¢27.3 million (¢273 billion) to over GH¢47.4 million (¢474 billion), representing an overall growth of 73.6 per cent. The growth is attributed to banks’ lessors whose portfolio increased by almost 300 per cent.
The non-bank lessors have also significantly increased their levels of activity. Total value of new lease written by non-bank lessors increased by over 108 per cent while their overall lease portfolio increased by 17.17 per cent, indicating the total growth in the industry.
In terms of the regional distribution of leases, Greater Accra accounts for 82 per cent of all leases. This, the report indicates, is that all the non-bank leasing companies which control the market are located in Accra and do not have branches in other regions.
However, the report states that with banks now involved in leasing and with wider branch networks, it is expected that the number of leases booked from the other regions would gradually increase.
The Ashanti Region accounts for eight per cent, Western Region six per cent, Central and Eastern regions three and one per cent respectively.
The duration of a finance lease transaction in the country ranges from 12 months to 60 months. Typically, the average lease period for a leasing transaction is 36 months. However, operating lease agreements are usually less than 12 months.
Some of the prominent non-bank companies that offer leasing products in the country are Leasafric Ghana, Horizon Leasing & Finance Company, Ghana Leasing Company, Dalex Finance and Leasing, and IFS Finance and Leasing.