AHAM NZENWATA
Abstract
This
paper investigated the problems, challenges and prospects of financial leasing
as a source of financing micro small and medium enterprises in Nigeria. The
study collected data from 25 small business owners based in Umuahia, Abia State
using questionnaire. From the analyses of the data collected, it was found that
a good number of the respondents (36%) had never heard of lease finance
companies in their locality before now and none of the respondents had ever
used the services of a financial leasing company. the findings also showed that
even though all our respondents had need for additional funding for their
businesses, very few (1%) had ever been able to access funds from banks, a
majority depended on co-operatives and contributory schemes and none from lease
finance companies. Finally, our findings show that 48% of the respondents
indicated interest in using the services of lease finance companies if they
could access such services. This we conclude is as a result of the dearth of
knowledge and information on financial leasing as a method of financing
asset/equipment acquisition. This problem can be somewhat solved by creating
awareness of such services and the government getting involved in the process
to ease requirements to qualify to lease equipment.
1. INTRODUCTION
For
both developing and developed countries, micro small and medium scale firms
play important roles in the process of industrialization and economic growth.
Apart from increasing per capita income and output, MSMEs create employment
opportunities, enhance regional economic balance through industrial dispersal
and generally promote effective resources utilization considered critical to engineering
economic and growth.
Micro,
Small and Medium Enterprises in Nigeria are acknowledged to have even greater
potential for employment generation and wealth creation in than what it
presently contributes to the econmy. Yet, the sector continues to underperform.
The
underperformance of the sector has been linked to myraid of issues chief of
which is the lack of access to finaicing. The Financial System Strategy (2020)
report agree with this viewing positing that lack of access to modern
technology and low managerial skills (which may be due to lack of funds to
acquire relevant technology and hire skilled staff) can be checked if the SMEs
are properly funded.
Financing
of micro small and medium businesses in Nigeria is therefore very critical if
they are to perform the growth and development role expected of them in the
economy. Thus, the proper financing of small businesses is an essential tool
for promoting and leveraging small and medium enterprises development in
Nigeria.
The
question according to Gbandi & Amissah (2014) becomes "what are the
financing options for SMEs in Nigeria?" Financing options available to
small businesses in Nigeria can be broadly classified into into
informal/personal sources like personal saving, funds from family members and
friends and informal contributory schemes. On the other hand, the formal source
include banks, Government/NGOs, Co-Operatives finance houses and leasing
companies.
While
the informal funding sources remain the major source of funding for small
businesses, it is inadequate to drive growth in the sector. On the formal side,
the banks are averse to providing financing for small businesses in the belief
that small businesses are too risky. Furthermore, funding from the government
hardly get to the small business owners due to bureaucratic bottlenecks and
corruption.
This
leaves very few viable financing options open to MSMEs among which is financial
leasing. A financial lease or capital lease is a type of lease in which a
finance company is typically the legal owner of the asset during the duration
of the lease, while the lessee not just has operating control over the asset, but
also has a substantial share of the economic risks and returns from the change
in the valuation of the underlying asset.
Essentially,
the company in need of the asset (lessee) approaches the finance company
(Lessor) with regards to the needed asset. The finance company acquires the
asset in its own name and hands it over to the lessee who agrees to use and pay
for the asset over an agreed period of time.
Financial
leasing as a source of financing for small businesses is gradually gaining
ground in Nigeria with a growing number of leasing companies sprouting up to
service the needs of small business. This paper aimed is at investigating the
problems, challenges and prospects of financial leasing as a source of
financing for micro-small and medium enterprises in Nigeria.
2. LITERATURE
REVIEW
2.1 Concept of
Micro-Small and Medium Business
Small
and medium enterprises (SMEs) are businesses whose operations are relatively
small. According to the Central Bank of Nigeria, a small and medium enterprise
(SME) as any enterprise with a maximum asset base less than N200 million
(excluding land and working capital) and with the number of staff employed not
less than 10 and not more than 300 (Sanusi, 2003). However, Micro businesses
whose entire asset base may be as little as N10,000 are difficult to accommodate
within this definition. But these micro businesses are an essential part of our
economic landscape as they provide employment for millions of Nigerians.
The
MSME sector comprises very different types of businesses across a wide range of
economic sectors. There are essentially two categories: those that are
growth-oriented, and those small and micro enterprises that operate at the
subsistence level to provide employment and income mainly for their owners and
a relatively small number of external employees. Subsistence enterprises
represent the vast majority of MSMEs in developing countries. On the other
hand, the growth-oriented type are innovative type of businesses which usually
operate in growing markets, as well as businesses that are efficiency-oriented
and/or network-intensive, which tend to grow through acquisitions (Etuk, Etuk, & Baghebo (2014).
2.2 The Concept of
Leasing Financing
Leasing is an
alternative means of financing business assets. It is a contract between an
owner of equipment (the lessor) and another party (the lessee) giving the
lessee possession and use of a specific asset in return for payment of specific
rentals over an agreed period. The lessee may or may not be entitled to acquire
title to the goods through the exercise of an option to purchase, usually at
the end of the lease term.
The
lessor’s role is to finance the acquisition of equipment required by the lessee
who will have selected the goods and dealt directly with the supplier in
determining their performance attributes and suitability (Salam, 2013).
Therefore leasing can be seen as a contractual agreement granting the use of an
asset to the lessee by the lessor within a specified period of time in exchange
of periodic payment of an agreed rental fee by the lessee to the lessor.
Prior
to the 1950s, leasing was most often associated with real estate, land and
building, however it is possible to lease virtually any kind of fixed assets now
(Thomson, 2005). Now more than ever before, all types of assets and equipment
such as Computers, Printers, Typewriters, Photocopy Machines, Buses and
Vehicles, Trucks, Cranes, Generators, Aircrafts, Ships and vessels, Satellites
and generating Plant and Machinery of different kinds, are leased. This has led
to the emergence of three core segments of leasing market that is, small,
medium and large markets for leases.
According
to Umar, Hannatu & Almustapha (2016) leases are classified currently under
IAS 17, as financial (capital) lease or operating leases, depending on whether
substantially all the risks and rewards of ownership transfer to the lessee or
not.
Operating Leases
Operating
leases, sometimes called service leases, generally provide both financing and
maintenance. Operating leases typically require the lessor to maintain and
service the leased equipment; the cost of maintenance is built into the lease
payments. Additionally, operating leases are not fully amortized, in that the
payments required under the lease contract are not sufficient for the lessor to
recover the full cost of the equipment.
However,
the lease contract is written for a period considerably shorter than the
expected useful life of the leased asset, and the lessor expects to recover all
costs eventually either by lease renewal payments or by sale of the equipment.
A final feature of operating leases is that they frequently contain a
cancellation clause that gives the lessee the right to cancel the lease and
return the equipment to the lessor before the lease expires. This clause is
important to the lessee because it allows the equipment to be returned if it is
rendered obsolete by technological developments or is no longer needed because
of a decline in the lessee's business (Maria, 2009).
Financial Leases
Financial leases, sometimes called
capital leases, are different from operating leases in that they (1) typically
do not provide for maintenance, (2) typically are not cancelable, (3) are
generally for a period that approximates the useful life of the asset, and,
hence, (4) are fully amortized. In a typical financial lease, the lessee
selects the item it requires and negotiates the price and delivery terms with
the manufacturer. The lessee then arranges to have a leasing firm (lessor) buy
the equipment from the manufacturer, and the lessee simultaneously executes a
lease agreement with the lessor (Maria, 2009).
The
terms of a financial lease call for full amortization of the lessor's
investment, plus a rate of return on the lease that is close to the percentage
rate the lessee would have paid on a secured term loan.
A sale and leaseback is
a special type of financial lease, often used with real estate that can be
arranged by a user that currently owns some asset. Here, the user sells the
asset to another party and simultaneously executes an agreement to lease the
property back for a stated period under specific terms. In a sale and
leaseback, the lessee receives an immediate cash payment in exchange for a
future series of lease payments that must be made to rent the use of the asset
sold (Maria, 2009).
Although
the distinction between operating and financial leases has historical
significance, today many lessors offer leases under a wide variety of terms.
Therefore, in practice, leases often do not fit exactly into the operating
lease or financial lease category but combine features of both (Maria, 2009).
2.3 Financing MSME
through Financial Leasing
As
has been noted in numerous academic research literature on the subject matter,
one of the biggest problems facing small businesses is related to access to
finance necessary to operate the business (Amissah & Gbandi 2014; Agwu
& Emeti 2014; Evbuomwan, Ikpi, Okoruwa, & Akinyosoye, 2013; Osotimehin,
Jegede, Akinlabi & Olajide 2012).
According
to Osotimehin et al (2012), there are various challenges facing micro and small
scale enterprises in Nigeria; while some are financial others are non
financial. The financial constraints include those factors that prevent micro
and small scale enterprises (MSEs) from accessing funds easily, inadequate
sources and supply of funds has been a major setback to the realization of many
brilliant business ideas and outward expansion of existing business.
The
inability of the small business owners to raise funds expand their business has
been linked to poor business history, high risks, associated with starting new
business, which banks tend to avoid, insufficient collaterals, inadequate
record keeping and knowledge of the risks facing their business.
Amissah
& Gbandi (2014) posit that the financial challenges of micro small and medium
enterprises are majorly related to funding needed for the acquisition of
capital and fixed assets like machine, vehicles and landed property. These
capital assets require a large outlay of cash that the average small business
person will not be able to provide.
In
a bid to overcome this challenge, the search light is in this study beamed on
financial lease. According to Wikipedia (2013), a financial lease or capital
lease is a type of lease in which a finance company is typically the legal
owner of the asset during the duration of the lease, while the lessee not just
has operating control over the asset, but also has a substantial share of the
economic risks and returns from the change in the valuation of the underlying
asset.
The
financial lease has some inherent features that make it a good candidate for
small business owners to overcome their capital acquisition challenges. These
include:
· First
and most importantly, financial leasing helps the small business owner to cut
equipment purchase costs and gets you the tools needed without paying the full
cost upfront.
· In
a tough economic climate, equipment leasing can help you free up the cash
sitting in fixed assets that are not utilizing their maximum earning power for
your business.
· It’s
usually easier to get an equipment lease than to get a loan for new equipment.
And because equipment leases are not bank loans, your credit lines are freed up
for other needs.
· Equipment
leasing helps the business owner make tax savings on equipment leases because
lease payments are often deducted as business expenses.
· With
equipment leasing, you get quick and easy upgrades. When you lease, you are
able to exchange an obsolete piece of equipment for the latest model once the
lease period is over. This is quite unlike buying the equipment, which leaves
you stuck with outdated equipment for many years.
· Finally,
by leasing equipment, the risks and costs associated with equipment ownership
will be avoided.
2.3.1 Problems and Challenges
Financial lease
as a source of financing capital acquisition by micro-small and medium
enterprises are not without its problems. In a business/economic setting like
Nigeria, the first question would be: Where will the average micro-small business
come in contact with lessors who are willing to finance equipment purchase?
For anyone
familiar with the Nigeria business environment, this will be a tough question
to answer. This is because, at the moment most equipment leasing companies
concentrate on providing for the needs of big indigenous and multinational
firms whose streams of cash flow is more certain and hence calculable.
Secondly, there
are technicalities involved in equipment leasing which even the most astute
business person will have to grapple with in order to understand very. But in the
case of Nigeria, a vast majority of Micro small and medium scale business
owners have limited education which may turn out to be hindrance to fully
utilizing the advantages in capital lesing and which may also lead to being
taken advantage of by a dishonest lessor.
Thirdly, in our
not so stable business environment where policy changes is almost a daily
occurrence, being tied down with a long-term equipment lease commitment whose
usefulness may be compromised by policy changes may turn out to be death knell
on the business. This is because once saddled with the responsibility of making
payments on leased equipment, any hiccup on cash flow may lead to bankruptcy.
Finally, over
the long term, financial leasing costs considerably more than paying for the
equipment out right.
2.3.2 Prospects
The
inherent challenges notwithstanding, the future of financial leasing as a means
of financing micro small and medium enterprises holds much promise in Nigeria.
This is so for several reasons which include:
Financial
leasing if well developed in Nigeria will reduce the pressure on banks to
provide funding for small businesses which over the years they have
demonstrated an aversion.
With
a new source of financing unleashed, micro small and medium enterprises will be
in a better position to thrive with the ultimate outcome of economy-wide growth
and development.
The
development of the sector will be accompanied with the needed technical and
managerial skills necessary to deal with the risks, servicing and cash flow
planning for the small business owner who ordinarilly may not acquire such
knowledge.
3. METHODOLOGY
The
study adopted the survey method (questionnaire and personal interview) to
investigate the Challenges and Prospects of Financial Leasing and Financing of
Micro-Small and Medium Business in Nigeria. The design was adopted as a reuslt
of its perceived appropriateness in eliciting information from respondents. The
population of study consists of all micro-small and medium enterprises
operating in Umuahia, Abia State.
We
adopted the convenience sampling method to select twenty five (25) micro-small
and medium enterprise operators who could be approached easily for information
on their business financing practices, access to finance and interest in
capital assets leasing.
The
primary instrument used for collecting data for the study is the questionnaire.
The questionnaires were designed open and close ended questions and
administered directly on micro-small and medium enterprise operators. The data
so obtained were presented in tables and analyzed using non-parametric simple
percentages.
4. DATA
PRESENTATION AND ANALYSES
In this
section, the data collected for the study will be presented and analyses using
simple percentages.
Table 1. Summary information
about the general attributes of our respondents
|
S/N
|
Question
|
Responses
|
Frequency
|
Percentage
|
|
1
|
Age
|
21-30
|
4
|
16%
|
|
31-40
|
10
|
40%
|
||
|
41-50
|
6
|
24%
|
||
|
Above 50
|
5
|
20%
|
||
|
|
|
|
25
|
100%
|
|
2
|
Gender
|
Male
|
14
|
56%
|
|
Female
|
11
|
44%
|
||
|
|
|
|
25
|
100%
|
|
3
|
Education
|
Degree and above
|
5
|
20%
|
|
Diploma
|
8
|
32%
|
||
|
Primary/Secondary
|
12
|
48%
|
||
|
None
|
0
|
0%
|
||
|
|
|
|
25
|
100%
|
|
4
|
Time in Current Business
|
1-5
|
8
|
32%
|
|
6-10
|
13
|
52%
|
||
|
above 10yrs
|
4
|
16%
|
||
|
|
|
|
25
|
100%
|
|
5
|
Nature of Business
|
Trade
|
12
|
48%
|
|
Artisan
|
8
|
32%
|
||
|
Business Service
|
5
|
20%
|
||
|
|
|
|
25
|
100%
|
Source:
Data from survey instrument
Table
1 above show that only 16% of respondents are 30 years and below while 40% are
within the ages of 31-40 another 24% are within the age of 41-50 and above
fifty years makes up 20%. From this, we can deduce that the majority of
respondents (56%) are mostly young people.
The
data also show that by gender, males make up 56% of our respondents while 44%
are female. Furthermore, none of our respondents are uneducated, 20% are Degree
holder and above, 32% hold diploma while 48% are primary secondary school
certificate holders.
Distribution
by length of time in current business indicate that 32% have spent 5 years and
below in current business, 52% have spent 6-10 years and 16% above 10 years. Finally
by nature of business, 48% are in buying and selling, 32% are artisans while
20% provide other forms of business services.
Table 2. Need for and Access to
Finance
|
S/N
|
Question
|
Responses
|
Frequency
|
Percentage
|
|
6
|
Do you have need for financing in your business?
|
Yes
|
25
|
100%
|
|
No
|
0
|
0%
|
||
|
|
|
|
25
|
100%
|
|
7
|
If yes to 6, what is the nature of your financial need?
|
Goods/Wares
|
10
|
40%
|
|
Equipment/Vehicle
|
12
|
48%
|
||
|
Land/Building
|
3
|
12%
|
||
|
|
|
|
25
|
100%
|
|
8
|
Do you have access to finance apart from your personal savings
and family members?
|
Yes
|
19
|
76%
|
|
No
|
6
|
24%
|
||
|
|
|
|
25
|
100%
|
|
9
|
If yes to 8, which of these sources apply?
|
Bank
|
1
|
5%
|
|
Co-Operatives
|
13
|
68%
|
||
|
Money Lenders
|
4
|
21%
|
||
|
Lease Companies
|
0
|
0%
|
||
|
Govt/NGO Aid
|
1
|
5%
|
||
|
|
|
|
19
|
100%
|
Source:
Data from survey instrument
Questions 6 to
9 in Table 2 above assess the need and access to finance for business of our
respondents. In question 6, all respondents (100%) indicated they had need for
additional finance for their business.
In question 7,
40% revealed that their need for finance was to purchase goods or wares for
their business, 48% needed the finance to purchase equipment for the business
while 12% indicated that their need for finance was to either to buy or rent
land/building space for their business.
In question 8,
76% of the respondents indicate that they have access to other sources of
finance other than their personal savings. 24% depended on their personal
savings and family for additional funding.
Of the 76% that
answered yes in question 8 above, the majority (68%) depended on Co-operatives
and contributory schemes. but none of the respondents accessed funds from lease
finance companies.
Table 3. Need for and Access to
Lease Finance Companies
|
S/N
|
Question
|
Responses
|
Frequency
|
Percentage
|
|
10
|
Have you heard of Lease Companies before?
|
Yes
|
16
|
64%
|
|
No
|
9
|
36%
|
||
|
|
|
|
25
|
100%
|
|
11
|
If yes to 10, have you
ever used their services?
|
Yes
|
0
|
0%
|
|
No
|
16
|
100%
|
||
|
|
|
|
25
|
100%
|
|
12
|
If yes to 11, what did you lease?
|
Nil
|
||
|
Nil
|
||||
|
|
|
|
0
|
0%
|
|
13
|
If you had access to a lease company today, can you think of an
equipment to lease?
|
Yes
|
12
|
48%
|
|
No
|
13
|
52%
|
||
|
|
|
|
25
|
100%
|
Source: Data from survey instrument
Questions
10 to 13 in Table 3 assessed the need for and access to the respondents. From
question 10, we see that 36% of the respondents had never heard of lease
finance companies before. However, of the 64% who had knowledge lease finance
companies, none had ever leased an equipment form them. Finally, 48% of the
respondents indicated that if they had access to a lease finance company, they
would use their services in leasing a piece of equipment for their business.
This included all artisans in our sample of 25 respondents.
5. SUMMARY AND
CONCLUSION
In
section 4 above, the data collected was analysed. The findings show that a good
number of the respondents (36%) had never heard of lease finance companies in
their locality before now and none of the respondents had ever used the
services of a financial leasing company. the findings also showed that even
though all our respondents had need for additional funding for their
businesses, very few (1%) had ever been able to access funds from banks, a
majority depended on co-operatives and contributory schemes and none from lease
finance companies. Finally, our findings show that 48% of the respondents
indicatd interest in using the services of lease finance companies if they
could access such services.
From
the above, we deduce that there is a dearth of knowledge and information on
financial leasing as a method of financing asset/equipment acquisition. This
problem can be somewhat solved by creating awareness of such services and the
government getting involved in the process to ease requirements to qualify to
lease equipment.
We
also add that the future of financial leasing as a source business financing
looks promising. This is because with the continual growth of the micro small
and medium enterprises sector coupled with the increasing number of the
educated populace who are getting involved in entrepreneurship and skills
acquisition, it is only a matter of time before the demand for financial from
small business owners gets the desired attention from proactive lease financing
companies.
REFERENCES
Agwu,
M.O. & Emeti, C.I. (2014), Issues, Challenges and Prospects of Small and
Medium Scale Enterprises (SMEs) in Port-Harcourt City, Nigeria, European
Journal of Sustainable Development, ISSN: 2239-5938
Etuk,
R.U., Etuk, G.R. & Baghebo, M. (2014) Small And Medium Scale Enterprises
(SMEs) And Nigeria’s Economic Development, Mediterranean Journal of Social
Sciences MCSER Publishing, Rome-Italy, ISSN 2039-2117
Evbuomwan,
G.O., Ikpi, A.E., Okoruwa, V.O., &
Akinyosoye, V.O. (2013), Sources of
Finance For Micro, Small and Medium Enterprises in Nigeria, International Farm
Management Congress, SGGW, Warsaw, Poland
Gbandi,
E.C. & Amissah, G. (2014), Financing Options For Small and Medium Enterprises
(SMEs) in Nigeria, European Scientific Journal January 2014 edition vol.10, No
1 ISSN: 1857 – 7881
Maria
V. (2009) Lease Financing and Business Valuation, Health Administration Press
Osotimehin,
K.O., Jegede, C.A., Akinlabi, B.H. & Olajide, O.T. (2012) An Evaluation of
the Challenges and Prospects of Micro and Small Scale Enterprises Development
in Nigeria, American International Journal of Contemporary Research, Vol. 2 No.
4; April 2012
Salam,
M. D. (2013). Effects of Lease Financing on Performance of SME’s in Bangladesh.
International Journal of Science Research, 2(12), 367-370.
Sanusi,
J. O. 2003a. Overview of government’s effort in the development of SMEs and the
emergence of small and medium industries equity investment scheme (SMIEIS),
Lagos, Nigeria, 10 June 2003.
Thomson
(2005). The role of leasing in UK corporate financing decisions. School of
management and languages, Heriot-watt University Edinburgh, EH144AS.
Umar,
B., Hannatu, S.A. & Almustapha, A.A. (2016) The Impact of Lease Financing
on Financial Performance of Nigerian Oil and Gas Industry, Research Journal of
Finance and Accounting www.iiste.org
QUESTIONNAIRE
SECTION A: GENERAL INFORMATION
Please Tick your appropriate Choice
1.
Age (Yrs): 21-30 31
– 40 41 – 50 Above 50
Age (Yrs): 21-30 31
– 40 41 – 50 Above 50
2. Gender: Male Female
Gender: Male Female
3. 
Education: Degree and above Diploma: HND/OND
Education: Degree and above Diploma: HND/OND Basic Education:
Primary/Secondary No formal Education
4. Length of time in the current line
of business
1 – 5 years 6
– 10 years 10 years and above
5.
Nature of business: Trade Artisan Business
Service
Nature of business: Trade Artisan Business
Service
7.
If yes
to 6, what is the nature of your financial need?
Purchase goods/waresPurchase of Equipment or vehiclePurchase/Rent of land or building
8.
Do you have access to finance apart from your personal savings and
family members? Yes No
Do you have access to finance apart from your personal savings and
family members? Yes No
9.
If yes
to 8, which of these sources apply?
Bank Co-operativeMoney LendersLease CompanyGovernment/NGO Aid
10.
Have you heard of Lease
Companies? Yes No
Have you heard of Lease
Companies? Yes No
11. If yes to 10, have you ever
used their services? Yes No
If yes to 10, have you ever
used their services? Yes No
12. If yes to 11, what did you lease?___________________________________
13. If you had access to a lease
company today, would you want to lease an asset from them? Yes No
If you had access to a lease
company today, would you want to lease an asset from them? Yes No
For comments, observation or other feedback or if
you need assistance with your research projects/papers, you can contact the
author via E-mail: researchmidas@gmail.com or call/Whatsapp (+234)0803-544-6622
